Kforce, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the second quarter 2020 Cape Horse, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, David Dunfield, Chairman and CEO. Please go ahead, sir.

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 K-Force'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. Our focus on providing critical technology talent to world-class companies, as well as the ability of our FAA business to support large-scale, critical government-sponsored COVID-19-related initiatives, in addition to our core FAA footprint, allowed us to grow revenues 1.2% on a year-over-year basis against the backdrop of an unprecedented macroeconomic landscape resulting from the sudden and dramatic effects of the global pandemic. Our strong performance in the second quarter is a testament to the longer-term strategic decisions we have made to position KFORCE for success and significantly insulate the firm from the consequences of the economic disruption. We have worked diligently over many years to shed non-strategic businesses, which has resulted in roughly 80% of our revenues being concentrated in high-end information technology staffing and solutions. This decision was supported by our belief that the technology, staffing, and solutions market would exhibit very strong and stable long-term demand that would have very limited economic sensitivity due to the critical need for ongoing technology investment, particularly in industry-leading world-class companies. While nobody could have foreseen this severe of an event to be the proof positive of our longstanding secular thesis, we believe that the current crisis has only strengthened the secular drivers of demand in technology as companies accelerate investments in their digital transformation efforts. We will continue to place a priority on allocating capital to grow our technology business. While we remain cautious and continue to fortify our balance sheet in the near term, the strength in our performance and financial position allows us to be flexible in how we deploy capital in the future. I am extremely proud of the tenacious focus and execution our leaders and associates have displayed during this difficult time. Our people have successfully tackled a sudden shift to working fully remotely, many schooling their children virtually in the spring and likely in the fall without any decline in productivity levels. 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, there is much that remains uncertain, but several things seem relatively clear to us. For instance, we will not be reoccupying our field and corporate offices anytime soon and are assessing what our future real estate needs may be as we modify our business model and structurally reduce operating costs. Our investments in a cloud-based technology-enabled operating model, primarily leveraging Microsoft as our platform of choice, has put our people in a position to excel in this virtual work environment, and we are assessing areas to accelerate investments in technology that will drive much greater effectiveness and enhance service levels in what will likely be a more flexible future working environment. Our priority during economic downturns has always been to retain our great people and maintain important strategic investments in our business so that we are well positioned to take market share and accelerate growth rapidly as the situation improves. We have handled the current situation in much the same way. We are very well positioned to navigate through the current period without having to take drastic actions to reduce costs, restrict or eliminate dividends, or raise capital. Rather, we will continue to manage our business in a disciplined manner as we always have based on operating trends. Through these difficult times, we will continue 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 second 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 third quarter. Thank you, Dave, and thanks to all of you for your interest in K-Force. The journey that Dave mentioned, to not all focus by shedding non-strategic businesses, to take greater advantage of the secular shift in technology demand, and the limited exposure to the highly cyclical direct hire business, is providing a significant level of resiliency to our revenues, as demonstrated by our second quarter results and early third quarter trends. Overall revenue growth in the second quarter on a year-over-year basis of 1.2%, and the performance in each of our lines of business exceeded both internal and Wall Street expectations. Let me give you a little bit more color in each of our lines of business. With respect to our technology business, threats revenues declined 3% year-over-year and 4% sequentially. As noted on last quarter's call, we didn't see notable impacts from the COVID-19 crisis until late March and into early April. After the April impacts of decline from these new misses directly affected by the pandemic, our weekly trends were largely stable throughout the remainder of the second quarter. Since mid-June, we've seen modest growth in our billable headcount. For the month of July, and on a year-over-year basis, technology flex revenues were down approximately 2%. They reached declines, and they increased slightly for full quarter against a more difficult prior year comp. Start activity and job order flow have begun to increase over the last several weeks. They remain lower than pre-pandemic levels. While job orders are lower than pre-pandemic, the quality of the job orders is higher as clients seek to stop critical roles. Our internal metrics and revenue trends point to an improving environment. As trends continue, we will see third quarter sequential growth in tech, as the higher skill set work, which is being done virtually 100% remotely, has been retained by our clients throughout the pandemic, and is now being supplemented with new assignment growth. The majority of the declines we experienced at the onset of the pandemic, as noted previously, were principally concentrated in travel and leisure, retail, and healthcare sectors. We found that many of our largest clients, where we had the greatest presence and most mature relationships, actually added additional resources in transformational roles as the quarter progressed. We continue to experience the acceleration of technology-driven, mission-critical, strategic consumer direct initiatives within world-class companies. We have matured our capability to source and deliver diverse skill sets of qualified talent at scale to 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, 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 managed teams, services, and solution 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 as competitive disruption in staffing companies emerge with those less capable or financially viable to navigate this economic downturn. We expect flex revenues in our technology business in the third quarter to be stable to slightly up sequentially. It is also notable that the stability we have seen in tech is much more significant than that experienced during the 2008-2009 recession, which further supports the secular story. Should current trends continue for the remainder of the year, tech flex would experience a full-year decline of less than 3%. Moving to RFA business. Press revenues were up nearly 29% year-over-year in the second quarter, primarily as a result of the contribution of approximately $35 million of revenue from our support of government-sponsored initiatives tied to the COVID-19 pandemic. For this business, we have partnered with several companies to provide consultants and roles, including customer service and call center agents, as well as loan processing specialists. These opportunities have provided a level of support to our core F8 Flex business as we navigate the revenue reductions brought on by the crisis. Our longstanding personal relationships, fortified by experience with these clients during prior natural disasters, and our ability to quickly source and deliver talent on a large scale, primarily due to our centralized delivery capability and innovative technology, uniquely position us to support these critical initiatives. These engagements remain fluid, but we expect these opportunities to continue through the third quarter and at least into the fourth quarter. Due to the nature of the projects, we would expect declines in these revenues as the economy recovers, which would likely correspond with increasing demand for our core tech and FA offerings. Due to the growth we experienced in the second quarter, Revenues related to COVID initiatives could be in the range of $45 million to $55 million in the third quarter. Our core FASX business declined approximately 25%. As we stated last quarter, we felt the negative impacts from the current crisis earlier and more deeply in this line of business. After the initial impacts were felt, we saw signs of stabilization during the majority of the second quarter and have experienced modest growth in billable headcount since the end of June. For the month of July, revenues in our core FAA business were down roughly 26%, and we could see a sequential decline for the third quarter at mid-single digits. When combined with the midpoint of the range for COVID revenues, total FA flex may be up approximately 17% sequentially and nearly 50% year-over-year. Direct higher revenue in the second quarter decreased approximately 50% year-over-year. We experienced a significant impact at the end of Q1 and generally held at those lower revenue levels through the second quarter. Direct higher revenues are inherently less predictable. No real revenue declines have decelerated in the month of July, and we may see revenue levels for the third quarter at approximately second quarter levels. As with most recessionary cycles, this service offering tends to be the most impacted by the economic uncertainty, and we've consistently reduced our concentration of direct hire revenue over the years. At the peak of the economic expansion prior to the dot-com bust, direct hire revenues were 22.5% of revenues and now constitute less than 2% of revenues in the second quarter. While direct hire remains an important part of our service offerings to clients over the long term, we have not allocated significant investments 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 are 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. As Dave stated, we have continued to invest in strategic initiatives to better position our firm for the long term, including investments in our most critical technology initiatives. Several years ago, we made a strategic decision to leverage Microsoft's suite of product offerings for our cloud-based technologies. which 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 in 2020. This combined with the seamless integration of these technologies with other Microsoft Office 365 products, such as Outlook and Teams, has provided us significant efficiencies with a fully integrated platform, especially as we shifted our associates to work remote environments in mid-March. We will continue 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 experienced a decline in overall performer headcount levels due to the natural performance-managed attrition, but we did not and do not expect to undertake any large-scale reductions. We will continue to monitor the business environment and our operating trends and manage our performer headcount accordingly. As conditions begin to improve, we believe we can take advantage of the capacity that exists in our existing talent, along with the improving productivity gains through our technology investment and greater enablement of our current communication tools that have been so successful for us during the transition to remote work. Our experience has been the recessionary cycles result in a shift in the competitive environment, and we believe we are ideally situated to take advantage of the market as conditions recover in what we believe will be an accelerated digitally-led expansion. I greatly appreciate the trust our clients, consultants, and candidates have placed in K-Force, and I couldn't be prouder of our team's efforts executing in a fully remote capacity while managing through these remarkable times. We are well underway in assessing any adjustments to our future operating model brought to the forefront by this pandemic, including but not limited to our future real estate footprint, internal talent acquisition strategies, technology investments, among others. I will now turn the call over to Dave Kelly, K-Force's Chief Financial Officer. Dave? Thank you, Joel. Revenues of $343 million in the quarter grew 1.2% year-over-year, and earnings per share of 47 cents declined 28.8%, due to a decline in gross margin and higher SG&A costs related to retention of critical infrastructure and resources. Our gross profit percentage in the quarter of 28.4% decreased 140 basis points year-over-year, primarily as a result of a lower direct higher revenue mix. Our flex gross profit percentage of 27% improved 10 basis points year-over-year, despite 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 increased 70 basis points year-over-year, primarily as a result of lower payroll taxes and consultant travel costs. Spreads in our technology business remained flat year-over-year and sequentially as improved spread from new managed services business has offset any pricing concessions provided to certain strategic clients during the pandemic. Flex margins in our FA business declined 240 basis points year over year, though approximately 120 basis points of this was driven by the lower margin COVID-19 business. Spreads in our core FA business were down slightly sequentially. Average bill rates in our technology business of $80 per hour increased 4.6% sequentially and 6.2% year over year. We believe this increase was driven in part by business mix as our clients are retaining the more highly skilled consultants given the scarcity of talent and the assignments that were ended at the onset of this pandemic were lower skilled areas which were less capable than working remotely. New assignment ads in the quarter, inclusive of the increasing mix of higher bill rate managed services business, were concentrated as well in higher bill rate skill sets. We saw a similar story in our core FA business, where average bill rates of $40 grew 4.6% sequentially and 9.5% year over year. As we look forward to the third quarter, we would expect continued stability in our bill pay spreads in our technology and core F8 business versus second quarter levels and for overall margins to be stable. Our strong results and the improvements we've made in associated productivity are allowing us to sustain or accelerate expenditures on strategic activities such as technology investments, acceleration of efforts to reposition our FA business, and retaining critical resources through the pandemic. These actions, as well as other discrete costs related to the pandemic, led to an increase in SG&A as a percentage of revenue in the second quarter of 50 basis points year-over-year. We expect SG&A expense to decline in Q3, which, in addition to increased revenue, will have a significant positive impact to earnings per share. Roughly 80% of our SG&A expenses are variable in nature, which allows us significant flexibility to manage our cost structure. We have also gained significant operating leverage over the last several years. This leverage, along with recent cost containment actions and our quality revenue stream, has put us in a position to navigate the current crisis without taking drastic actions. We've continued to make investments in our business that we believe will position us well to continue to outperform the market as the crisis subsides. Our second quarter operating margin was 4.5%. Our effective tax rate in the second quarter was 29.4%, which was slightly higher than we anticipated as a result of certain true-ups. Next, I'll spend a few minutes discussing our operating cash flows and liquidity position. Operating cash flows in the second quarter were $36 million, an increase of $25.4 million year-over-year due to continued profitable growth. We also benefited from the deferral of approximately $12 million in payroll taxes under the CARES Act in the second quarter. Our accounts receivable portfolio continues to perform well as day sales outstanding was flat from Q1 2020 levels. 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 June 30th, net of cash on hand, was approximately $140 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. A trailing 12-month EBITDA as of June 30 was roughly $87 million, which currently provides incremental borrowing capacity, should we need it, of roughly $140 million. We had approximately $52.4 million cash on hand at the end of the quarter, and net debt as of June 30th was approximately $48 million, or roughly .5 times trailing 12-month EBITDA. Looking forward into Q3, we expect to continue to generate positive cash flow, which we plan to utilize to further reduce net debt levels. Our current cash flow expectations suggest that we could be effectively net debt-free by the end of 2020. We believe we are in an enviable position due to our low debt levels, healthy cash flows, high-quality accounts receivable portfolio, and resilient revenue stream. The strength in our financial position allows us to be flexible in making continued investments in our business, deploying capital in other areas, such as acquisitions, and returning capital to our shareholders. We are resuming guidance this quarter, but with wider ranges given the continued unknowns and the unpredictability of our COVID-19 revenue stream. Our billing days are 64 days in the third quarter, which is the same as Q2 2020 and the third quarter of 2019. We expect Q3 revenues to be in the range of $352 million to $362 million, and for earnings per share to be between 72 cents and 80 cents. Gross margins are expected to be between 28.2% and 28.4%, while flex margins are expected to be between 26.9% and 27.1%. SG&A as a percent of revenue is expected to be between 21.3% and 21.5%, and operating margins should be between 6.3% and 6.7%. Weighted average diluted shares outstanding are expected to be approximately $21 million for Q3, and the anticipated effective tax rate is 26.8%. 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 one-time 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. K-Force outperformed the market during the Great Recession, and our results thus far during this pandemic have been encouraging. At that time, technology only comprised 50% of total revenues versus approximately 80% today. We believe we are in an even better position to outperform as we navigate the current economic and health crisis. Lastly, I'd like to extend a sincere thank you to all of our teams for their efforts over the last five months to ensure that we are living up to our brand promise of providing great results through strategic partnership and knowledge sharing.

Operator, we will now turn the call over for questions. Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by as we compile the Q&A roster. Our first question comes from Josh Robo with Sidoti & Company. You may proceed with your question.

Thanks. Good evening, guys. Thanks for taking my questions. Pretty impressive results in this environment. My first question is, do you see any sort of scenario that even after the economy recovers that the government decides to keep some of these programs intact longer term and thus you can sustain a level of this work too?

Yeah, Josh, this is Joe. I'll take that question. Obviously, it's hard to say what's ultimately going to play out. I mean, that's the trillion-dollar question, right? But what I would say from, you know, what we've been able to capture from the government support, we're kind of comfortable where we are as a percentage of a mix of our overall revenue. So we're not currently actively pursuing additional opportunities. mainly as we've stated for quite some time now, our investments are going towards tech with an emphasis really on that higher value add, managed services, solutions-oriented type project work, along with continuing to further evolve our FAs and the skill areas that are really synergistic with our tech footprint in and around data and business intelligence in those areas. So how long this will run out, is a question that we really can't give you an answer to, but I wanted to give you a little bit more of that backdrop. I would ask the question, if you could tell me when all of this ends, then I could probably give you a better clue. You know, we've been watching this go up and down for so long. The one thing that's very clear is that nobody knows. And what we are seeing is the continued uncertainty is bringing additional flexibility. So because of our unique capability to be able to deliver at scale what was approximately 5,000 people in four weeks, utilizing our centralized delivery, as Joe pointed out in his prepared presentation, remarks and also some of our own innovative proprietary technology. I mean, what a remarkable story that is. And so overall, we're very pleased with the way everything's balanced and not knowing how long it's going to last. I think we're very well positioned, as Joe said, that if, in fact, we do see an economic recovery, that's only going to feed the core business and technology anyway. So we're in a good spot.

Thank you. Great. Shifting to Texlex, you had the business update in early June. I think you said it was down about 2% year over year, but 3% for the quarter. So am I right to think that it declined at a 4% to 5% clip in June? And if so, what drove that?

No, Josh, I would say, you know, that was a point in time when we gave that, and that was very early on into COVID. So we experienced a little bit more deterioration kind of, you know, mid-quarter and then started to really improve as we moved to the back end of the quarter. So as we exited the quarter and as we enter Q3 here, we're pretty much in the same zip code of where the full quarter was. So I think it's just really the timing of where things happened in the quarter.

Understood, understood. And you said July or early August you were trending down about 2%? Is that in the earlier comments? Okay, great. Yes. When we look at the expectations built into your guidance and understanding it's a fluid situation and you're only giving quarterly guidance, but maybe if you could give any sort of directional commentary when we think about Q4, and let's just say hypothetically that the COVID-19 work is no longer contributing. Do you think that this will trend back up to historical levels as a percentage of revenue or – or how much do you think you could sustain of these cuts longer term and what could be more of a long term run rate of SG&A?

Yeah, so, Josh, a couple things. You'll note, and I think we provided some data in the release that shows you the gross margin profile of this COVID-related business, and as you'd expect, the profitability levels of that business are not at the levels of our tech and our core FAA business. But if you look forward to your point about historical operating margins, actually, if you look at a revenue composition that I think Joe stated we expect to be between $45 and $55 million for that COVID revenue in the third quarter, and you look at the operating margins that we put out there relative to the revenue in the third quarter, not... the fourth quarter, but earlier than that, in the fourth quarter, we actually are approaching the profitability levels that we had had pre-pandemic. So, we're very pleased with, even at this composition of business, how we're operating, and obviously, as the business mix for us changes and tech starts to grow, relatively speaking, in FA, which is certainly a more profitable, higher bill rate revenue stream, we think we're in a great position to continue to improve profitability. So you mentioned fourth quarter. I think it's important to take a look at the third quarter and the profitability levels we're expecting even in the third quarter.

Okay, thank you for that detail. And just lastly, you did talk about debt repayment, but can you just talk about your capital allocation strategy in general, where it stands today?

I'll restate what I said in the prepared remarks as we think about the near term. We certainly want to be cautious. We are in a great position with very low debt levels, but as indicated, as we look to generate cash, again, strong cash flows in the third quarter, we expect to continue to pay down debt. But we've got great flexibility. We think it's good right now to be cautious. in terms of capital allocation, you know, all those things, as we have always talked about, in terms of returning cash to shareholders, acquisitions, you know, thinking about opportunities on the table when we think the time is right. But we need prudent right now to be cautious. Well, thank you for taking my questions, guys.

Sure. Thank you, Josh. Thanks, Josh. Thanks. Thank you. Our next question comes from Tim Mulrooney with William Blair. You may proceed with your question. Good afternoon.

I wanted to build on one of the previous questions that was asked, but not on the top line trends, but rather the bill's pay spread. Can you just talk about how the bill pay spread moved sequentially through the second quarter and into July?

Sure, happy to do that, Tim. This is Dave Kelly. So if you look at both, I made a commentary here on tech in particular. Again, I think a very positive story as we look sequentially. We've seen increasing bill rates because of, as Joe mentioned, a higher concentration of higher skill set business and spread themselves as we look sequentially. sequentially were actually stable. You know, we had, I know, talked in the last call as the pandemic started that we had had some requests from strategic clients for some near-term concessions. I haven't seen a lot more of that, but obviously that impacts spreads in the second quarter, and that has been offset completely if you think about flat spreads with some of the higher margin new business that we've had. So we feel very good about where spreads were in the second quarter sequentially, and our commentary suggests we think those are going to be stable as we move into the third quarter for Flex, or for Tech Flex. Obviously, FA, the spreads in the aggregate are impacted by that COVID business, but I feel good about with stability as well in the historical core FAA business for spreads to remain constant as well as we move into the third quarter.

Okay, that's encouraging. And on that COVID-related revenue, you know, $45 million to $55 million, I think you said you expect to see in FAA flex in the third quarter. Is that a continuation of the $35 million of the government work that you did in the second quarter, or are these completely separate projects and clients?

Yeah, no, they're the same projects that we've been working on. You're just telling me the full reflection of those projects being fully staffed for the quarter.

Okay, thank you. Lastly, just a broader question. So you talked a lot about how digital transformation is driving incremental business right now, which makes sense. I was wondering if there were any concrete examples that you could provide of the type of work that's being done right now to support client needs as they try to support their clientele and their employees.

It's a great question, and I wouldn't say that this is a near-term incremental, so I want to be clear there. What you really have to do is you have to look back to 2008, 2009. That was really a turning point. With the advent of smartphones coming about, areas such as mobility, cloud, along with the security ramifications, they were in their infancy back in 2008, 2009. So, I mean, the entire world has moved online. And I'm not talking just Internet online, but, you know, the way that all businesses are interfacing with their customers, their distributors, their vendors, how they're even interfacing with their internal people. I mean, we're personally experiencing this front and center. So I think you almost have to think of this in terms of the customer journey and leveraging technology in a mobile cloud base and interfacing wherever there's possible opportunities to really enhance or optimize that client experience, whether it's acquisition of a product or service, how you're processing payments, billing, all those dynamics, the support. So it's really an end-to-end experience. You know, what's happened with COVID is it's really only accelerated, you know, what was already underway in terms of data, you know, this whole digitization. You know, and then on the back end of this, you have the whole data aspect, which is really everybody's trying to figure out, how do I get after my data to enhance my decision-making? How do I get after that to enhance the overall customer experience? I'd really say, you know, to sum it up, This has really just been an accelerator of all these digitization activities. I mean, we continue to see clients that are hiring what I would really consider more transformational roles, with a high percentage of these being really more senior level and they're directly linked to accelerating that digitization experience, and it's really that consumer direct type relationship, and then, you know, enabling the whole remote work environment with mobility and cloud, you know, at the forefront. So it's much broader than something that's incremental. I want to add something to that, too. Another major factor is the disruptors that have come into the various industry verticals. So some of the traditional operators within those verticals, and obviously You can use retail as an example in the description that Amazon brought. Many of those retailers are now in an arms race, if you will, to upgrade their own digital capabilities, their interfaces with their customers, mobile organizations. platforms, and so this is going to go on for quite a while. So that's just one industry, for example, where you see another disruptor that has triggered a response from some of the more traditional operating entities within the vertical. And this is going to continue for quite some time. Yeah, it's this whole creating a frictionless experience is really what it boils down to. You know, when you look at some of those disruptors, whether it be the Ubers of the world, the Lyfts of the world, what did they really do? They took something that was traditional, bought it online, and created a frictionless experience and a much more efficient, you know, overall operating environment. And this is what every business in the land is after.

Got it. I appreciate the call. Thank you.

Sure. Thank you. And as a reminder, to ask a question, you'll need to press star one on your telephone. Our next question comes from Mark Marcon with Beard. You may proceed with your question.

Hey, good afternoon and congratulations on a strong resiliency. I'm wondering if you can talk a little bit on the IT side. You know, obviously you referenced there are certain verticals where, you know, clients are being impacted, but obviously others are, you know, are continuing to accelerate what their work was. Can you give us a sense for the percentage of clients that were expanding their usage versus those that were pulling back a little bit? And how broad is the client base that you're seeing with the expansion right now on the IT side? Yeah, so I'll kind of answer that in two parts. One, I'll give you a sense for, you know, our customer base, and then I'll give you a sense for what we're seeing across broader industries. So, Mark, the way that I would say is, you know, seven of our top ten industries where we do business, they either grew or remained stable sequentially or on a year-over-year basis. And I say year-over-year because some of them had very difficult comps, so there's great momentum in there. You know, the three industries that were more challenged were those that were more directly impacted by the current crisis, you know, retail, health care, transportation, and leisure. I mean, outside of these industries, we've really seen stability, growth, and in the normal course of business, outside of you always have unique client dynamics, but within those industries, all those other industries seem very stable. A subset of that, when I look at our top 25 clients that we do business with on the tech front, 17 out of 25 of those clients grew on a sequential basis. So that's from Q1 to Q2 and realized Q1 did not have a full COVID impact. So that just gives you some feel for the overall market, hopefully. It does. That's very helpful. And of those 17 of the 25, how much do they comprise of the overall IT flex? Yeah, I mean, our top 25 customers here for a number of years now, you know, typically make up almost half of our overall tech revenue footprint. I mean, it'll bounce around. Sometimes it'll be, you know, it might be mid-40% or it might bounce, you know, a little bit closer to 50%. But it's all pretty much been in that zip code for quite some time now. Great. And then it sounds like, you know, you gave really good color with regards to the bill rates on the TechFlex side. in terms of it's a greater level of concentration on some of the higher skill sets. On a skill set for skill set basis, apples for apples, what sort of bill rate increase did you end up seeing if you were just looking at comparable skill sets, roughly speaking? Yeah, I don't know that it's very easy to parse that, Mark. I would say, generally speaking, there's a scarcity of talent. There certainly is an acknowledgment of that in the marketplace, and so for skill set to skill set, certainly the bias is increasing bill rates. That's what I thought. Yeah, I'd say it is increasing bill rates, but, you know, the shift in our portfolio because of, you know, the lower skills not being as remote capable, you know, so when that business comes out, I mean, if you artificially evolve numbers, right, it takes up those bill rates. And so it's really the combination of those two things. Okay. And then with regards to managed solutions, can you talk a little bit about some of the types of projects that you're doing there and what percentage of your IT flex that's currently comprising and what sort of growth you're experiencing there? We haven't really broke out the percentage of revenue because it's a nominal percentage of our revenue at this point in time, but I would say our teams are continuing to make really nice strides in building out our capabilities, the overall operating model. I mean, our efforts on this front, from a revenue growth standpoint, they are outpacing the traditional tech offering. I think as you hear from others as well, because of just some of the market dynamics that are going on, I mean, we've actually redirected a number of, you know, our best people that are now fully dedicated to pursue this type of business to leverage. Because what we're really doing is we're leveraging existing relationships, and those clients are pulling us upstream. So our objective, and I think Dave put it out there on one of our earning calls in the past, was, you know, really within probably the next four or so years for this to comprise, you know, 20-plus percent of our overall tech flex footprint. So the types of work that we're doing within this is very similar to the other types of work that we're involved with the customer. It's still in and around a lot of digitization. You know, it's the same type of work. It's just that we're playing a more significant role and or having greater responsibility for what those engagements are versus just putting in staff, all the people on those same types of engagements. So it is not like it is a different business that we're in. It's just the nature of how we're performing the work within those clients. This is Dave. We'll break out that business when it gets to a significant level. And, you know, I'm going to tell Joe on this call to hurry up and get to that 20% plus level so you've heard it here first. But we're making great progress there. And, by the way, those business projects that we're taking on are also at higher bill rates, which is another reason the bill rates are going up. Great. And then can you talk a little bit about, obviously, COVID and the impact towards digitization having an impact. But can you also talk about some of the other factors that are impacting IT work in the current environment? So obviously, with the administration putting pressure with regards to offshore work and then some of the technical difficulties that have occurred and then also some of the changes in terms of potential legislation around H-1Bs and restrictions. Can you talk about those impacts and how we should think about them going forward? Well, I would say in terms of the impact to the STEM worker, the tech specifically, I mean, you have to look at what the overall makeup of the tech workforce is. There is a very high percentage of foreign nationals, which is why you see the big tech companies, whenever this comes about, they come to the forefront because, again, You know, if you start impacting that world, then you're going to bring tech to a screeching halt. And what's been driving the market over the better part of the last several years? I mean, it's the tech companies. So, you know, in terms of what we've seen from the administration, because we track those things very closely in terms of the different visa situations because it is unique based upon type of visa. We see very little risk in our business at this point in time based upon what's out there. And I'd say that would apply to many others out there. Because, again, remember, a lot of this legislation is going after, you know, those global providers that are basically trying to, you know, offshore or bring people onshore to replace droves of people from an outsourcing standpoint, not necessarily the people that are inside these IT organizations working on very specific projects. So, I mean, that's really what's happening from that standpoint. And in terms of just the overall tech, you know, we've just seen tremendous stability across our entire customer base. Great. And, I mean, it should create some opportunities as well, no? Are you talking about the opportunities because of what was going on with India and the inability for India to potentially service things from an offshore standpoint from a roadside standpoint? Yeah, that was out there when that first happened. I'm sure when you read the reports of all the global outsourcers that have reported, that's not being reflected in their reporting to date. And we, you know, while on the front end, we had certain clients that were starting to raise potential issue. I don't think they saw the same ramification. I would say, actually, more of what we've heard is, and I don't want to call out any one specific, but more is in and around the data breach that took place, which I would say is a much more isolated situation versus this massive, what used to be offshore is now coming back onshore. I mean, there's going to be mission-critical situations that may have been identified, but I don't think that's materialized to the extent of what it was believed that it might be. Great. And then can you just talk a little bit about the efficiency improvements that you've had? You've got the talent management system that's still in the process of being rolled out. What will that do? Also, what percentage of capacity are you currently running at with the existing number of recruiters and account managers that you currently have? And lastly, David, you talked about potentially changing your office footprint, what are the implications from a margin perspective longer term as you reimagine what work from home could be like relative to under the more standard traditional way that we've worked? I'll let Joe answer the first part, and I'll comment at the end. Go ahead, Jeff. From a technology investment standpoint, as I mentioned in my comments, our first step was to decide who did we want to partner with long-term. That decision was made with Microsoft just because of how integrated and seamless things could be with them leveraging Dynamics. We started down that journey. We went after our CRM platform first, and now we're on the back end of going after TRM, which will provide us a fully integrated, seamless platform. You have to remember, when you're inside one of these platforms, one day somebody is a client. You know, the next day they're a candidate, but it still is a person, and that's the value that we get out of the Dynamics platform. So what we've really been focused on, because I would say, you know, CRM, TRM within Dynamics is just one element of what we've been after from technology innovation. As we've mentioned in the past, you know, we entered into a strategic relationship with another party. From a joint venture standpoint, we're applying some very innovative technology. In fact, that technology is what was a key driver in our ability to staff over 5,000 to 6,000 roles in less than a 30-day period when we picked up the COVID business. So what we're really honed in on is on the recruitment side is everything from identification to match. And where can we apply innovative technologies to remove people out of that equation so that technology can do the things technology can do better and then our people can do only those things that people can do so that they can be much more proficient in interacting with people because the relationship is still a huge piece. So that's what I would say from the technology front. From a capacity standpoint, we're very comfortable with where we are right now that we have ample capacity in our existing associate population. And, you know, as the market indicators are there, you know, that's when we'll start to handle, you know, future hiring when those conditions are warranted. So we've continued to selectively hire into areas where productivity warrants, where we need to be adding people to certain teams. We've been doing that a lot within, you know, our managed services and solutions group just because of how quickly the revenue has been expanding there. But our most productive four-plus-year population, It remains at all-time highs in terms of the amount of people that we have that are with us over four years, as well as the percentage of our overall population in that group has continued to really, even through COVID, maintain very strong levels of performance. And we believe, with the addition of everything that we've been investing from a technology standpoint, that that only provides us more capacity for productivity and for us to be able to help those people to take their performance even to the next level. I don't know if you want to jump in on the real estate one. Do you want me to address that? Yeah. Well, you can editorialize when I'm done. I want to respect we have a few other folks in the queue for questions. But, you know, the one thing I will say related to the real estate is we don't have the answer yet. We just know that it's going to be different. And we are going to test different models. But I think for just about everybody, work from home certainly opened up a lot of different ideas and greater flexibility. There's still a desire for people to have fellowship and to gather and to interact. but it's no longer necessary to have large-scale footprint of real estate in what was a traditional office setup. We can't say today what the future is going to be. We just know that it's going to be different, and we just know that the likelihood is that the real estate footprint is likely going to be smaller with a much greater flexibility. Jerry, do you want to add to that? I think you really captured everything there, Dave. I mean, the reality is that the office of yesterday is not going to be replicated. High probability will not be replicated in the future. If you remotely believe that social distancing... is going to be one of those remnants that remain to any extent after this. Because I just don't see organizations doubling their real estate footprint to accommodate social distancing. And most companies that you talk to, that's where most people are. They can only accommodate about 50% of their historic population and their legacy real estate footprint. to step back and really look at how do you really repurpose how you're using the office space to take advantage, by the way, of all of these innovations that are coming about. I mean, if you read any of the acceleration and adoption of, you know, these video platforms, whether it be Zoom or Teams, you know, those are going to be remnants that are also left behind, and everybody's going to be re-challenging Where did I get efficiencies through this? How do I integrate that into my standard operating model? Where does that translate to my real estate footprint? And people have changed the way that they're working. I mean, you've got families at home now, two-income families teaching their children at home. And so that's going to change as well, depending on what happens with school openings and so forth. So, well, we do believe that there is much greater operating leverage now for us from a real estate footprint. And I think the technology, as Joe said, is going to continue to enable people to do the fun part of the job and not have to do some of the more mundane aspects of it. Great. Thank you.

Thank you. Thank you. Our next question comes from Toby Sumlin with Truist. You may proceed with your question.

Thanks. Could you describe some of the occupations that you said are sort of high end now and in greater demand and driving the bill rate increases as well as some of the occupations and categories that have seen decline? Yeah, I would say, you know, decline would be the logical ones that you would think of, you know, which would be more of like the support-oriented roles where somebody really had to be physically on site to help do certain things. So, you know, really what we call the lower end of the tech spectrum would which is heavily, you know, involved in the operations or, you know, really the day-to-day things where they have to physically be there. That's where we saw some of our fall off. Obviously, when we get into, you know, whether it's the help desk and those types of support things, those are more capable of being – But in terms of the skill set acceleration, I really say, Toby, what it's really been is there's not anything new that we're doing. We're just doing a little bit more in some of the higher-end skill areas. You know, a lot of the people that are in the UI, UX area with heavy understanding of mobility that can come in and really, from an architect standpoint, so really, you know, help evolve things versus just, you know, lane code or something of that nature. So I'd say that's just one area where we've seen some of the shift mix take place. And then you also, this has driven a lot of need for, you know, your project managers, your program managers, you know, which, again, are areas where we've always played, but as a percentage of our overall makeup, it's becoming a little bit larger percentage, so that's what's driving up some of the bill rates. Thanks. With respect to the managed services growth, you said accelerating faster. Could you quantify that? Do you think that you're going to be able to grow your business there organically sufficient to meet your longer-term goals? Yeah. Yeah, and I think I've said this in the past is we're totally confident that we can obtain our goals organically. However, that doesn't mean that we're not going to look for the right opportunity that could accelerate some of our move into a given skill area. So we were and we still continue to look at strategic opportunities on that front. We just haven't found the right fit. So the good news is we don't have to do anything from an acquisition standpoint. to hit the targets that we've laid out there. However, if the right opportunity comes about, you know, it's a good cultural fit, they're in the right skill areas that are going to allow us to accelerate within an area that we've already designated that we see long-term market opportunities, then we're going to pursue those. And could you quantify what sort of growth rate the faster acceleration was in the business here recently? It's significantly more than our core tech business has grown. We haven't broke that segment out, nor have we reported growth rates because, you know, to talk to you about a growth rate without understanding what the revenue base is is kind of meaningless. Okay. Curiously, in the F&A side, you've certainly shielded what otherwise would be kind of a downside in the core flex business. Do you think you've got something structural in place that can shield a downturn, or did you just kind of land a great contract? How should we think about that over the course of time? I think I mentioned it earlier, and it was in my opening comments as well. The opportunities that present themselves were from past relationships on business that was won by partners that we had worked with in various other disaster recovery relief programs. So it was the right place, right time. Part of that was the strategic relationship and our ability to deliver at scale programs So obviously they wanted to trust a partner that they knew that if they were to push this amount of work that it was going to get delivered upon in very compressed timelines just because of the pace that was required because of the nature of the crisis to get people on board. But in terms of, you know, structurally as we look forward, and I mentioned this in one of the questions that was asked earlier, we're really looking at our F8 footprint to try and create as much synergies with our tech footprint as possible. because there's this whole gray zone that sits between the finance organization and the tech organization that's blending. And those are the areas that we see the long-term prospects for us as K-Force, just because of the nature of our tech footprint, what we're doing in tech, and then how that can transcend into other areas. areas within the organization, outside the IT organization, into the CFO organization, into the CMO organization, because, again, everybody's looking at how do I get after this data and how do I leverage this data, and there's a lot of finance expertise that's required there, as well as a lot of technology expertise to make those things come together. Thanks. If I could just take one last one. With respect to your capital deployment, I'm curious why you're paying down the debt, given how resilient the top line has been, and not just buying back stocks. Yeah, I think, Toby, you know, one, I think important, we're continuing to make investments as well. be technology or otherwise. And I think for us, where we are today, we think caution and being in discretion is a better part of valor here in these uncertain times. It's as simple as that. I would just comment on that as well. If you look at what's happened with the recent outbreak accelerating again, there's still some question as to whether there's going to be a second derivative and a fall outbreak. So we're going to play a conservative at this point. Unless something is so compelling that we need to act on it because it's still going to give us all the power that we would need to do something. So as we'll watch over these next two quarters or so to get a sense for where this is going, we'll be able to give greater clarity. Thank you. Thank you. Thank you.

Thank you. I'm not sure any further questions at this time. I would now like to turn the call back over to David Dunkel for any further remarks. Well, thank you. It's been an amazing time.

And I just want to take this opportunity again to congratulate our team and thank our team. You guys were spectacular. And for our customers and our consultants, amazing resiliency. The word unprecedented. what we just went through in this quarter. Yet at the same time, as we look ahead to Q3, we're really excited about all the good things that are happening and the resiliency of K-Force and just the talent in our team are just such an encouragement to all of us. We thank you. And so for the rest of you on the investment side, thank you for your interest and support for K-Force. And certainly unprecedented times, and thank you for your support and standing with us. And we're excited, actually, about what lies ahead, and we will be diligent stewards of K-Force in the future.

Thank you very much. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.