Kforce, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the third quarter 2020 K-Force Incorporated Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star then 1 on your telephone keypad. If you require any further assistance, please press star then 0. 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. 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 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. 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 we're rapidly transforming and embracing digital models in 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. Healthcare 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 K-Force 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 revenue. We have also experienced a return close to pre-COVID-19 start levels in technology over the past four 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 in the spring and now here in the fall, while still driving success for our farmers. 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 and technology. Companies accelerate investments in their digital transformation efforts. We will continue to place a priority in 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 two 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, and 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 increase in 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?

Thank you, Dave, and thanks to all of you for your interest in K-Force. 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 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 has demonstrated a greater ability to work effectively remotely during the pandemic. Our strategic journey has included shedding a number of non-strategic 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 variable 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 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 four 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. This still has an air 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 healthcare sectors. We experienced growth sequentially in retail space, though travel, leisure, and healthcare experienced some weakness sequentially and remained 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 serve 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 are 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 trend, as is notably better than the experience during the 2008-2009 recession, which further supports the secular story. Moving to our FAA 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 FASLEX business as we have navigated the revenue reductions brought on by the crisis, with many of the roles within FASLEX not being as remote-friendly. Through the end of the third quarter, we began to see declines in these lower-level, predominantly customer service and call center roles, and 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 FAA 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 FX flex may be down approximately 18% sequentially and up nearly 21% year-over-year. Direct higher revenues in the third quarter increased approximately 32% sequentially and declined nearly 27% year-over-year. Direct hire revenues are inherently less predictable, and as in 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 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 K-Force Connect 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. But 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. Our 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 in what we believe could be an accelerated digitally led expansion. We've retained our best people, taken costs 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 K-Force, and I couldn't be prouder of our team's attitude and efforts executing a fully remote capacity while managing through these remarkable times. I will now turn the call over to Dave Kelly, K-Force's Chief Financial Officer. Dave?

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 89 cents 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 higher revenue mix and a decrease in overall flex gross profit margins. A 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 and 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 businesses, lower bill rate areas. New starts during the pandemic has 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 a 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, FAA 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 FAA 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&E 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 positions. 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 day sales outstanding of six 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 30th, 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 matured in May 2022. Our trailing 12-month 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 two 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 70 and 78 cents. 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 margins 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 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 in 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, would you now like to turn the call open to questions?

Yes, sir. Ladies and gentlemen, if you have a question or comment at this time, please press star then 1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press the pound key. Again, if you have a question or comment at this time, please press star then 1 on your telephone keypad. Our first question or comment comes from the line of Toby Sommer from Truist Securities. Your line is open.

Thank you. 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.

This is Joe. Needless to say, I mean, obviously the offshoring 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, you 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 shift outside of certain things in very much isolation. So we've really seen it more modestly. And I think, you know, if you look at the results of any of the major global integrators, their report has 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 taken place.

And when we look at your balance sheet as well as your cash flow and your stated goal to move more to 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, you know, better to be prudent than wait?

This is Dave. 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 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 for it.

Yeah, and Toby, what I would also add to that is, You know, 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 five-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.

Okay. I guess you prompted a follow-up before I get to my last question, then. What does tracking ahead mean when we've only got an endpoint and a five-year timeline? Could you give us a little more context around that, please?

Yeah, I guess the context that I would give you is, you know, our intent is when this starts to become a meaningful part of our overall plan, 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. 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, you know, it looks like you're going to be, you know, that's going to be a 10% customer, if not more, by the end of the year. So you'll probably, for regulatory reasons, need to 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 input you could give would be helpful.

Yeah, actually, no, I would correct you. I mean, I think in my opening comments, I tried to make it clear. We hit our high watermark here in Q3, and, you know, the range that we provided for Q4 is literally, you know, 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, you know, this is very project related to support, one, a client that we had a longstanding relationship with, and two, for a very good cause because of what our capabilities were. So we 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.

Thank you. Thank you. Our next question or comment comes from the line of Mark McCone from Bayard. Your line is open. Good afternoon, everybody.

I was wondering if you could give us a little bit of color with regards to, you know, the specific factors in terms of the dynamics that you're seeing on the TechFlex side. You gave us the color with regards to, you know, travel leisure and healthcare being down. I'm wondering how How big is that at this point in time, you know, now that it's started to pick up? And how much more does it have to build? And then on the financial services and telecom, which have been resilient, can you describe some of the underlying dynamics there that you're seeing growing? How would you describe it?

Yeah, so I guess I'll start with travel and leisure. You know, 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, you know, 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 but 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, you know, our sectors, you know, 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. Within communications, you know, 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 their 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 headcount.

Great. 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 840? How would you characterize that? So, hey, 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 courts. I think it's very, first of all, difficult to say, you know, what those changes are and whether they're going to be sustained at this point. But I think a couple of things I think for us are pretty clear. You know, during the administration that exists today, I think that there's a recognition that, that technology and talent is hard to find. And I think 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 three and a half 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. 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 highly talented technology workers. So I think as an industry, and certainly for K-Force as a company, We feel very good about the environment, regardless of what happens, and 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. 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 you did a really nice job this quarter here on the margin side, and I'm just wondering, we should think about the potential for further margin expansion.

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 projects 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 as everybody's experiencing this remote work. So, you know, 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 here more recently in the last day or two, 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 costs 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.

Yeah, 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 improvements in our operating profit. And, you know, for us, you know, we had previously stated that our, you know, operating margin targets at $250 million in revenue, we'd be about 6.5% operating margin. And then when we got to $400 million, we'd be about 7.7% operating margin. For us, obviously, we're tracking slightly ahead of that, you know, so productivity is 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 at the total average. But it's in a very comfortable position, we think, to meet or exceed those targets that we previously put out there. So, yeah, 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. Great. One last follow-on to that. Can you talk a little bit about the headcount? you know, where you're positioned from a capacity perspective? And you talked about some, you know, potentially some modest ads. How are we thinking about those?

Yeah, so we, you know, we have capacity across all of our 10-year groups because that's really how we look at our population. And, you know, 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 couple key capacity measures that we really hone in on because they're the output are new starts per associate 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 headcounts. And that's really so that we're prepared to sustain long-term growth as we start to look out past 2021, providing 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.

Thank you. Our next question or comment comes from the line of Josh Vogel from Sidoti and Company. Your line is open.

Thanks. Good evening, everyone. I just want to maybe build off one of the earlier questions when we, you know, 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?

So, Josh, just to be clear, so in terms of how we think of things unfolding, You know, obviously, as we look to 21, we're already starting to see, obviously, Joe spent a lot of time, growth in our tech flex business. I think, you know, 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. You know, 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 at SG&A levels. You know, as we have been, we'll probably continue to invest technologically at the same pace. I don't see a big change in terms of what CapEx might be looking like. And because we have been investing, we'll continue to invest. Obviously, a lot of the solutions that we're putting in place are 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 a number of things working in our favor here.

I appreciate the insights there. Looking at the balance sheet and ending the quarter with the net cash balance one quarter ahead of the schedule is pretty impressive. And, you know, outside of, you know, the reinvestment you're talking about and the dividend, how else should we think about, you know, your capital allocation priorities today?

Yeah, 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, you know, 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 into our culture. You know, and then as we think about the dividend, and obviously historically, you know, we think our stock is 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 I think Dave said it. 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.

All right, great. Thank you. Thank you. Again, ladies and gentlemen, if you have a question or comment at this time, please press star then 1 on your telephone keypad. Our next question or comment comes from the line of Sam Cussworm from William Blair. Your line is open.

Definitely. Am I coming through all right? Yes.

Yep, you sounded good.

Yep, just fine.

Thanks. Okay.

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 wall share with current customers or maybe reaching out to new customers who might have previously been serviced by competitors who aren't weathering a downturn as well as you have? That'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 longstanding track record. Likewise, In any downturn such as this, we've seen some of the smaller, more mid-sized clients, maybe that were 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 K-Force, 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 when we maybe were a little bit earlier in our development efforts. So, you know, 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. Great. Well, appreciate the color there. The next question kind of relates to the acceleration of the remote work model. We're more than eight 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 ways you would compete against other larger IT staffing firms. I would just love to hear your thoughts around that. Yeah, 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 of 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 of different skill sets 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, you know, 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, you know, we entered into a joint venture a little bit over a year ago with a company by the name of Work Llama 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. Great. That really helps turn the issue there. Best of luck on the next quarter here, guys. Thank you.

Thank you very much.

Thank you. I'm sure 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.

Well, thank you very much for your interest in support of K-Force. 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 K-Force and 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.