Kforce, Inc.

At this time, I would like to welcome everyone to the KFORCE fourth quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I would now like to turn the conference over to Joe Liberatore, President and CEO. Please go ahead.

Good afternoon. This call contains certain statements that are forward-looking. These statements are based upon current assumptions and expectations and are subject to risk and uncertainties. Actual results may vary materially from the factors listed in K-Force's public filing offerings and other reports and filings with the Securing Exchange Commission. We cannot undertake any duty to update any forward-looking statements. You can find additional information about our results in our earnings release and our SEC filings. In addition, we have published our prepared remarks within our investor relation portion of our website. On this call, we will discuss certain non-GAAP items. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. They are included as an additional clarifying items to aid investors in further understanding the impact that these items and events have on our financial results. Our earnings press release provides the reconciliation difference between GAAP and non-GAAP financial measures. Let me begin by offering some commentary about the current operating environment, which is informed by our internal metrics and discussions with our clients and our associates. As we've mentioned on prior earnings call, we experienced unprecedented demand in technology business beginning in 2021 and continuing largely for the first half of 2022. driven by our clients' acceleration of their digital spend and transformation efforts geared towards employee engagement in a more remote-centric environment and their customer experiences. The unprecedented demand fueled the two-year growth rate in our technology business of approximately 44%, which yet again significantly exceeded market benchmarks. We had previously noted a slowdown in demand during the second half of the year, and more recently have seen a higher level of project scrutiny being exercised by our clients given the macroeconomic uncertainty. However, technology spend on critical technology initiatives across industries is still proceeding and provides strong underpinning for our technology business. We continue to have an unwavering belief and expectation that the long-term secular drivers of demand and technology spend are more present than ever, irrespective of how the economic environment plays out. The strength of our secular drivers of demand and technology accelerated coming out of the Great Recession by advancements in mobility, big data, cloud, and the rapid expansion of consumer-facing technology initiatives. The pandemic has only accelerated the strategic imperative for businesses to further digitize their business to enhance the consumer and employee experiences. Technology is not optional and is core to all business strategies, regardless of industry, and we don't see that changing. While our business is not immune from the impacts of economic turbulence, trends during periods of economic softness suggest that technology spend is increasingly resilient and less correlated than other areas where companies utilize flexible talent. This is informed by our performance in the Great Recession where our technology business is down approximately 7% versus general staffing market declines of roughly 25 to 30% and the 2020 pandemic where our technology business was virtually flat in comparison to the general staffing market, which experienced 10 to 15 percent declines. We also believe that our focus on organic growth for the last 15 years and the divestiture of non-core businesses has dramatically sharpened our focus and contributed to our sustained success. It has also resulted in a clean balance sheet with virtually no debt and allowed us to return a tremendous amount of capital to our shareholders. Today's announcement of a 20 percent increase in our dividend, the fifth increase in four years, and an increase in our share repurchase authorization is further evidence of our confidence in our business and our intention in prioritizing return of capital going forward. We have significantly improved our profitability levels as evidenced by our nearly 300 basis point increase in operating margins since 2016. This has been accomplished while also reducing our concentration of cyclically sensitive direct higher revenues to less than 3% of revenues in the fourth quarter of 2022 versus 7.5% immediately preceding the Great Recession, and 19.4% preceding the dot-com recession. The quality of our business and revenue stream continues to improve. To that point, 2022 was an extremely successful year for K-Force. We met the financial objectives we outlined at the beginning of the year, despite the softening in demand we began to experience in the second half of 2022. We grew revenues in our technology business by 18%, on top of more than 22% growth in 2021. In addition, we further improved our profitability by 20% in 2022 over 2021 levels. Strategically, we advanced our integrated sales strategy to further integrate our managed teams and project solutions capability within our technology business. We advanced the repositioning of our FAA business towards more highly skilled positions. Our team made significant progress on the multi-year effort to transform our back office and we fully transitioned to a hybrid work environment across all markets and opened our new state-of-the-art headquarters in Tampa. Our office occasional work environment provides our people with maximum flexibility and choice in designing their work days that is grounded in our trust in them and supported by technology. This has resulted in improved retention of our associates and positioned K-Force as a destination for top talent. K-Force is proud to be certified as a great place to work, which distinguishes K-Force as one of the best companies to work for in the country. As we look ahead to 2023, we will continue to make necessary investments in our business to further advance our integrated sales strategy and the transformation of our back office to sustain our long-term growth ambitions and attain double-digit operating margins. We have built a solid foundation at K-Force and are partnering with world-class companies to solve complex problems and help them transform their businesses. There is simply no other market we want to be focused on other than domestic technology talent solution space. In a macro sense, the near term is uncertain, but our path forward couldn't be clearer, and we will remain consistent with the principles under which we've been operating so successfully. We have a solid, highly tenured team in place with the expectation of continuing to capture additional market share and are prepared for the long term in whatever the near-term environment may bring. We have a long track record of expanding our market share, particularly in times of market turbulence, and intend on continuing to deliver above market performance. I am thankful for the tireless efforts of all K forces, from our incredible leadership team, our sales and delivery associates, to our revenue enablement team and our executive leadership team, who have been together through multiple economic cycles. I cannot be prouder of what these teams have achieved in executing our strategy over so many years. Kai Mitchell, our Chief Operations Officer, will now give greater insight into our performance and recent operating trends. Dave Kelly, K-Force's Chief Financial Officer, will then provide additional detail on our financial results as well as our future financial expectations. Kai?

Thank you, Joe. Overall revenues grew slightly more than 2% year-over-year in the fourth quarter. Our technology business, which continues to be the primary driver of our success, performed slightly ahead of our expectations with year-over-year growth of nearly 8% in the fourth quarter and 18% growth for the full year of 2022. Our technology business now has an annual run rate of $1.5 billion and represents approximately 90% of our total revenues. We believe our strong, consistent outperformance of the market over many years has resulted from our execution and dedicated focus in the domestic technology market. As Joe mentioned in his commentary, our recent operating trends and activity levels have experienced a degree of softening as clients appear to be more cautious given the uncertain macroeconomic environment. This trend began in the second half of 2022 and has continued into the new year. Sales cycles are becoming longer due to extended interview processes and more scrutiny around budgets. Year-end assignment attrition was also slightly higher compared to the last few years. However, our clients continue to pursue essential technology projects even as they become cautious due to the economic uncertainty. Overall, average bill rates in technology continue to improve with 1.7% sequential growth to approximately $90 per hour. While the pace of bill rate growth may moderate in the near term, we expect that the continued scarcity of highly skilled technology talent will drive continued bill rate expansion over time. Further, as our portfolio of managed teams and solution engagements continues to grow, we would expect average bill rates to expand along with improved revenue visibility and margins. Critical technology initiatives continue with our clients in areas of cloud, digital, UI, UX, data analytics, project and program management. Conversations with our clients suggest that they will continue to prioritize significant technology investments to remain competitive regardless of the economic environment. Many of our engagements are multi-year initiatives that we expect to continue despite any changes in that macroeconomic environment. Clients continue to look to us to provide managed teams and project solutions engagements. Our integrated sales strategy allows our people to leverage their long-term relationships in this space as we seek to solve our clients' challenges. Clients are looking for us to continue to move up the value chain, providing more complex solutions. We feel an integrated strategy allows us to leverage our existing sales, recruiters, and consultants to effectively deliver in the solution space. Our year-over-year growth was driven by a diverse set of industries. Sequentially, we are still seeing broad-based demand, but with select softening, We have not yet seen any particular industry vertical as a whole experience acute reductions in demand. This remains true through the first month of 2023. We have a very diverse client portfolio of large market-leading customers that are prioritizing technology spend, which we believe will be a positive catalyst for a long-term, sustainable above-market growth. While we may be susceptible to short term disruption with specific clients or industry specific dynamics, we expect our diversification and concentration in world class companies to serve our shareholders well over the long term. We expect first quarter revenues in our technology business to grow in the low to mid single digits year over year and decline in the mid single digits sequentially. which contemplates the softness we experienced at the beginning of the year. Our overall FA business declined 26.4% year-over-year, which reflects the continued runoff of business we are no longer pursuing due to our repositioning efforts. Sequentially, our FA business experienced 4.7% growth, primarily due to a short-term project in support of Hurricane Ian recovery efforts, with a strategic client. This project essentially ended in late January. We expect revenues to decline in the low to mid teens sequentially and year over year to be down in the mid 20% range. We continue to support our FAA business and improve its alignment with our technology business. Evidence of this progress is that our average bill rate in FAA, excluding the Hurricane Ian project in the fourth quarter of 2022, is $51 compared to $37 in the fourth quarter of 2019. As Joe mentioned, direct hire comprises less than 3% of total revenues. We made the intentional decision to curtail investment to grow our direct hire business due to the volatility we typically see in this revenue stream in uncertain economic times. Our expectations for direct hire are for continued declines in the first quarter. We are pleased that we are not reliant on this business to make significant contributions to our growth and profitability. We believe the scalability of a flexible model is the best foundation for predictable, sustainable, and profitable growth. The investments we continue to make in our strategic priorities along with process improvements to increase productivity levels in our associate population provide capacity to grow. While capacity exists, we have continued to make targeted investments in associate headcount to drive sustainable growth. This investment is predominantly in our managed teams and project solutions capabilities within our technology business as we evolve to meet customer requests and grow share. We have supported and retained our best people and we have made significant changes to give our employees flexibility and choice in our office occasional work environment. As mentioned last quarter, K-Force has earned Glassdoor's Open Company designation which recognizes employers that proactively promote and embrace workplace transparency through sharing workplace culture, being responsive to all reviews, and sharing our updates related to diversity, equity, and inclusion efforts, along with our ESG priorities. I am grateful for the trust our clients, consultants, and candidates have in K-Force. I would like to thank our amazing people who helped our fourth quarter results and impressive 2022 performance. They are the backbone of our success. I will now turn the call over to Dave Kelly, K-Force's Chief Financial Officer. Dave?