Kforce, Inc.

Good afternoon and welcome to the K-4 second quarter earnings call. My name is Brianna and I will be your conference operator today. Please note that this call is being recorded. 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, please press star followed by the number one on your telephone keypad. I will now turn the call over to Joe Liberatore, KFORCE President and CEO. You may begin your conference.

Good afternoon. This call contains certain statements that are forward looking. These statements are based upon current assumptions and expectations that are subject to risk and uncertainties. Actual results may vary materially from the factors listed in KFORCE's public filings 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. Our results for the second quarter reflect a continuation of an uncertain economic environment, and we believe the actions being broadly taken across industries by our market-leading clients to ensure they are prepared for the possibility of a slowdown. This view is informed by our internal metrics, discussions with clients and other industry and economic data points. There have been widespread concerns and, frankly, expectations the U.S. economy would fall into a recession of uncertain severity since the Federal Reserve began aggressively raising rates in March of 2022 to address the persistently high inflation. The yield curve continues to be significantly inverted, which has been a very strong indicator of a likely recession going back more than 50 years. We also experienced the collapse of several large financial institutions over this time. Though the pace of hiring has slowed and we have seen an increase in level of layoffs, the labor markets have continued to be remarkably resilient with continued historically low levels of unemployment. More recently, there have been some indicators suggesting significant moderation in inflation, the increasing discussions of a possible soft landing to the U.S. economy. While we are not economists, my point in sharing these data points is to articulate the significant uncertainties that exist in the macro environment. We believe this is causing companies, broadly speaking, to exercise restraint in the number of new technology investments they initiate and to selectively trim existing projects that don't create an immediate return. The restraint being exercised by companies, generally speaking, including our clients, continued in the second quarter And though we are still seeing new project awards, we have not seen any broad change in client mindset. This is reflected in our second quarter results and expectations of performance in the third quarter. While the firm continues to operate efficiently due to our focused technology-centric platform and produced results in the technology business that are top of class, it became clear to us that we needed to adjust our structural costs to align them with lower levels of revenues that we are experienced without compromising investment in key strategic initiatives. While actions that affect our K-Force team are tremendously difficult to make and never taken lightly, the impact of these macroeconomic uncertainties on our business drove us to take these actions. Dave Kelly, K-Force's Chief Financial Officer, replied, insights into the cost and benefits associated with these actions in his remarks. As of performance in the second quarter, overall revenues were slightly below the low end of guidance. Despite lower than expected revenues, earnings per share was within the range of guidance. As we look further into the future, we remain steadfast in our belief in two areas. First, we believe that the long-term secular drivers in demand and the technology are very much intact and will persist in the future, irrespective of how the short-term economic environment plays out. The strength of the secular drivers of demand and technology accelerated significantly coming out of both the Great Recession and the 2020 pandemic, and it remains clear to us that broad and strategic use of technology, including the recent headlines that Gen AI technologies have garnered, will continue. While clients are acting with heightened caution today, we believe this is resulting in tremendous backlog of desirable investments that will be prioritized once the macro uncertainties begin to clear. Technology investments are simply not optional in today's competitive and disruptive business climate. Our core competency is rooted in our ability to identify and provide critical resources real time at scale to solve business problems for our clients in virtually every industry. Our integrated strategy also allows us to be flexible in partnering with our clients to meet their needs as part of a traditional staffing assignment, a managed team, or a managed project engagement. There is simply no other market we would want to be focused on other than domestic technology talent solution space. Second, we expect the sharpening in our focus to continue to contribute to our market outperformance. We have built a solid foundation at K-Force and are partnering with world-class companies to solve complex problems and help them competitively transform their businesses. Our balance sheet is clean. and we expect this and our strong cash flows to continue providing us great flexibility to return significant capital to our shareholders. We have a solid, highly tenured team in place with the expectation of continuing to capture additional market share. Our executive leadership team has been through multiple economic cycles and has the experience to skillfully navigate through whatever may lie ahead. A reflection of preparedness is the success of our executive transition plan initiated in December 2021. At that time, our founder, Dave Dunkel, announced his retirement as CEO and entered into a multi-year agreement to provide the firm support in a non-executive employee role, in addition to continuing his role as a board chairman. The board of directors has determined that due to the success of the transition and the confidence it has in the executive management team, It is now comfortable accelerating this transition to a role solely as a board chairman effective immediately, and that those transition services are no longer necessary. I want to personally thank Dave for sharing his wisdom and guidance during this transition, and I look forward to continuing to engage with Dave and the rest of the board of directors. Our highly experienced management team is navigating through the current macro climate well, and we will remain very excited about our future prospects. Kai Mitchell, K-Force's Chief Operations Officer, will now give greater insights into our performance and recent operating trends, and Dave Kelly will then provide additional details on our financial results, as well as our future financial expectations. Kai?

Thank you, Joe. Overall revenues in Q2 declined 10.8% year-over-year, with revenues in our technology staffing and solutions business declining 8.5% off very difficult prior year comps, where our technology business grew approximately 24%. As Joe mentioned, our clients exercised more caution in starting new technology investments than we anticipated. Additionally, they continued to selectively trim resources on existing projects. With that said, we have not experienced clients terminating existing large projects, While the caution being exercised was seen across our client portfolio in 2023, it has been more prevalent in our largest clients. As you look at overall trends within the quarter, we saw some relative stability in April after a weaker than usual Q1, which was followed by a continued slight softening in May and June. During the last two months of the quarter, the number of technology resources placed on new engagements declined from April levels and assignment ends continued to slightly outpace new consultants on assignment. To that point, we experienced relatively modest declines in the total number of consultants on assignment throughout the second quarter, and our guidance reflects the continuation of that trend, as we have not yet seen an inflection point. Overall average bill rates in our technology business remain near record levels at approximately $90 per hour, which improved 1.3% sequentially and 3.5% year over year. The increase is primarily driven by the increasing mix of higher skilled workers on assignment. In the near term, we expect that average bill rates will remain stable or show slight improvement. This is primarily due to highly skilled technology talent mix and an increase in the proportion of managed teams and project engagements within our overall technology business. Looking ahead, we believe average bill rates will continue to work in our favor in the long term. This is especially true as our mix of higher value service offerings continues to rise. Our clients remain focused on critical technology initiatives in the areas of cloud, digital, UI UX, data analytics, project and program management, and modernization efforts. Our clients tell us they are committed to starting new mission-critical projects for their organizations, leading to wins across multiple industries, though the pace of initiation is slower. Although clients are currently exercising more caution in their project investments, based on our historical experience, We expect companies to swiftly shift their priorities and increase their technology investments once the macroeconomic landscape becomes clearer. Our clients expect us to broaden our service offerings beyond traditional staffing to include managed teams and project solutions. Clients consider access to the right talent essential to their success and see our services as a cost-effective solution for their project requirements. Our integrated strategy capitalizes on the strong relationships we have with world-class companies. We are utilizing our existing sales, recruiters, and consultants to provide higher value teams and project solutions that effectively address our clients' challenges. Our client portfolio is diverse and includes large market-leading customers, which we believe will drive sustainable above-market performance in the long term. While short-term disruption may occur with certain clients or industries, our diverse client base of world-class companies will ultimately benefit our shareholders. We saw sequential declines in most of our large industry verticals with the exception of our energy and utilities industry. On a relative basis, we experienced stabilizing sequential trends in the technology, hardware, and software industry. This sector had previously garnered attention due to the headlines about workforce reductions. Our guidance contemplates third quarter revenues in our technology business to decline sequentially in the mid-single digits and decline in the low teens on a year-over-year basis. Our FA business declined approximately 10% sequentially and 28% year-over-year. The year-over-year declines reflect the impact of business we no longer are supporting due to the repositioning efforts as well as a more challenging macroeconomic environment. We expect revenues to be down sequentially in the low double digits and approximately 30% on a year-over-year basis in the third quarter. We continue to support our FA business and approve its alignment with our technology business. Evidence of this progress is that our average bill rate in the second quarter of 2023 is $51 compared to $38 in the first quarter of 2020, and more recently up 7.7% over the second quarter of 2022. Not surprisingly, our higher skill set business is where we see relatively better performance. We have taken necessary and thoughtful measures to strike a balance between associate productivity and revenue expectations. Our primary focus is on retaining our most productive associates, ensuring that we are well prepared to capitalize on market demand when it accelerates. At the same time, We are also making targeted investments to improve our managed teams and project solutions capabilities. I am truly grateful for the unwavering trust that our clients, candidates, and consultants place in us. It fills me with immense appreciation to witness the dedication, creativity, and resilience displayed by our incredible team. Without a doubt, it is their dedication and commitment that drives our success. and I am truly grateful. I will now turn the call over to Dave Kelly, K-Force's Chief Financial Officer. Dave?