Kforce, Inc.

session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, again, press star one. I would now like to turn the conference over to Joe Liberatore, K-Force's 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 and are subject to risk and uncertainties. Actual results may vary materially from the factors listed in K-Force'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 filing. In addition, we have published our prepared remarks within our investor relation portion of our website. The firm continues to operate effectively against a challenging macro environment. Our laser focus on growing our business organically with a consistent, refined business model tailored to provide highly skilled technology talent solutions to world-class companies has been critical to our success. Third quarter results were stronger than we anticipated, and results in our technology business continue to be at the top of our peer group. Further to this point, we saw notable improvements in consultant retention in the back half of the third quarter, which contributed significantly to our better than expected third quarter performance. We've experienced an improving trend in new assignment starts in October. Our strategic position is solid, and our prospects are excellent. With that said, tremendous uncertainty still exists in the macro landscape, though the improvements in our results over the last quarter leaves us cautiously optimistic. The prevailing view of economists continues to be that the U.S. economy will fall into recession in early 2024 following the aggressive monetary tightening by the Federal Reserve. The challenges in the geopolitical landscape continue to grow with the ongoing war in Ukraine, more recently with the war in Israel, along with U.S. political uncertainties and many others. Against this backdrop, the labor markets continue to be remarkably resilient with unemployment remaining at very low levels. The message to our people has been simple. There are many things that are uncontrollable in this environment. We have asked our teams to focus on what they can control, such as staying close to our internal associates, supporting our consultants, and continuing to listen to our clients and partner with them solving their most significant and complex business problems. As we announced on our last earnings call, we took action in July to reduce our structural costs to the lower revenues that we were experiencing and announced certain executive organizational changes in September. While actions that affect our KFORCE team are tremendously difficult to make and never taken lightly, we believe these changes allow us to navigate through the ongoing macroeconomic uncertainties and situate us well strategically for the future. Our third quarter results include charges related to these actions and certain other costs, which Jeff Hackman will address in greater detail in his commentary along with the annualized benefit we expect as a result of these actions. Our executive leadership team has been through multiple economic cycles and has the experience to skillfully navigate through whatever may lie ahead. We also are blessed to have a solid, highly tenured, and highly performing team at K-Force. The strength of the secular drivers of demand and technology accelerated significantly coming out of both the Great Recession with the advancements in mobility, cloud computing, among many others, and the 2020 pandemic with further digitization of businesses, and the continued headlines around Gen-AI technologies. I've seen a lot of economic cycles in my 35-plus years in the business, and each one behaves a bit differently. The acceleration in spend during the pandemic may have been a driver to the reduction in technology spend during early 2023 and more severely impacted technology trends relative to other staffing disciplines. The recent stabilization in our technology business suggests to us we are migrating to a more traditional pattern. it remains clear to us that the broad and strategic use of technology will continue to evolve and play an increasingly instrumental role in powering businesses. While clients have been acting with heightened caution over the past year, their backlog of desired investments continue to grow. We expect these important technology investments to be high priorities once the macro uncertainties begin to clear. Technology investments are simply not optional in today's competitive and disruptive business climate. There is simply no other market where we want to be focused in other than the domestic technology talent solution space. Our core competency is rooted in our ability to identify and provide critical resources real-time at scale to solve business problems for clients in virtually every industry. Our operating model also allows us to be flexible in partnering with our clients to meet their needs across a broad spectrum of engagement forms, from traditional staffing assignments to managed team engagements and also fully managed projects. 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 to provide us great flexibility to return significant capital to our shareholders, given our significant bias towards organic growth. I cannot be prouder of the performance of our collective K-Force team. Together, Against a challenging operating environment, they have more than stepped up and met each and every challenge. I'm excited about the future of K-Force operating consistently as one firm. I'd like to take the opportunity to recognize two fellow participants on this afternoon's call. I'm confident both will serve K-Force and its shareholders well in their new roles. As announced last month, Dave Kelly was promoted to K-Force's Chief Operating Officer. Dave has been with the firm for nearly 24 years in various progressive roles, including most recently serving as our Chief Financial Officer for the past 10 plus years. Dave will provide commentary on our performance operating trends and strategic positioning. I'd like to introduce Jeff Hackman to our call, who was recently promoted as our new Chief Financial Officer. Jeff began his professional career with Arthur Anderson in 2001 and has been with K-Force for nearly 15 years, most recently serving as our Senior Vice President of Finance and Accounting for the past eight years. He will provide additional detail on our financial results as well as our future financial expectations. Dave? Thank you, Joe.

Revenue for the third quarter meaningfully exceeded the top end of our guidance. The performance of our technology business, which declined less than expected due to positive late Q3 trends, was the most significant driver. Overall revenues in Q3 declined 13.4% year over year, with flexible revenues in our technology, staffing, and solutions business declining about 11% off very difficult prior year comps. As a reminder, our technology business grew organically approximately 16% on a year-over-year basis in the third quarter of 2022, and nearly 30% in the third quarter of 2021. When you look at our technology business from Q2 to Q3, revenue declines moderated sequentially to only 2% as compared to a nearly 4% decline from Q1 to Q2. As Joe mentioned, our consultants on assignments stabilized mid-quarter in Q3 and actually showed a very modest improvement at the end of the quarter. This trend has continued into October. The volume of new assignments and projects still remain at lower levels than a year ago, though assignment retention was significantly better than we anticipated and new assignment starts have recently improved. We believe this may be indicative of clients reaching minimum staff levels necessary to perform required activities and execute on mission critical initiatives. Based on our conversations with clients, they recognize the need to retain highly skilled talent while they await a point of increased confidence to more aggressively address their increasing backlog of desirable and important technology investments. Overall average bill rates in our technology business remain near record levels at approximately $90 per hour, which improves slightly sequentially and 2.3% year-over-year. Even in this uncertain environment, Highly skilled talent remains in short supply and high demand, which is reflective of the stability in bill rates. We are also benefiting from an increase in the proportion of managed teams and managed project engagements within our overall technology business. Looking ahead, we believe average bill rates will continue to remain at or near these levels and will trend higher over time. Our clients remain focused on critical technology initiatives in the areas of digital, UI UX, cloud, data analytics, business intelligence, project and program management, and modernization efforts. Flex margins of 25.5% in our technology business declined 40 basis points sequentially due primarily to seasonal factors such as higher consultant paid time off and 50 basis points year over year as a result of higher price sensitivities and higher healthcare costs. The year over year declines in technology flex margins that we've seen recently are fairly typical of what we've seen in prior slowdowns, and we normally see margins recover as the macroeconomic environment stabilizes. As we look forward to Q4, flex margin spreads in our technology business are expected to be stable, though overall flex margins are expected to be slightly down due to seasonally higher pay time off in the fourth quarter. Our clients expect us to continue 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're utilizing our existing sales, recruiters, and consultants to provide higher-value teams and project solutions that effectively and cost-efficiently address our clients' challenges. Our client portfolio is diverse and includes large, market-leading customers. market leaders typically prioritize technology investments to maintain their competitive advantage and our focus on addressing their needs have been and will continue to be critical in our ability to drive sustainable, above-market performance in the long term. While short-term disruption may occur with certain clients or industries, our diverse client base provides an outstanding platform for consistent long-term growth. We experienced sequential declines in some of our larger industry verticals in Q3, And while our financial services and technology verticals were slightly down, trends stabilized late in the quarter. Healthcare and retail are experiencing some headwinds most recently, while transportation and utilities have been relative strengths. October trends have continued to improve from Q3 levels, and new starts activity in October has been meaningfully better than it was in early Q3. As a result, the midpoint of our guidance for the fourth quarter contemplates slight sequential revenue growth in our technology business from Q3 to Q4 and low double-digit decline on a year-over-year basis. Full-year flexible revenues in technology are expected to be down approximately 7%, which is consistent with what we saw during the Great Recession. Our FAA business declined approximately 5% sequentially and 25% year-over-year. The year-over-year decline reflects the impact of business we are no longer supporting due to our repositioning efforts, as well as a more challenging macro environment. We expect revenues to be dialed sequentially in the low single digits and approximately 30% year-over-year, which is partially driven by a Hurricane Ian support project in Q4 last year. Our average bill rate in the third quarter was $51 compared to $38 in the first quarter of 2020. Not surprisingly, our higher skill set business is where we're seeing relatively better performance. Flex margins in our FAA business increased 10 basis points sequentially and have improved nearly 400 basis points since the first half of 2020 as our mix of business has improved due to repositioning efforts. We anticipate flex margins to remain fairly stable at these levels now that the significant majority of business that we are no longer pursuing has run off. We've taken necessary and thoughtful measures to strike a balance between associate productivity and our revenue expectations. As we've done in prior economic downturns, we are focused on retaining our most productive associates and making targeted investments in the business to ensure that we are well prepared to capitalize on the market demand when it accelerates. We continue to invest in our managed teams and project solutions capabilities and the integration of those offerings within the firm. We are fortunate to have one of the most recognized brands in the market for providing technology talent solutions. Our reputation has been established over our 60 plus year operating history and we're proud to carry a world-class Net Promoter Score as rated by our clients and consultants. We also carry the highest overall Glassdoor rating within our peer group. In addition, K-Force was recently named to Fortune's 2023 list of best workplaces in consulting and professional services and best workplaces for women. I'm extremely excited about our strategic positioning and ability to continue delivering above-market growth. The success that we have as an organization doesn't happen without the unwavering trust that our clients, candidates, and consultants place in us. and I appreciate the dedication, creativity, and resilience displayed by our incredible team. I will now turn the call over to my partner for many years and K-Force's new Chief Financial Officer, Jeff Hackman.