Q3 2019 Earnings Call
This time, all participants' lines are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised to today's conference is being recorded if you require any further assistance. Please press star zero I mean, I'd like to hand, the conference over to your speaker today Mr. Michael Blackman.
Corporate development officer. Thank you. Please go ahead.
Good morning, before we get started I would like to remind you that this call may contain certain statements that are forward looking statements are based upon current assumptions and expectations and are subject to risks and uncertainties. Actual results may vary materially from the factors listed NK forces public filings and other reports and filings with the Sky.
It is an exchange commission, we cannot undertake any duty to update any forward looking statements.
I would now let's turn the call over to David Dunkel, Chairman and Chief Executive Officer, Dave. Thank you Michael.
You can find additional information about this quarter's results in our earnings release Moneris. We see filings. In addition, we published our prepared remarks within the Investor relations portion of our website.
Unless otherwise indicated our commentary relates to results from our continuing operations.
We're very pleased with our third quarter results as both revenues and the earnings per share exceeded the top end of our guidance.
The better than expected results were driven primarily by an acceleration in the new assignments starts in our technology business as the quarter progressed.
We're excited about our focus footprint.
Technology now comprising almost 80% of overall revenues.
Our business is now completely dedicated to meeting our clients domestic needs and technology in finance and accounting, which are two of the largest and fastest growing segments.
Clients, particularly in technology are looking for partners that are able to provide resources at scale with multiple skill sets across multiple geographies, where the focus on compliance.
We have built a business that is able to do just that without distraction entered is helping us increased clients and market share.
Growth in our technology business is now outpaced the market for the eighth consecutive quarter.
We continue to look to deepen relationships within our existing client portfolio.
Which is comprised of predominantly fortune 500 companies.
These companies are increasingly looking for their partnerselect risque forced to provide the resources necessary to execute on critical projects.
You also assume or greater role and more complex technical projects that require managed services and solutions.
Our clients have increasingly expressed the desire to engage with us to serve as an effective more cost efficient alternative or complement to the larger scale integrators as evidenced by our success and recently winning several strategic engagements.
This growing demand significantly expands our market opportunity beyond the $30 billion domestic technology staffing market.
Demand for flexible staffing resources continues to be quite strong.
Reorganization across every industry is being confronted with the imperative to invest and rapidly adapt to ever changing business models, new competitors and the changing preferences of their customers.
Market, leading companies understand the value of utilizing flexible technology resources to execute on the project work needed to address this changing landscape where speed and flexibility are critical.
Discussions with many of these companies indicates that there are targeting an increase proportion of flexible resources within their technology teams to meet these project driven needs.
We believe these secular drivers of demand have fundamentally change the trajectory and persistence and technology investments and utilization of flexible labor to meet this demand.
Given the strength and the secular drivers with demand and technology. We would expect performance are the best domestic technology staffing and solutions market.
To perform well relatively speaking even during adverse macroeconomic environments.
What is true for our clients is also true for K force as demand for our services gross we're constantly evaluating and testing and enabling technologies that can significantly enhance the experience of our clients and candidates and improve the effectiveness and efficiency of our people.
Before I turn the call over to Joe I wanted to let you know during the quarter, we repurchased 1.2 million shares roughly 40 million in the third quarter.
And in early October we made additional purchases that exhausted the 102 million or an estimated net proceeds from our divestitures earlier than we anticipated.
Looking forward, our low debt level and strong cash flows provides significant flexibility to both pursue strategic acquisitions and still consider opportunities to return additional capital to shareholders.
I'll now turn the call over to Joe Laboratory, Presidents, who will give greater detail into our operating results and trends.
And then Dave Kelly, our Chief Financial Officer will further color on third quarter results.
Our intentions with use of cash proceeds and provide guidance in Q4, Joe. Thank you, Dave and thanks, All you for your interest in Cape worse, Our technology service offerings continue to be the engine that is fueling our growth.
This business saw meaningful improvements in starts activity in the second half of the quarter.
Which drove an improvement in year over year growth rates to 6.5% in the quarter. However, both our essay flex business, which grew sequentially.
Our direct tire business, which has seen improvement in growth rates for four consecutive quarters.
Were important contributors to exceeding our expectations in the quarter.
Collectively we have excellent service offerings that set the firm up for sustained growth at rates exceeding the market.
Let me provide some details about the performance in each of our service line.
We continue to take a larger share a business that existing clients in technology.
The increase in billable consultants on assignment at clients, where we have our longest than deepest relationships is driving our growth, which has now exceeded the market for eight consecutive quarters.
We believe our continued focus on furthering deepening relationships with existing clients is the right path given our enviable find portfolio.
We have established relationships is roughly 70% of the fortune 500, many of which are a longstanding.
These companies continue to be the largest consumers of technology talent.
We are aligning our service offerings and operating model the best fit with how these clients purchased our services.
We've made a concerted effort to align our teams by industry and size of relationship to drive enhanced customer intimacy.
Overall.
Technology Bill rates have increased modestly by 2.9% over last year and 1% sequentially.
Our strong relationships, coupled with the quality of skilled technology talent, we provide our clients is contributing to an increase in the average duration of consulting assignments, which is approaching 10 month.
We believe this trend may continue due to the scarcity of supply and the growth, we're experiencing and higher value add managed service solutions projects.
We are leveraging the longevity of our relationship and the resulting deep understanding of existing client needs to provide talent through traditional staff augmentation, while also increasingly seeing success in areas, including resource and capacity management as well as managed services and solutions.
The size of this business for US is still relatively small it continues to grow at a faster rate with higher margins and is an important part of our strategy.
We believe significant opportunity exists to expand our capabilities and provide differentiated value added services to our clients.
We've experienced growth across the majority of our top industry birders verticals with particular strength in business and professional services technology and health services with some weakness and telecommunication and financial services.
We are expecting an increase in conversion activity with some of our largest clients in the fourth quarter for planning to offset this and expect year over year technology growth rates to approximate third quarter levels on a billing day basis.
That's a flex revenues increased sequentially for the second consecutive quarter.
No declined 5.3% year over year.
Market for essay Flex business continues to be healthy and we expect revenues to remain stable at these levels for the near term.
Average bill rates within Epay flex were up 3.9% year over year and 0.9% sequentially.
Revenues in the fourth quarter last year were positively impacted by federal government disaster recovery project related to the hurricane really that did not reoccur.
Consequently revenues will be down from Q4 levels last year, we expect year over year revenues declined in high single digits.
Direct hire revenue increased 11.8% year over year and has probably been performing well in 2019, our direct hire business continues to be an important capability and ensuring that we can beat the talent needs of our clients through whatever means they prefer.
We expect a seasonal sequential decrease in the fourth quarter and for year over year growth rates to be impacted by a tougher comp in the fourth quarter 2018.
We continue to make significant technology and process investments in order to continue improving associate productivity.
We are particularly focused on our new talent relationship management system, which will be rolled out to our associates over the next several quarters.
This system should improve our capabilities and more effectively and efficiently sourcing evaluating and deploying talent.
Continued productivity improvement and the expectation a further improvements have allowed us to accelerate revenue growth, while maintaining a relatively stable level of sales and delivery associates. We expect this trend to continue and but we have significant capacity available to further drive growth.
We don't expect to make material additions beyond specific areas were productivity levels are extremely high and building further capacity as warranted.
Our simplified business model client portfolio and focused service offering has us well positioned for long term growth our focus on relationships with our clients in Canada as well recognized as we carry a world class net promoter score for our clients.
And glass doors highest rating among our competitors.
I truly appreciate the trust our clients in candidates have placed in K for us and our teams effort and driving the from forward I'll now turn the call over to Dave Kelly K Force, Chief Financial Officer, who provide additional insights on operating trends and expectations Dave.
Thank you Joe.
Revenues of $345.6 million in the quarter grew 4.2% year over year in earnings per share from continuing operations of 68 cents grew 21.4% year over year.
Our gross profit percentage in the quarter of 29.8% increased 40 basis points year over year as a result of a higher mix of direct hire revenues and a higher flex gross profit percentage.
Our flex gross profit percentage increased 10 basis points year over year, while we are seeing an increase in rebates and discounts from our largest clients. We're having success growing revenues at other clients, where our share of client spend is not quite a significant in the margin profile is more attractive. Additionally revenue from managed services projects.
Which also have a more attractive margin profile is increasing but.
The 30 basis point improvement and Tech flex margin, which is 26.8% in the third quarter was driven by some favorable pricing adjustments, we expect margins subject to seasonal impacts to remain closer to Q2 levels Perspectively.
Our portfolio is well diversified no single client represents more than 4.2% of total revenues and our 25 largest clients represent only 40.2% of total revenues.
SGN a expenses increased as a percentage of revenue by 10 basis points year over year as a result of increased accruals for variable compensation costs related to improved full year performance absent. These costs, we continue to make progress generating SGN a leverage as our revenues group. This leverage has been achieved.
While also significantly increasing our technology investments, we expect to continue to make incremental technology investments to improve productivity and drive operating efficiencies, while continuing to improve profitability.
Third quarter operating margin of 6.4% was inline with expectations and on track with our operating margin objectives. During this economic cycle. Our gross margins typically have declined by approximately 200 basis points due to a decline in the percentage of direct tire business and the compression in our flex spreads. Despite this compression.
Operating margins have improved over 400 basis points, which reflects the success of our efforts to deepen relationships in our existing client base, while aligning our infrastructure to optimize efficiency in serving these larger more complex clients.
Our effective tax rate in the third quarter was 25.3%, which was slightly higher than expected due to the nondeductibility of certain performance based compensation costs.
Our business continues to generate significant operating cash flows which were $24.2 million in the third quarter. These cash flows coupled with the $102 million of estimated net cash proceeds from the sale kgs have allowed us to returned significant capital to our shareholders through the third quarter, we've repurchased.
$91.3 million or 2.6 million shares in paid cash dividends of $12.7 million for a total of $104 million returned to shareholders. This year.
Additional share repurchases in October marked the completion of the full deployment over the $102 million and estimated net cash proceeds which was accomplished ahead of schedule.
Efficient redeployment of proceeds from the divestitures has allowed us to fully offset the negative impact to our earnings per share from the loss of profitability from the divested businesses through the accretion derived from lowering our share count.
Our net debt at the end of the third quarter was approximately $24 million the strength of our balance sheet healthy operating cash flows low capital requirements and $300 million credit facility provided us maximum flexibility to pursue pursue strategic acquisitions that enhance our service offerings to our clients well being appropriately back.
Launched with returning capital to our shareholders.
There were 62 billing days in the fourth quarter, which is two days less than Q3, and the same as the fourth quarter of 2018 a.
A single billing day equates to roughly $5.4 million in revenue.
With respect to guidance, we expect Q4 revenues to be in the range of 336 million to $341 million and for earnings per share to be between 65 and 69 cents.
Gross margins are expected to be between 29.2% and 29.4% well flex margins are expected to be between 26.8% and 27%.
DNA as a percentage of revenue is expected to be between 23% and 23.2% and operating margins should be between 5.7% and 5.9%.
Weighted average diluted shares outstanding are expected to be approximately 22.1 million.
Our anticipated tax rate effective tax rate of 19.7 billion, 19.7% as expected in the fourth quarter.
As a reminder, fourth quarter operating margins are impacted by approximately 40 basis points due to the seasonal decline in direct hire revenues and the impact of two fewer billing days on our fixed cost infrastructure.
Additionally earnings per share estimates include a negative impact of approximately two cents related to our share of quarterly losses from the work Lama joint venture, we anticipate we anticipate that our share of the losses in this joint venture could approximate the approximate these levels for the next several quarters.
These costs are reflected in other income and loss on the income statement.
Our expected effective income tax rate of 19.7% for the fourth quarter include estimated tax benefits on the vesting of restricted stock of approximately $1.1 million, which positively benefits earnings per share by five cents in the fourth quarter compared to our normalized tax rate of approximately 26%.
Due to the vesting schedules of our long term incentive grants the impact of this adjustment is reflected almost entirely in the fourth quarter each year.
Our guidance does not consider the effect if any of charges related to any onetime costs cost surcharges related to any pending tax or legal matters. The impact on revenues of any disruption and government funding or the firm's response towards regulatory legal or future tax law changes.
Finally, having completed the kgs divestiture earlier in the year in finished deploying the related capital we thought it would be helpful to provide some initial perspective on 2020 as well as to provide additional information on the quarterly impacts of seasonality on our profitability and how that might affect full year results.
We've included a table in our press release for illustrative purposes to assist in your understanding we will continue to provide quarterly guidance, which obviously will provide our investor base with the most up to date information and expectations.
The table reflects our expectation of continuing to grow our technology business year over year growth rate of 6% or better but for our finance and accounting revenues to be stable on a billing day basis.
Provided detail on quarterly operating margin expectations consistent with the targets. We have previously established of attaining 6.5% when quarterly revenues reached $350 million and 7.7% at $400 million you will note the seasonality impacts to these margins in Q1 of 180 basis points primary.
Early due to annual payroll tax resets in Q4 to 40 basis points consistent with the impact we expect this year.
We expect a fairly linear progression towards our operating margin targets operating margins are expected to improve by approximately 10 basis points for each incremental $4 million into revenue.
The strong performance noted suggest that revenues will grow between 4.6% and 6.1% and we will generate full year operating margins of between 6% and 6.2% taking into account a reduced share count of approximately 22 million. This would result in an improvement in full year earnings per share but between.
10.2% in 25.1%.
We're excited about our prospects and well positioned to take advantage of a strong market and our exceptional foundation to saying above market revenue growth rates, while improving profitability.
Jimmy.
We'd now like to turn the call over for questions.
Thank you as a reminder to ask a question you will need to press star one on your telecom to withdraw your question press the pound key please standby, while we compile the culinary roster.
And our first question comes from Tobey Sommer with Suntrust. Your line is now open.
Thank you very much.
I Wonder if you could start out by.
Giving us a little bit of color.
Regarding your your decision to kinda offers.
A preliminary outlook at 2020.
Historically, most companies in the industry only given give a look out one quarter and its after half the quarters done so.
How did you arrive at that choice.
Yes, Tobey this is Dave Kelly.
So I think a couple of things obviously, we've done a lot of work over the last few years and Theres been a lot of.
I guess effect on our income statement that I think it becomes increasing has become difficult to for you guys. In particular to say where are we going now that we've completed the divestitures. We've got a couple of quarters ahead of us.
And frankly.
We had finalized the deployment of all the cash and.
Looking at where the public in the Investor and the analyst bases in terms of models Theres a lot of differentiation. There. So we thought since we finished that work we give you a look at number one how things look on a clean basis and number two there seem to be quite a few questions from time to time.
On the seasonality impacts of the business. So we wanted to provide although we verbalize that in quarters past. We wanted to provide you a little bit more easily understandable look at that so those are really the drivers as well as I mean, obviously reiterating our belief that the market for 2020 protect in particular is going to be strong.
Thank you and as a reminder to our listeners if you'd like to ask a question. Please had star then one if you'd like to withdraw your question press the pound key.
Our next question comes from Greg Mendez with Baird. Your line is now open.
Hi, Thanks for taking the question Craig on for Mark Marcon I was wondering just could you talk a little bit about into within the how you're thinking about 2020.
Yes.
The flex gross margins I mean.
You know, we improved here normalize a little bit in Q4, but it means an expectation that maybe we can hold those stable or.
With larger clown still be a little bit of pressure.
Could you offset that with some of the stuff you're seeing with statement work.
Yes, Greg This is Dave Kelly.
Yes to your point, we have seen some nice stability.
In margins in general I think we've done a very good job in managing our business looking for opportunities to drive improved margins and increase our clients here as we mentioned I think is we look forward.
I think we look at it relatively stable margins going forward.
Clearly, it's a competitive environment out there in growing client share in some respects requires us to.
Yeah, obviously put some pressure is on bill pay spreads.
But I think we do look for stability I would say.
If there is any degradation it would be along the lines of what we've seen our ability to grow revenues and drive at least as good operating margin unite those declining margins, because we're taking client share and being more efficient.
Is it has been very beneficial for us. So I think gross margin stability, even if theres a degradation I think our operating margin expectations continue to be very solid.
Okay, Thanks and.
Just also thinking you know with a productivity gains you're seeing and we've done a lot from a technology perspective here and now we get the talent management system Rolling out what else is on the roadmap.
To help drive further productivity gains.
You just talk a little bit more met about that.
Yeah, Greg This is Joe Joe Laboratory.
I would say even from a technology standpoint, we'd be at to realize what we truly believe the productivity gains can be there from a technology. So we're in the early innings. There. So we think theres a lot of opportunity, especially when we look at the activities from candidate acquisition through match, where we're seeing the majority of investment being made in them.
Marketplace really addressing opportunities in those areas. So I'd say, that's one one leg of the school is ongoing technology is going to continue to provide opportunities and we haven't realized what we believe the opportunities are there just yet the other I would say is that the consistency of our team's execution we've been really.
Relentlessly focusing on the business to drive greater consistency into our overall operating model, which hasn't byproduct effect of allowing us to ramp people faster improve.
Our retention of individuals so it all kind of dovetails together with our technology strategy.
And our are really our human capital talent strategy, putting those two things together and then the overall operating environment.
Okay. So I mean, you still think there's more room within.
Hey, Kelly you have.
Yes, now we're very we're very comfortable.
We've continued to see our productivity levels, especially in our more tenured people move up there are actually it at all time highs right now and we still see room, there when we look at metrics such as.
Average amount of placements that somebody's, making on on a weekly or monthly basis, the amount that billable consultants that we have for associate we see we see plenty of runway there and then when we get into our less tenure populations are just not real a lot of opportunities continue to move those out.
Great. Thanks, I'll hop back in the Q.
Thank you and as a reminder, if you to ask a question Press Star then one on your touched on telephone to withdraw your question press the pound key.
A question next question comes from Tobey Sommer with Suntrust. Your line is now open.
Thanks.
It seems like you're a assignment links in Texas and Tech Kevin.
Elongated quite a bit could you talk about that and the the elaborate on kind of what's driving that.
Got it.
I mean, it toby's, you're well aware I mean this is.
An interesting time when you have every organization across every industry competing really for the same type of talent.
We're seeing trends in the marketplace that personally I haven't seen prior my career, we're seeing in lot of organizations looking extending their tenure limits.
In fact, I just now with the client last week that was talking about moving their tenure limits from two years to four years and mainly the reason that they're doing this is because they see the ongoing need offer these skills that and also there are battling to get the skill sets onboard and so there by the time, they're getting these people oriented and ramped up and.
Productive in their environments, they're having to turn them over from a from a 10 year standpoint. So we're seeing expansion and tenure limits is one driver of it.
The other is the statement of work business when when we look at different ways that we're engaging in statement of work whether it's through managed teams managed services solution.
These these types of initiatives usually have on multi year facet associated with them. So as that continues to be a higher percentage of overall business. That's also on extending out those contract durations.
Thank you Thats helpful.
Yes, Toby the last piece that I would add now if you saw the Wall Street Journal article a couple of weeks ago, where they talk about tack employment currently 7.6% of overall employment in the U.S. and they're projecting that to go into double digits on in the coming years. So I think customers are really seeing that the.
Demand for these technology people specialty on these front end customer facing systems, it's not going away.
Perfect. This is Dave.
Thats going cross functional.
As well so you see M&A people are becoming more information analysts and so they're taking on additional technology skills. So.
Technology is clearly driving business models productivity.
And really transformation and moving into the digital realm for a lot of these non traditional competitors is they are moving into new space. So.
I don't see that ending anytime soon.
Great I appreciate the the answer.
You talked about investment in check in kind of new tools can you just for a second talk to us about.
Whether these are proprietarily developed or your.
You are buying kind of industry off the shelf things and maybe doing some customization to them.
That's a great question actually what we've done as we've done we've componentize Tom all of our front end systems. So that allows us an opportunity to basically plug and play is different technologies are evolving. So we all see it I mean today X Y Z search engine might be the best search engine somebody.
I might be developing a better search engine in their garage.
Tomorrow and so when we went through our system re architecture basically we broke everything apart so that we'd have more ultimate flexibility in plugging, implying so we're really doing both I'd say, it's a combination of off partnering with the organizations that are very focused in specific areas because here's the re.
Equity I mean capers is not going to al technology on the massive technology providers and everybody's after human capital and one way or the other so we're partnering we're acquiring SaaS type licensing and then we're also bringing in platforms and customizing to a certain extent so it's really combination all the above.
Thanks last question for me.
2020.
Outlook, you gave us a little bit of color on tech and M&A.
Yes.
Direct hire what would the assumption be for 2020.
Yes, so again, yes. So we're trying to give you an illustration here as of how 2020 might look I think obviously the direct tire market has been is very good Joe talked about and you were talking about average duration of assignment right. The strengthened the direct hire market probably reflective of the same thing trying to identify talent I think I think we're looking at.
At a very good year for 19.
And as I look forward here.
A relatively stable good outlook for direct hire for 2020, but.
I wouldn't read too much into specific numbers here Tobey this is for illustrative purposes.
Got it from a from a direct hire standpoint, as well Tobey I think it's important to note.
It was probably about three years ago, we saw our conversion levels really move off and we've seen those stay at elevated levels. So that it's clear the end clients are utilizing staff augmentation as also on means to accommodate their full time hiring more in the try and buy so we're seeing really.
A lot of right to higher being executed within our contract once those consultants become proven they see an ongoing need it's a right fit for the consultants are right fit for the organization. So that's another means were direct hire and we don't really in many instances derived revenue in our direct hire.
Line item associated with that because after certain duration of assignment basically those consultants can convert and there is theres no fees associated with that so that employment space in tech has been very healthy.
Thank you very much.
Thank you only have a follow up Greg Mendez with Baird. Your line is now open.
Hey, Thanks, just one more follow up I was wondering if you could just talk little bit more on the growth with.
Service in the quarter and then how we're thinking about that.
Next year.
So you continue to grow but I think previously.
We're at about 5% of revenue.
So just thoughts there.
For next year would be helpful.
I am I remember on one of our previous calls I believe David had managed expectations. Our objective over the course than in the next five years is to really evolve this service offering to be roughly 20% of our overall revenue mix or better hopefully and so we're continuing to make the investments.
The pipelines continue to build that we're building out the teams also refining our processes and methodologies.
We've aligned more dedicated people to focus on on these efforts. So we're very comfortable with.
Staying on track to hit those objectives that they've put out there.
Okay. Thank you.
Thank you and I'm showing no questions in the queue at this time I'd like to turn the call back to David Dunkel, Chairman and CEO for any closing remarks.
Alright, great well. Thank you for your interest and support for K Force.
Well, we always have much more to do I'd like to again say, thank you to each and every member of our field and corporate team and also to our consultants and our clients for allowing us to privilege of serving you look forward to speaking with you again soon thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.