Q3 2020 Kforce Inc Earnings Call
Good day, ladies and gentlemen, thank you for standing by welcome to the third quarter 2020, K. Force incorporated earnings Conference call. At this time all participants 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 would need to press Star then one on your telephone keypad.
If you require any further assistance. Please press Star then zero 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.
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 East.
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 forces 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 and the shape and conduct the business and personal lives.
Prior to the pandemic, our society and the business community at large we're rapidly transforming and embracing digital models and technology investments appear.
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 had been forced to convert that engagement online.
Often times through self service digital platforms.
Education, and learning companies and institutions in their students are adapting to virtual learning.
Health care companies are working aggressively to address consumer desires for Tele health.
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 from 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.
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.
Significantly improved our profitability levels most.
Most encouragingly, we in currency, we experienced sequential growth of nearly 2% and our technology business, which is roughly 80% of overall revenues we.
We have also experienced a return close to pre COVID-19 start levels and 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 and displayed during these difficult times.
Our people have successfully tackled a sudden shift to working were 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 for our.
Our investments in our 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 KMP.
The company has accelerated investments in their digital transformation efforts.
We will continue to place a priority on allocating capital to grow our technology business, we have exercise caution as we have fortified our strong balance sheet and 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 and 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.
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 in new technologies and tools to meaningfully improve our flexibility and capability and providing exceptional service any more virtualized work environment and an 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 increasing success as we move through.
And beyond the current situation.
I will now turn the call over to Joe Laboratory, President, who will give greater insights into our third quarter performance recent operating trends in other insights into our operating environment there.
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 you for your interest in K Force our results for the third quarter and our expectations for fourth quarter performance continued to demonstrate a remarkable level of resilience and represent further confirmation of our strategic decision to focus our business to take advantage of the secular shift in technology demand now.
The higher end technology skill set that we support have 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 MAU growth and billable head count beginning in early June and this growth continued throughout the third quarter and through October, which we believe reflects clients' growing confidence and restarting projects and seeking resources for key initiatives.
Technology billable headcount is now 8% larger than the low point in early June.
[noise] job order flow and new assignment activity has continued to increase over the last several weeks well.
While job order 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 it 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. It still has an air of uncertainty around rising Kobe cases election outcomes and potential pent up demand of paid time off from 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 and retail space, so travel leisure.
On health care experience, 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 directed initiative within World class companies.
We have matured our capability to source 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 have 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 a recording 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 need 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 and 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 one and 2%.
Our performance compares extremely favorable to the overall economic trends and this is notably better than experienced during the 2008 2009 recession, which further supports the secular story.
Moving to our Epay 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 a government sponsored initiatives tied to the co. The 19 pandemic.
These opportunities have provided an important level of support to our core Epay flex business as we have navigated the revenue reductions brought on by the crisis with many of the roles within that they flex not being as a remote friendly.
Towards the end of the third quarter, we began to see declines in these lower level predominately customer service and call center roles as 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 cobot 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 cobot initiatives as we exit the fourth quarter of 2020 suggest we could see up to $10 million in revenue in the first quarter of 2021.
Our core Epay 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.
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 code revenue total epay flax may be down approximately 18% sequentially.
And up nearly 21% year over year.
Direct hire revenues in the third quarter increased approximately 32% sequentially and declined nearly 27% year over year.
Direct hire revenues are inherently less predictable and is the 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 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 power 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 higher revenues in the fourth quarter or maybe stable to slightly down versus Q3 levels given the traditional season and that 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.
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 empower bee.
Has provided us significant efficiencies with a fully integrated platform, especially as we shifted our associates to work remote environment in mid March art.
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 impart leveraging our K force connect from a sourcing referral and engagement standpoint in a boundary listen bar.
Moment.
These and many other efforts underway will position us with maximum flexibility regardless of what lies ahead during these uncertain times.
We're continuing to manage the productivity of our associates as we typically do with an elevated focused 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 head count in the third quarter due to the natural performance managed attrition those.
So 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 sustaining our above market growth rates. These.
These actions will add to the existing capacity of our current associates 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.
[music].
Our experience has been that recessionary cycles, resulting competitive advantage for the strongest companies and we believe we are ideally situated to take advantage of the market as conditions conditions continue to recover on what we believe could be an accelerated digitally led expansion.
We've retained our best people, taking cost out of the system and refined a more leverageable model, which will result in positive leverage as growth accelerates as we re imagine 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 teams attitude and efforts executing a fully remote capacity while managing through these remarkable time I will now turn the call over to Dave Kelly Capex versus 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 SGN 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 hire revenue mix and a decrease in overall flex gross gross profit margins.
Our 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.
Proximately 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.
Gross margins in our fee 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 retain the more highly skilled consultants given the scarcity of talent.
The majority of the assignments that were ended at the onset of the pandemic. We're on average in lower skill lower bill rate areas.
New starts during the pandemic have 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 fee business of approximately $37 per hour are close to pre pandemic levels due to shift in the mix of assignments.
As we look forward to the fourth quarter, we would expect to 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 EFI 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 fee business and it began 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 SGN expenses declined in terms of absolute dollar sequentially and declined approximately 270 basis points as a percentage of revenue.
Roughly 80% of our SGN any expenses are variable in nature, which allows us significant flexibility to manage our cost structure.
We expect SGN expense to decline further in Q4 in terms of dollars given lower revenues from the cobot 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 net.
Next I'll spend a few minutes discussing our operating cash flows and liquidity position.
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 days sales outstanding of six days sequentially were critical drivers who are 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.
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 Thirtyth 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 matures in May 2022.
Our trailing 12 months EBITDA as of September 32020 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 and making continued investments in our business deploying capital in other areas, such as acquisitions 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 or 62 days in the fourth quarter, which has two fewer than in Q3 2020, and the same as Q4 2019.
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 encoded cases gross margins are expected to be between 28.1% and 28.3% while flex margins are expected to.
To be between 26.5% and 26.7%.
As you know as a percent of revenue is expected to be between 21.4% and 21.6% and operating margin should be between 6.2% and 6.6%.
Weighted average diluted shares outstanding are expected to be approximately 21.2 billion 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 onetime costs costs or charges related to any pending tax or legal matters.
Impact on revenues of any disruption in government funding or the firms response towards regulatory legal or future tax law changes.
Okay Force outperformed the market during the great recession, and we have delivered superior results again in the third quarter against a very challenging global us economic backdrop our.
Our balance sheet is very strong our strategic position and client portfolio isn't the ideal position in 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, we'd 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 one 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 one on your telephone keypad.
Our first question or comment comes from the line of Tobey Sommer from Truest. The Securities. Your line is open.
Thank you.
I was curious if you could give us your perspective.
And.
Whether or not re shoring or onshoring is a phenomenon that your clients are undertaking and or do what do you hear they're expecting to undertake it in house.
How significant a driver if so may that be.
Yeah Tobey this is Joe.
Needless to say I mean, obviously the offshore is not a big piece of what we do but we haven't really seen any material shift in the man. The thing is coming back onshore I know out coming out of the initial front end to the pandemic. There was a lot of talk about this earlier on the.
And but we really haven't heard of any major shifts outside of certain things and very much isolation. So we've really seen at more modestly.
And I think if you look at the results of any of the major on a global integrators are there. The ports have continued to be a pretty strong in terms of new engagements and that their territory. So this would further support there's really not any major shift that's taking place.
[noise] and when we look at your balance sheet as well as your.
Cash flow and your stated goal to move more into managed services.
How are you feeling about.
Utilizing that capital to take.
To start to move towards that goal or are we still kind of in the midst of uncertainty and in better to be prudent and a wage.
Hi, This is Dan.
Hey, Bill.
Conservative.
Deploying the capital.
I would say that.
Can you to be conservative however.
If we find the right match.
The right portfolio of customers and the right skill sets in the right team will do it.
So it's not a isn't a won't do it but we're certainly going to be more selective.
So revenue would be.
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 and when we find the right thing.
We'll go for it.
Yeah, Tobey, what I would what I would also add to that is you may recall I think it was in our May 2019 call I'm, Dave had 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 all.
Our internal teams have done a really nice job and we're tracking ahead of on this at this point in time.
Okay. I guess you prompted a follow up for I guess my last question. What does tracking ahead mean, when we've only got an endpoint in a five year timeline just could you 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 a when this starts to become a meaningful part of our overall 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 backend.
About next year, if not into the early part of 2020.
Okay.
And then I was hoping you could my last question can you give us a little bit of color about your kobin related work it looks like you're going to be and that's going to be a 10% customer if not more by the end of the year. So you'll you'll probably for regulatory reasons you to give us a little bit can 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 than certainly those are on the rise. Unfortunately, so any kind of color and inputs you could give would be helpful.
Yeah actually no I I guess 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 the.
The range that we provided for Q4 is literally.
Roughly half of what we did in Q3, so we see that beginning to tail off and as I put out there we see a 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 of our rep.
Revenue on an annualized basis.
So that this was very project related to support one.
Client that we had a long standing relationship with.
And to offer a very good cause because of what our capabilities were so we we took advantage of this as a bridge I'm not knowing what was coming our way going into the pandemic and as we've seen things play out and our tech business because of the remote capability and now the.
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 Mccomb from Baird. Your line is open.
Good afternoon, everybody. So wondering if you could give us a color with regards to business since then.
Yours.
In terms of the dynamics that you're seeing on the Tech Flex side, you gave us the color with regards to travel leisure and health care being down I'm wondering how big is that just.
It started its Dick's and how how much more does.
Good.
And then on.
On the financial services Telecom, which have been resilient and can you describe some of the underlying dynamics there that you're seeing that growth.
Gross.
We describe it.
Yes, so I guess I'll start with on travel and leisure travel needs or 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, we're starting to see is a those clients are starting to onboard console.
Well, it's because they're getting after things that they need to be doing with their business to be prepared for post pandemic or the back end of the pandemic. So we're actually seeing net headcount I'm here at the latter part of Q3 and heading into Q4 within within the travel and leisure clients that.
We have we have a very nominal footprint in the airline, but obviously with a strong south Florida presence we had.
Some footprint within the cruise lines, but they're doing some really neat things within the cruise lines in fact there.
There was a really nice wall Street Journal article talking about some of the things that they are having to be innovative and around to get through the CDC and be able to reopen so a lot of nice things happening there in terms of our sectors. You know we saw a nice sequential performance from a financial services and.
Current communication and also retail and so I think they all have unique dynamics going on within them well.
Within within Communications you know, we there's there's this race for the young customer so a lot of work happening within those organizations in and around consumer facing.
Digitization aspects and then actually even within retail we saw early on is those those retail entities that had not made great strides to digitize their business in <unk> and and interact with their clients from an online standpoint have really ramped up their efforts on so even some of the.
The clients, where we saw an initial impact there. We've also seen them begin to ramp up their head counts.
Great and then can you talk a little bit about the.
Staying on Tech Flex just what would you envision the impact being with regards to the new changes with regards to any form.
Thanks, I encourage occur or is that.
So hey, Mark this is Dave Kelly so.
I guess a couple of comments so that would make so some of these executive orders I know a bit.
Challenged I know in the court. So I think its 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.
But I think getting a couple of things I think at least for us a pretty clear during.
During the administration that exists today I think that there is a recognition that technology and talent is hard to find and I think the in that space that we play well and then I think just generally in specialty staffing other is 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.
Did that would change because these are essential workers to drive the us economy, I think I, I mean, something like 22 or 25%.
Biology workers are non U.S. citizens. So you can't really cut that off and I don't think that that frankly has been occurring administrations intact as we look forward to it.
If the Democrats were to win clearly they've been pretty vocal in terms of their desire to bring in more talent.
It's highly talented technology workers, so I think as an industry and certainly for K for us as a company we feel very good about the environment and regardless of what happens in the ability for us to access these technology workers as part of the skill sets that we have you know we don't bring people in so so we're really.
Pretty good 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 as we go out towards next year.
Dave you mentioned.
For the office.
With print could you just add a little more color to that and and particularly as you know as some of your internal IP initiatives.
Our completed in early 2021, how we should think about the margin.
Profile changing because it does you did a really nice.
This quarter here on the margin side and I'm just wondering how we should think about the potential for further margin expansion.
[noise] Yeah. Let me this is Joe let me handle the first part of your question I'll, Let Dave Kelly I'm chime in on the second part so since really the early part of May when we launched some internal initiatives.
Weve made considerable project to Reimagine, what our office or the future will look like give.
Given the pipe pandemic dynamics things that were learning through this and being a completely 100% virtual as well as looking at what's happening with client drivers Artemis and our consultant drivers and also internal dynamics that are happening is everybody's experiencing this remote work so.
Yeah, I would say in summary, we subscribe to very similar thoughts are.
That had 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 drop off 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 more 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'll really be irrelevant, if somebody's physically in an office or if they are working somewhere remote and so we believe this is going to allow us the opportunity to reinvest into the business today.
To more effectively support our overall business with Technip.
Technology and it really a model that is also going to provide us cost leverage.
Yes, Mark Mark I would add to that so so.
The investments with 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.
Our profitability improvements and Thats, improving productivity right, we've done a great job doing that year after year. After year now in these kind of investments. We think we'll have significant returns very quickly in terms of where associate productivity is going to go you mentioned I. Appreciate you recognizing that we've had some nice improvement.
And our operating profit.
And.
Yes.
We had previously stated that our operating margin targets at $350 million in revenue, we'd be at about 6.5% operating margin and then when we got the $400 million.
We'd be about 7.7.
Operating margin.
For us obviously.
Obviously, we're tracking slightly ahead of that so productivity improvements going well on top of that the opportunities that we've seen with some of the changes as to how we're going to operate to Jon elaborated on put us in a very comfortable position, we think to meet or exceed those those targets. We previously put out so yes, we feel very good about the future as we promised revenue.
We'll be able to grow more profitably even than we had expected before the end.
Great.
Last follow on to that.
Can you talk a little bit about that where you're positioned from a capacity perspective, and you talked about some potentially some modest ads how are we thinking about those.
Yes. So we you know we have capacity across all of our 10 year groups, because that's really how we look at our population.
Got into Great Lakes on this in the past on on how much productivity over time really ramps up as we hold on to people. So for example, a key a couple key capacity measures are the weve really hone in on because they're they're the output our new starts per associates and billable.
Consultant per associate so both of these are running well below pandemic levels. So we have capacity and 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 headcount and that's really so that were 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 the leverage we will continue.
You have 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.
<unk>.
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.
Just wanted to maybe build off one of the earlier questions when we won't.
You know you talk about reinvesting in new technologies up 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, you may be 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 think of things unfolding obviously as.
As we look to 21.
Are you starting to see obviously.
Obviously, you don't spend a lot of time growth in our tech flex business I think we've talked about a market that we think is going to continue to improve obviously.
Obviously, a lot less cyclicality to that business. So.
80% of our revenues are.
Hi, it's 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 this can continue to drive improvements in SG nine levels, you know, where we are as we have been we'll probably continue to invest technologically at the same pace. So I don't see a big change in terms of what capex might be looking like.
Because we're going to we have been investing will continue to invest obviously a lot of the solutions that we're putting in place our SaaS based solution. So that already is coming through in some of our US unit costs. So I think it's a matter of growing revenues as we kind of replace some of the cove in business with higher quality higher profitability technology business and.
Hey business combined.
That'll help from a gross margin standpoint, and drive as well.
Fundamentally improvements so you've got a number of things working in our favor.
Appreciate the insights there.
Looking at the balance sheet and ending the quarter with a net cash balance one quarter ahead of schedule is pretty impressive and.
Outside of.
The reinvestment you're talking about and the dividend how should we think about.
Capital allocation strategies.
Priorities today.
Yeah, I mean, I would say that I'll, just kind of reiterate a little bit about what did when Dave certainly we want to be opportunistic as we think about.
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. Obviously historically you know we think our stock Opportunistically valued is a good place to put capital as well. So I don't think really our strategy has changed.
Quite frankly I have it in I think in the very near term, we've got to make sure that we're appropriately cautious as Dave said.
Something happens that might require companies to.
You know pullback so sort of 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.
And ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
Our next question or comment comes from the line of Sam <unk> from William Blair. Your line is open.
Good afternoon, my comment there all right.
Yes, yes, yes.
No just wrong. Thanks.
I have a few questions related to market share you can.
How many 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 wallet share with current customers or maybe reaching out to new customers you might have previously been serviced by competitors, who aren't weathering the downturn as well as you have.
Yes, it's a great question, it's it's really both arms. So we're continuing to see clients looking at consolidation of their of their vendor list.
Which we're positioned very well for us so that 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 all longstanding track record.
Likewise in any downturn such as this we've seen some of the smaller more mid sized clients, maybe they 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 for US were predominately focused on fortune 1000, which have held up very well. So we've seen a lot of those competitors up has scaled back some of their resources.
So that really provides us an opportunity to take advantage of capturing customer share in clients, who and where maybe we're a little bit earlier in our development efforts. So you know through through the downturns at 2008 2009 and this current climate.
Historically, we've outpaced the market by more than two acts and we foresee that continuing into the near future.
Great well I appreciate the color. There my next question kind of relates to the acceleration the remote work model.
We're more than eight months and this new covert world are you getting the sense that clients you previously preferred local staffing resources will be permanently okay with remote services and if so how does that change the competitive environment I think it makes you more competitive against smaller localized terms, but maybe increases the ways you would compete against other larger I T staffing.
Firms I would just love to hear your thoughts around that.
Yeah, I would say in this boundary analysts 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.
As the winning formula so in terms of the the local competitors or the regional competitors no doubt there is 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 hot 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 we're actually starting to see RF Tees and RF buys come through where they're asking us to provide a menus of different skill set accessible and 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 position 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 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 propels as well and.
Then you know we entered into a joint venture.
But a little bit over a year ago with.
With the company by the name of work Lama that has some very innovative technologies that we've been deploying in and around.
Candidate engagement as well as a referral type tools in a 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 frame the issue there.
It's like in the next quarter here, yes.
Thank you.
Thank you very much.
Thank you I'm showing no additional questions in the queue at this time I would 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 and support of K for Us and as we forge ahead through these unprecedented times.
I'd like to say, thank you to each.
Each and every member of our field and corporate teams for the incredible efforts and to our consultants and our clients for your trust and K, forcing partnering with you and allowing US the privilege of serving you we.
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.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.
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