Q4 2020 Kforce Inc Earnings Call
Yeah.
Ladies and gentlemen, and thank you for standing by and welcome to the K Force Q for 2000, and 'twenty earnings Conference call.
At this time, all participants are in a listen only mode and.
After the speaker's presentation, there will be a question and answer session.
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I would now like to hand, the conference over to your first speaker today to David Dunkel, Chairman and CEO. Thank you. Please go ahead.
Good afternoon, and I'd 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.
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 and 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 and our earnings release, and our SEC filings and.
In addition, we have published our prepared remarks within the Investor relations portion of our website.
Let me start with some commentary about 'twenty and 'twenty.
Reflecting back and considering all of the significant challenges, our nation and world and endured and it's remarkable to see how we have persevered adapted survive and in some cases prospered.
We began the year with great optimism for continued prosperity.
Suddenness of the Covid pandemic and its dramatic effect on businesses communities and families cannot be overstated.
Followed by several unrest and other social issues disruption to our daily lives has been very significant.
We now face a change in administration that brings with it new questions and concerns about regulatory and fiscal policies and.
Certainty of 2020 has carried over into 2021.
Through it all but heroes for those who have stepped up through incredible personal sacrifice to serve others experiencing prices.
Most proud of the leaders of K for us and our wonderful people.
Not only adapted to dramatic change and their own lives, but also founded and their hearts and serve others and their communities through our corporate social responsibilities initiatives.
Against this backdrop, our talented team also delivered extraordinary financial results and.
And we are grateful and proud of their exceptional efforts.
Years of preparation and K for US had a strategically situated as we entered the pandemic and early 2020 because of the decisions. We made to principally focus our efforts on helping world class companies solve their strategic objectives, while providing critical technology talent and solutions.
The pandemic heightened the urgency to rapidly digitize operating models to meet competitive threats from existing and emerging disruptors.
Financially on a billing day basis, we achieved year over year on revenue and earnings per share growth from approximately 3% and 14% respectively.
Full year revenues and our technology business were only down approximately 1% year over year, despite a very difficult economic landscape.
And the fourth quarter, we continued to take market share and our results exceeded our expectations across each of our lines of business, most notably our technology business grew 6% sequentially.
During the year, we also continue to adapt operationally as the situation required.
And we seamlessly transitioned our entire workforce to work remote within 24 hours advanced our K Force re imagined initiative as we look to define and more flexible future operating model and work environment and made significant progress implementing our talent relationship management system.
From a governance standpoint, we continue on with our board refreshment activities and are pleased to welcome and Catherine Cloud Man and the newest member of our outstanding Board of directors.
As we look for 2021, we are very excited about our strategic position and ability to execute within what we believe will be a continued strong demand environment for our services.
It's our belief that the pandemic has exponentially elevated the imperative for companies to rapidly digitize their businesses transform business models and drive productivity gains through technology and investment.
We believe the macro and secular trends play to the heart of the position of K for us as a technology and professional services and solutions for them.
We will continue to place a priority on improving associate productivity, while allocating capital to grow our technology business, especially on our managed teams and managed solutions practice, where we have continued to experience tremendous market receptivity and success.
The strength of our performance and financial position allows us great flexibility and how we deploy capital and the future.
We are migrating our FAA business toward higher and skill sets for decision support and analytics, which are more closely aligned to certain technology disciplines. We are also positioning our firm to having more flexible work environment post pandemic by leveraging many of our ongoing internal technology investments and <unk>.
Utilizing available tools such as on our employees will have a blend of in office and remote work.
And we expect that this shift will result in fewer offices and a smaller physical footprint per office.
Though it will take a few years two and transitioned fully we have made good progress. During 2020, we expect that these decisions will result in a more profitable and higher quality revenue stream.
We expect to continue to manage our business and a disciplined manner as we always have based.
Based upon operating trends.
Through these uncertain and trying times, we will continue to put the health and 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 performance.
<unk> operating trends and other insights into our operating environment David.
And Dave Kelly CFO will then give greater detail on our financial results and position as well as our financial expectations and guidance for the first quarter Joe.
Thank you David and thanks for all you for your interest and K for US I want to first Echo Dave's comment and give us David Thanks to advocate for us or for the personal sacrifices and they've made and elevating their game and delivering tremendous results and 2020 against the very challenging backdrop.
As for the fourth quarter total revenues grew five 3% on a year over year basis and exceeded our expectations across each of our lines of business, especially in our technology business, where revenue has resumed growth on a year over year basis, let.
Let me give you a little more color on each line of business with.
With respect to our technology business and nearly 6% sequential increase in revenues Inc.
Meaningful acceleration from the roughly 2% sequential increase we experienced in the third quarter and as David noted resulted in year over year growth of almost one percentage.
These increases are primarily volume driven as.
As we've grown our consultants on assignment by 15% since early June 2020, Inc.
Encouragingly the pace at which we were growing our consultants on assignment meaningfully accelerated in the fourth quarter, we're benefiting from a combination of solid new assignment activity as well as continued lower level asami down.
These trends have continued into the first quarter and we experienced the lowest level of assignment on a.
And at year end.
Have on record.
Job order flow and new assignment activity and continue to increase in fact newest Simon and activity increased 16% sequentially and the fourth quarter.
While job orders remained at levels lower than pre pandemic. They continue to increase we are also continuing to see significantly higher fill ratios due to the improved job order quality as clients are executing against and overall higher mix of critical technology initiatives.
We also believe the trends we are experiencing are reflective of our growing confidence and restarting projects delayed and deferred or delayed.
The scarcity of high and it resources and secure and resources for new transformative initiatives.
There remains a broad strength and demand across multiple industries.
We experienced growth sequentially and the professional services insurance and retail industries, while other key industry sectors experienced stability.
Financial services and shirts, and professional services of shell relative resilience throughout the pandemic and as shown on growth on a year over year basis.
We continue to see the acceleration of critical technology initiatives.
Within our clients and areas, such as cloud mobile and data analytics and cyber.
With a strong focus geared towards improving the consumer digital experience.
The investments that we've made and frontier and technology and processes over the last three years.
Matured our capability to efficiently provide these clients with highly diverse top talent at scale and our balance sheet and listed environment across the U S.
Over the last three years, we have also significantly invested in our managed teams and solutions capabilities and in order to provide a higher value differentiated offerings to our clients.
We have been experiencing tremendous success and bringing this offering to our clients do.
Due to strong long standing partnerships, we have built and our reputation for delivering quality services.
We intend on making further investments and this capability and 2021.
I thought it would help if I provided a relevant and client engagement to help solidify the type of business, we are driving and this offering.
The first engagement with a telecommunications client related to their legacy infrastructure. There was compromising their service offering to their end customers our client needed a partner with proven cloud strategy and implementation expertise to deliver a holistic solutions from architecture to implementation and age.
W. S.
As a strategic partner, we are responsible for defining the cloud strategy, including future state cloud architecture and implementation roadmap.
We were also responsible for cloud native development and implementation, including data security and compliance and reporting.
And our client is now able to focus on new pursuits, and data monetization strategy with a flexible solutions complete with multi tenant capacity.
The second engagement with our health care clients.
And there was embarking to build a new custom greenfield application as part of its digital transformation strategy.
Force delivered a scalable outcome based solutions initially deploying for scrum teams to take over the legacy application support and enhancements, we were able to ramp up quickly and exceed the performance targets and delivery schedule due to our successful partnership. This client is now engaged us to support the application and.
And related to a recent business acquisition.
Revenue on this offering are accelerating at a significantly greater pace than our overall technology business we.
And we feel extremely confident and the positioning of our technology business and the ability to continue expanding our market share.
And so early first quarter trends consultants on assignment are up 2% on a year over year basis, and new assignment starts and continuing to be strong. Thus, we expect first quarter revenues and our technology business could increase and mid single digits on a year over year basis.
Moving to our <unk> business.
Revenues were up nearly 26% year over year and the fourth quarter, primarily as a result of the contribution of approximately $28 million of revenue from our support of government sponsored initiatives tied to the economic fallout from the COVID-19 pandemic.
These opportunities for continued to provide an important level of support to our overall FA flex business.
The Covid revenue stream remains fluid and we expect that revenues could be and the range of $22 5 million to $27 5 million and the first quarter and a range of $10 million to $15 million and the second quarter based upon current information.
Our non Covid FAA flex business grew 13% on a sequential basis and declined approximately 17% year over year we.
We have collectively grow and our consultants on assignment by 33% since the early June 2020.
As Dave mentioned, we are intensifying our efforts to migrate our business towards more highly skilled assignment and such as analytics and decision support roles and on western.
Septimal to technological change and automation and are more synergistic with our technology footprint.
For that and we expect to experience natural assignment and although.
Lower skilled FAA roles and 2021 more strategic client relationships do not exist.
We expect our non Covid FAA revenues to be down and the mid single digits sequentially and down on a year over year basis, consistent with fourth quarter levels when combined.
With the midpoint of the range for Covid revenues total S. A flex may be down sequentially and the high single digits and up year over year low to mid 20% range.
Direct higher revenues and the fourth quarter increased approximately 8% sequentially and declined 13% on a year over year.
Direct hire remains an important part of our service offering to clients, though we've not allocating significant investments year due primarily to its sensitivity to economic cycles. We expect direct hire revenues may be roughly flat on a year over year basis, and the first quarter.
And we're continuing to invest and strategic initiatives to better position our firm for the long term sustainable profitable growth. These investments include our CRM and tiara and systems, both of which are cloud based and seamlessly integrate with other Microsoft product offerings.
And that's providing us.
Significant efficiencies.
And our team has also significantly advanced efforts and the evolution of our fully integrated hybrid operating model to enhance the online experience of our internal team and the interaction with our clients candidates and consultants.
These and many other efforts will position us with maximum flexibility regardless of what lies ahead.
We are continuing to manage the productivity of our associates and the fourth quarter, we began making selected investments to increase the number of associates and our technology business. So that we're able to take advantage of the expected economic acceleration in 2021.
Overall capacity remains sufficient to support above market growth rates and should improve due to our continued investment and technology and greater on day moment of communication and collaboration tools and processes that have been so successful for us during the transition to remote work on.
Our experience has been that recessionary cycles result, and a competitive advantage for the strongest companies and we believe we are ideally situated to take advantage and the market as conditions continue to recover and what we believe could be and accelerated digitally led expansion in 2021 and beyond.
We have supported and retained our best people structurally reduced our fixed costs and our refining a more leverage and more model that we expect will result in positive leverage as growth accelerates as we re imagine the future our customers and employee satisfaction levels are at an all time high we carry the highest glass.
Store rating among our peers achieved a world class net promoter score from our clients and consultants and.
For the most recognized firm by technology and consultants per S. IAA.
Greatly appreciate the trust our clients consultants and candidates placed and K for us and I couldnt be prouder of our team's attitude and efforts executing and are fully remote capacity, while managing through these remarkable times I will now turn the call over to Dave Kelly <unk>, Chief Financial Officer, David.
Thank you Joe.
The ability of our team to execute extremely well and our core business. During this very difficult gear and the critical decisions made to pursue business outside of our core allowed us to do not to not only maintain valuable infrastructure, but to also deliver exceptional results to our shareholders.
Full year revenues of $1 4 billion and earnings per share of $2.62 represent year over year increases of three 3% on a billing day basis, and 14, 4% respectively.
Driven by our strong tech performance fourth quarter revenues of $354 million significantly exceeded our expectations and reflect a continuing strengthening of performance and each quarter since the beginning of the pandemic.
Earnings per share of <unk> 86 cents grew.
<unk> grew 33% year over year.
Our gross profit percentage and the quarter of 28, 4% was stable sequentially and decreased 80 basis points year over year as a result of lower direct hire revenue mix and a decrease and overall flex gross profit margins.
Our flex gross profit percentage of 26, 5% declined 20 basis points sequentially due to the usual holiday impacts and 40 basis points year over year.
Primary drivers and our flex margin decline was the impact of the lower margin and COVID-19 revenue on our FIA business.
Gross margins declined 100 basis points year over year.
Margins and our technology business declined 30 basis points year over year, due primarily to slight spread compression and slightly higher health care costs.
Average bill rates and technology, and nearly $80 per hour and increased nearly four percentage over the past year and.
As we've previously stated our clients are generally retained the more highly skilled and highly compensated consultants since the onset so it depends and given the scarcity of talent, which is positively influence both overall bill rate and overall length of assignment.
Average bill rates and all and thanks business exclusive of COVID-19 revenues were generally stable at $37 per hour.
As we look forward to Q1, we expect and we expect the bill rates and Bill pay spreads in both our technology MFA business seems to be relatively stable.
We're seeing continued growth and our managed teams and solutions business, which carries and overall higher average bill rate this higher rate higher and these higher and higher rate higher margin projects should help bring rate and spread stability and a competitive environment and over the longer term create leverage to increase margins and <unk>.
Overall profitability.
While we expect stability and overall spreads flex margins will be negatively impacted and the first quarter by approximately 110 basis points relative to Q4 due to seasonal payroll tax resets.
Overall, SG&A expenses decreased as a percentage of revenue by 170 basis points year over year due to improved associate productivity solid expense management and lower costs and areas such as travel and office expenses. These positive trends will continue into the first quarter as we embraced the remote work environment.
Brought on by the pandemic.
SG&A expenses in Q1 will be up slightly from Q4 in terms of percentage due primarily to payroll tax resets, but will be lower than the first quarter last year in terms of both percentage and dollars despite significantly higher revenues.
Our fourth quarter operating margin was six 8%, which once again exceeded previously communicated operating margin targets. We believe the improving quality of our revenue stream continued productivity improvements and ongoing lower operating costs will collectively drive improved profitability.
As a result, we are raising our operating margin targets by approximately 20 basis points from prior expectations.
This increase is reflected and our full year 2021 expectation of operating margins of between 6% and six 3%.
Our effective tax rate and the third quarter was 21%, which was lower than we anticipated due to a greater tax benefits realized upon the vesting of our long term incentive awards as a result of and increase in <unk> stock price. The majority of our long term incentive awards vest annually and the fourth quarter.
Next I'll spend a few minutes discussing our operating cash flows and liquidity position.
Operating cash flows were $15 million and the fourth quarter and slightly greater than $109 million for the full year.
We continued to benefit from the deferral of approximately $13 million and payroll taxes under the cares Act and the fourth quarter, bringing the total for the year to nearly $39 million.
Our strong operating cash flow as a result on the resulted in us ending 2020 with $3 million and net cash versus net debt of $45 2 million at the end of 2019.
In addition to retiring all of our outstanding debt, we returned approximately $46 million and capital to our shareholders and 2020 through $29 $4 million and share repurchases and $16 8 million and dividend payments.
We generated roughly $97 million and EBITDA in 2020.
Our strong cash flows debt free balance sheet and $300 million revolving credit facility, providing ample liquidity to operate the business even in extreme conditions and flexibility to opportunistically allocate resources to areas such as acquisitions and returning capital to our shareholders. While also continuing to make invest.
And <unk> to organically grow the business.
And as a signal of our belief and the strength of our operating trends going into 2021, our board of directors approved a 15% increase to our quarterly dividend effective and the first quarter. This increase will bring our dividend yield to roughly 2% at current stock price levels.
The continued macroeconomic uncertainty and the unpredictability of our current COVID-19 revenue stream leads us to continue providing a broader range and our guidance are.
Our billing days are 63 days and the first quarter, which is one day more than Q4, 2020, and one day fewer and Q1 2020.
We expect Q1 revenues to be and the range of 354 million to $364 million and earnings per share to be between 57 and 65.
Gross margins are expected to be between 27, 4% and 27, 6% while flex margins are expected to be between 25, 4% and 25, 6%.
SG&A as a percentage of revenue is expected to be between 21, 6% and 21, 8% and operating margin should be between five 2% and five 6%.
Weighted average diluted shares outstanding are expected to be approximately 21, 5 million and Q1 and the anticipated effective tax rate is 28%.
As a reminder, first quarter operating margins are typically impacted by approximately 150 basis points due to seasonal impacts of annual payroll tax resets. This also impacts earnings per share by approximately <unk> <unk>.
This guidance does not consider the potential negative impact on the demand environment from a significant inventory increase and COVID-19 cases, the effect if any of charges related to any onetime costs costs or charges related to any pending tax or legal matters. The impact on revenues of any disruption and government funding for the for.
Arms response towards regulatory legal or future tax law changes.
To better assist and understanding how our business may change over the course of 2021, we've provided some detail on our full year revenue and profitability expectations and our press release.
This information reflects an expectation of full year revenue growth and our technology business of between 8% and 12% range as provided for RFA unit reflect the net impact of revenue declines from business that we are no longer pursuing due to our strategic migration to higher and skill sets. We have also provided on most.
Today, the expectations for our COVID-19, and revenues, which we currently believe may and in the first half of the year.
In terms of profitability, we've reflected the improved operating margin as I mentioned earlier and the resulting earnings per share.
We are very pleased with our performance in 2020 and believe that demand for technology resources and 2021, we'll continue to strengthen and.
As our revenue mix evolves and we expect to enter 2022 with 85% for heart revenue is focused on technology, which permeates every aspect of business and society and an <unk> business that is directly focused on complementing those technology efforts we've.
We've built an exceptional team and with the technology enabled operating and model that we believe will allow us to outperform the market on a sustained basis.
Our strong financial position and bias for ongoing investment will further enable and the team to excel and providing resources and solutions critical to for success of every company and every industry.
On behalf of our entire management team I'd like to extend a sincere. Thank you to our teams for their efforts and overcoming the challenges of the past year and making it a resounding success operator.
We'd now like to turn the call over for questions.
Thank you Sir as a reminder to ask a question you would need to press star one on your telephone to withdraw your question. Please press the pound key please stand by while we compile the Q&A roster.
I show. Our first question comes from the line of Josh Vogel from Sidoti and company. Please go ahead.
Thank you good evening guys. Thanks for taking my questions.
First one.
And thinking about the tax Tech flex bill rates were and the upper <unk> for the year and I know that you've talked in the past and was driven by business mix and clients generally retaining more highly skilled consultants.
Do you still think the dual force will remain elevated and for house hold before we may see some churn of assignments with you.
And your price averages.
Yes, Josh this is Joe laboratory.
Say, what youre seeing and the bill rates is really indicative of two things one it's our strategic focus of the business that we're going after and the nature of that work.
Coupled with the pandemic really was just an accelerator of where we were already going on.
So we don't we don't foresee anything in the.
Near term.
Start moving bill rates down and so we're not artificially inflated from a bill rate standpoint, I mean, these are the going rates for those skill areas.
Yes.
So Josh and outreach I'll, just emphasize what Joe said it because I made a comment in my prepared remarks, so imagine managed services managed teams businesses.
And we are carrying higher bill rate and so our expectation here is that as a great counter journey.
And activity that might be a lower bill rates and on the longer term.
And that business.
Gross I want and positive effect for us.
Yes, it makes sense.
How much revenue.
It's coming from the managed teams and solutions practice.
Yeah, we haven't we haven't broken that out specifically our intent is as that starts to become more and meaningful mix of our rural Tech business that we will be breaking that out at some point in the future.
Understood.
Shifting gears, a little bit when we think about.
Paring down the physical office footprint.
You gave guidance for Q1, but how should we think about a good SG&A runway run rate going forward and other levers that can.
And move it up or down from quarter to quarter.
Yes, Josh this is David Kelley.
No.
Part of the reason why we gave you.
For your expectations as to give you an idea that right. So we see benefits across a number of things right.
And the real estate is one of them improving productivity right yielding returns on the investments that we made is on.
Also a big part of it right and we've been after this for a number of years.
Which let us actually for the second time in two years to raise the incremental profitability expectations that we had previously provided.
If you kind of look at that guidance that we had given guidance. If you look on the expectations that we had provided for the full year on.
Operating margins between six and six 3% have you would've kind of compare that to prior years and would've been 20 basis points lower so it's a number of different things that are driving and certainly there is opportunity here.
And from our real estate perspective on things like travel right. The idea of how we operate is having and the positive impact here for us.
But for US. We also wanted to make sure that we give ourselves enough opportunity to reinvest and the business right and we've had a lot of nice returns from our technology investments, we think that continued investment and going to be critical for us because we're after sustained continued profitability improvement.
Alright, great and just last one and I'll hop back into queue talking about the migration efforts and the FAA business is that is that complete or when is that going to be complete in 2021, and then should we inherently expect to see an increase from.
And from that 37 dollar bill rate level.
Going forward.
Yes, the team on the team did a lot and nice work on throughout the course and for 2020 and our efforts were accelerated as the pandemic hit as we all know that.
That really hit the lower skilled areas much harder than the higher skill areas. So we really accelerated and our overall strategic plan that we're executing in Q3 and Q4. So a lot of that work is behind us and there'll be continued ongoing alignment that'll be taking place here on through the core.
So for 2021 and.
And ramping up and certain areas. So what we would anticipate over time as that bill rates will gradually increase.
Alright, great well, thanks for taking my questions.
Thanks, John.
Thank you on next question comes from the line of Tobey Sommer from choice, but please go ahead.
Hey, good evening. This is Jasper bibb on for Tobey I wanted to ask about what kinds of consulting capabilities you'd be interested and having to manage teens business to fuel your growth there.
Yeah, we've remained active and looking at.
<unk> and the marketplace obviously.
Troll and then the nature of the type of portfolio that brought to the table or two paramount things that we're looking at because we are confident that we can we can build this business organically.
We need to so we don't have to do an acquisition. So we're going to continue to be very selective, but and it really anything in and around the digital because that's where our clients are really pushing a lot of work.
Two to our area of expertise. So we're going to know anything digital transformation cloud are really important practice areas for us as we look forward as well as and the big day to area that laundry list that I ran through my opening comments.
Thanks, and then just with respect for them moving kind of the M&A segment and further up market what percentage of that business would you say is kind of a higher skilled versus lower scale per day. Just so we can kind of think about the timeline of repositioning that business.
Yes today.
It's important to really before speaking to the future kind of step back and look historically I mean, we've been uniquely qualified due to our centralized recruitment capability to service high volume lower bill rate lower scale.
And we've concentrated on the area for many years, however, overtime those skill areas are going to be the ones that are going to be most impacted by technology and advancement. So as we emerge from the pandemic our strategy to rebuild this and the skill areas as David had mentioned and I had mentioned really requiring more use.
And then and still intellect, such as the analytics decision support.
We will continue to.
Support certain strategic customers and higher volume business, just because of the nature of our relationship and the needs that they have but long term. We believe this really insulates us from disintermediation through technology advancements coupled with.
These more intellectual areas are highly synergistic with our technology footprint.
So I would say if we were to look at it today I probably accounts for about 19% of kind of our total job postings at this point and time.
Okay, great. Thanks for taking the questions.
Sure.
Thank you on next question comes from the line of Sam Chris Moore from William Blair. Please go ahead.
Hey, everyone might come through alright.
Yep Yep, sorry, and we can hear you Sir.
Perfect Your F&I.
The business benefited from some large one time project last year, but I'm curious of additional stimulus packages are path. If you think there's potential for more of that type of government work to come in or is that more of a onetime opportunity.
Yes.
Started stating that some on the back half of last year. These were opportunistic situation with a lot of unknowns going into the downturn and through long standing relationships. We had partners that had reached up reached out to us as they had engaged and received contracts. So we really support them for for two main <unk>.
Drivers not knowing what was going to lie ahead for us.
And likewise because of and how meaningful that work was especially at that point in time with everything that was going on and the domestic U. S. However, we've always as we come out and this really view that more as a bridge and that will allow us to continually basically replace that business as it falls off.
With higher quality tech business it fits much more within our overall strategic plan.
Start to look out to 2022, you know, we really look at more of about 80, 515% type mix between tech.
And at Bay, just to give you kind of a pulse on what our intentions. There. So no I mean, we're selectively continuing to support those customers that we've committed to but we're not actively out pursuing to onboard more of that business. It doesn't align with the strategy that we bought laid out on this call.
Perfect. That's helpful. Maybe switching gears on.
I wanted to ask a little bit about managed solutions still I know, it's been a growth driver for you. So I wonder how the pandemic impacted things if there was any disruption or if it outperformed expectations. During this period and then are there any specific client groups or project types, you've found more success and the service model out too.
Yes, I said I'll start on the back and those areas that we've been mentioning.
Really have continued to accelerate so I'd say the pandemic has been an accelerant to everything that we were pursuing from a managed teams us solutions standpoint for.
Really two reasons one.
It doesn't matter what industry. It doesn't matter what company is the amount of initiatives that we're seeing kicked off in and around Digitization.
And have increased from where we were at this point last year. So there's a burning need there for every organization they've seen it through especially the dynamics that have unfolded throughout the pandemic and really the second area I would say that there was really played into that is through the pandemic we have seen clients.
Pushing more responsibility and our direction.
Because some of them have had a right size their teams. So they are actually on boarding more flexible resources versus going the FTE route. So that has also played well for.
Managed teams and solutions type work force.
Yes.
Perfect I appreciate the color guys.
Sure.
Thank you.
And as a reminder to ask a question.
And do so by pressing star one on your telephone.
I show on next question comes from the line of Mark <unk> from Baird. Please go ahead.
Hey, good afternoon, and thanks for taking my question I'm wondering.
You talked a lot about.
Some of the things that you've been doing when we think really long term. How do you think about the margin structure really long term and I'm not talking about just one to two years, but let's say, we have a normal cycle and we ended up going.
Five six years out how do you think that ends up we ended up progressing through that particularly given some of the comments that you made with regards to efficiency and.
And reduced real estate footprint.
Yeah I'll jump on it.
Go ahead David.
Yes, I was going to say I think it's important to step back and if we look at the if we look at the dotcom recession or we look at the financial crisis.
Recession and both of those from a tech standpoint, what we saw for them really peak to trough was about 400 basis points of margin deterioration and comparison to this recessionary cycle, where we roughly experienced about 100 basis points.
And so needless to say it hasnt been as deep so that provides us some.
Yes.
And we're optimistic on what that means just because of the overall demand environment and then I would couple that with the wait and historically do see a higher margin profile in the managed teams and the solutions business will be performed and so as that continues to become a higher mix of our overall technology business and that would provide.
This opportunity for <unk>.
For continued margin expansion.
Yeah.
And although I would add to what Joe said and this is no different marketing and what we've been talking about this is it's been a journey that we've been on.
Marching as we grow to.
And to the improve.
And profitability.
For productivity and technology investments, and we said that a little bit earlier, but for us Joes points for right on right. We look at opportunities at the gross margin line and the longer term and then business mix becomes richer, but really a huge amount of.
Continued improvements and operating margin are going to come from the efficiencies and we continue to derive right. So we've said in the past.
And we're looking at.
And a clean quarter right now nearly 8% operating margin so as we get larger.
Gross margins are potentially positively impacted I don't know that theres any reason why we wouldn't still targeting double digit operating margins.
Great and then can you talk a little bit about just on the F and ace side with some of the longer term.
You know focus on on some of the higher value added.
You know skill sets.
Would that end up impacting the gross margins within the F&I side, and how we should think about that.
Yes.
So if we only look at actual gross margin and one of the dynamics right. As we go up the food chain from and FAA standpoint, and at a higher bill on AR.
It will it will translate to more margin dollars, albeit on a percentage basis.
<unk> won't move to that extent, just because youre dealing with a much higher bill rate. So you're dealing with the law of numbers there does that make sense mark.
Totally does and I appreciate that.
Great and then.
When you when you think about like the the areas that are emerging.
People aren't really thinking about that much with regards to your business. What what do you think is going to be the biggest surprise. When we think you know when we look back.
We're in the future were for five years out and we look back on on on.
Two day things that youre going to be doing four to five years from now that people arent we.
Really considering do you think there's anything that's going to be materially different.
And probably the thing that'll be most materially different and it's the strategies that we're beginning to execute at this point and time, it's going to be the the synergy opportunities between these these analytic business decision support type roles within and Theyre, not all sitting within finance and many instances their sitting and other.
And the units because some organizations have a very decentralized on some still have a very centralized but just how synergistic that is with technology and our ability to go into organizations and provide that turnkey solution across both of those areas are really provides us a lot of opportunity and it's at the end of the day.
And when we look back for five years from now it is going to be the mix up that higher value oriented work that we're doing from a managed team solutions standpoint, all of our overall technology footprint is also going to be material.
Terrific.
This is David Dunkel, I wanted to add something.
And you are imagining the future and and you start thinking about all of the different applications of technology.
How pervasive technology is now with robotics with.
Analytics with Internet of things.
Things that we werent, even considering year a few years ago.
And if theres anything I think we're in the midst and the digital arms race and every organization is either facing the challenge of new Disruptors or just this rapid digitization of their business and.
Nobody gets to take a pass so unlike prior cycles, where.
And organization can make a decision and say well, we're not going to replace our customer facing applications and the cycle. There now compelled to do it they have to do it just because of the competitive nature of it so theres things today and that we're doing that we'll likely won't be done and the future and there'll be new things that we're doing that we can't even contemplate today.
But the one thing Thats very clear is technology underpinning everything from from consumer to business to government every aspect of life has been digitized now and and that's going to continue so.
The beautiful thing is and when we look at where K forces today.
And we're and absolutely the right place to be with 85% exiting this year being and technology and growing.
And the higher skilled technology areas, where service servicing 300, plus for the Fortune 500.
And on the domestic focus on operating margin increases.
Continuing where actually and a great position right now it's been a long time getting here.
But hats off to our team to Joe and Dave and our leadership team for what they've accomplished so we're actually on a great spot.
Great.
Thank you.
And you back a little bit on more David was going there.
Not sure. If you saw the recent announcements, both Microsoft and Salesforce around employee experience platforms dealing with collaboration learning coaching wellbeing.
Along with many other support areas from a remote work. So also when we look for five years out and I think it was S. S. IAA just did a poll survey in January I mean, 83% of Ikea temporary workers remain remote as of January So I think they said it best.
And question is what the new normal looks like post pandemic. So clearly there's a lot of proving its.
Success, suggesting that probability of heightened levels of remote work will persist into the future. So and we're seeing those similar trends across our clients. So I think the nature of how work is done we will continue to evolve as well as what we look for five years out and just all the technology, that's being infused into businesses and support of those businesses.
<unk>.
It's a great point thank you.
Sure.
Thank you Mark.
Thank you.
I show no further questions in the queue at this time I'd like to turn the call back over to Mr. David Dunkel, Chairman and CEO for closing remarks.
Great. Thank you very much first of all thank you for your interest and support of K for Us and.
As we continue to persevere during these unprecedented times and I'd like to again and say thank you to each and every member of our field and corporate teams.
For their incredible efforts and to our consultants and our clients for your trust and K for us and partnering with you and allowing us the privilege of serving you.
We delivered another quarter and exceptional results and excited about how we're beginning 2021.
And of course, we are very excited to declare and Tampa titled Town with the box for whitening and the raise as American League Champs and we look forward to talking with you again after the first quarter. Thank you very much and good evening.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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Okay.
Yes.
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