Q1 2021 Kforce Inc Earnings Call
Good day, and thank you for standing by and welcome to the K Force first quarter 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you would need to press star one on your telephone if you require any further assistance. Please press Star then zero.
I'd now like to do is supposed to this conference call, David Dunkel, Chairman and CEO you may begin.
Good afternoon I.
I would like to remind you that this call may contain certain statements that are forward. Looking 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 force as 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.
I am incredibly proud of the continued outstanding execution by the entire K force team and delivering first quarter results that were at the high end of our elevated expectations and that improved as the quarter progressed.
It's extraordinary execution follows on the heels of a great 2020, where our largest business technology demonstrated remarkable resilience against the backdrop of an unprecedented macro environment.
The momentum we have built an increasing expectations of demand for technology resources have significantly raised our expectations for the second quarter and our ongoing performance, which Dave Kelly will cover in some detail in a moment.
As I reflect on our strategic decision to focus our business on domestic technology staffing and solutions, it's important to remember that prior to the great recession. The domestic technology staffing market was roughly $20 billion in size and the third largest staffing market segment behind industrial and clerical staffing the most.
A recent update from staffing industry analysts noted that the domestic technology staffing market became the largest market segment in 2020 with spend of nearly $31 billion over the same period, our technology business grew in excess of two times the market rate. Additionally, the technology from.
<unk> services market exceeds 100 billion.
Companies have significantly increased their technology spend over the past decade, and the rate of growth in this market is accelerating.
In fact, FIA currently anticipate the domestic technology staffing market will grow by 9% in 2021.
This confirms the wisdom of our strategic decision to focus our energy and technology and complementary functional it skills and FAA and related skill sets.
As we look to the future. There is no other single market segment, where we would want to be focused and we are incredibly excited about <unk> future prospects.
Strength in the secular drivers of demand coupled with improving corporate prospects across virtually every industry allowed our talented team to deliver services to our blue chip client portfolio at a level above our expectations with technology in the first quarter growing more than 3% sequentially and 6% year on.
Here on a billing day basis.
Additionally, we made nice progress on our objective of migrating our FA business toward higher end skill sets for decision support in analytics in the quarter.
Our FAA results, excluding COVID-19 revenues also exceeded our expectations. This strategic shift we believe we will provide an important complement to the technology services, we provide our clients, which Joe will elaborate on during his remarks.
We also continue to make great progress in positioning our firm to have a more flexible work environment post pandemic through our re imagine initiatives by leveraging many of our ongoing internal technology investments and utilizing the available tools such that our employees will have a blend of in office and remote work we have.
Expect that this shift will result in fewer offices in a smaller physical footprint per office.
This vision includes both the revenue generating and revenue enabling components of our workforce.
As for our release last week, we have entered into an agreement to sell our corporate headquarters and are actively seeking a new facility in Tampa Bay.
Our business continues to generate significant operating cash flows and we were active in repurchasing approximately $16 million in stock in the first quarter.
To strengthen our balance sheet and availability under our credit facility allows us to be opportunistic with respect to deploying capital.
We continue to evaluate potential acquisitions, we will apply our stringent cultural and financial criteria to any potential transaction.
In addition to the proceeds from the sale of our building we expect to continue generating solid operating cash flows in the second quarter, given the strength on our balance sheet and our belief in our future growth prospects, we expect to remain active in repurchasing our stock at current levels.
From a governance perspective, four years ago, we began in earnest a mission to refresh our board with individuals possessing necessary skill sets and backgrounds to lead K force into the future.
Earlier in the quarter, we provided detail on two additions to our board.
MS. Katherine <unk> joined our board of directors in the fourth quarter of 2020 and Mr. Derrick Brooks joined the board in the first quarter of 2021.
Each of these extraordinarily accomplished individuals both professionally and personally bring diverse and valuable perspectives to our board.
As we look ahead, 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.
Activity gains through technology investments.
I'll now turn the call over to Joe Laboratory, President, who will give greater insight into our performance recent operating trends and other insights into our operating environment. David Kelley CFO will then give greater detail on our financial results and position as well as our financial expectations and guidance.
For the second quarter.
Joe.
Thank you, Dave and thanks, all for your interest in K Force.
Momentum across our business is accelerating.
Total revenues from the first quarter grew 10, 1% on a year over year billing day basis as the improvements we're seeing in our technology business and strategic areas NFA are being complemented by the COVID-19 business.
Extremely pleased with the three 1% sequential and six 3% year over year billing day growth in our technology business.
This is the best sequential growth in first quarter, we have on record and perhaps the best performance, we've ever experienced and capable of.
More typically we experienced a sequential revenue decline on a billing day basis in the first quarter given seasonal year end assignment ends.
However, we had remarkably low assignment ends at the end of 2020 and very strong first quarter with respect to new assignment starts.
In fact, we returned to pre holiday levels of consultants on assignment by the end of January.
Typically it takes until the end of the quarter to return to these levels for additional perspective going back to the great recession. The range a sequential billing day declines in our technology business is about 1% to nearly 6%. So this resolves tremendously encouraged relative to that range.
We believe that this speaks volumes as to the vital non discretionary mission critical work that we're performing across our client portfolio, which I'll refer further elaborate on shortly.
Enhancing our growth rate, even improving bill rate trend bill rates have increased four 4% year over year on technology to $80 an hour.
Volume However is the most significant driver to our growth.
Billable consultants on assignment began increasing shortly after the inception of the pandemic and have grown sequentially from three consecutive quarters consultants on assignment are now at levels, 21% greater than in June 2020.
We're benefiting from a combination of solid new assignment activity as well as continued lower level of assignment ends growth strong bill rates and volume increases have continued into the second quarter on provide us a solid foundation to meaningfully accelerate our sequential growth from first quarter levels.
Job order flow has recently returned to pre pandemic levels and new assignment activity in the month of March and thus far in April has significantly surpassed levels seen prior to the pandemic.
We are also continuing to see higher fill ratios due to improved job water quality as clients are executing against on overall higher mix of critical technology initiatives. We also believe the trends. We are experiencing are reflective of a growing confidence in restarting projects that may have been deferred or delayed.
<unk> high end, <unk> resources, and securing resources for new transformative initiatives.
We continue to see the acceleration of critical technology initiatives within our clients in areas such as cloud mobile data analytics project and program management with a strong focus geared towards improving the consumers' digital experience.
The investment we have made in the front end technology and process over the last several years have matured or keeping the ability to efficiently provide these clients with highly diverse top talent at scale and are now balance sheet with environment across the U S.
Significant accelerant. So overall technology growth has been the investments we've made in our managed team and solutions capabilities in order to provide higher value differentiated offerings to our clients net.
Offering provides a strong complement to our traditional staffing business.
We have been experiencing tremendous success, bringing this offering to our clients due to the strong long standing partnerships, we have built and our reputation for delivering quality services we.
We intend on making further investments in this capability throughout 2021 and in the foreseeable future. We feel extremely confident in the positioning of our technology business and the ability to continue expanding our market share.
It remains broad strength in demand across virtually every industry, we experienced growth sequentially and professional services insurance and retail industries, while nearly all of the other key industry <unk> experienced modest growth or stability.
<unk> financial services insurance and professional services has shown relative resilience throughout the pandemic and have been significant contributors to our growth on a year over year basis.
Given the momentum we are carrying into the second quarter, we expect revenues in our technology business could increase in the mid to high teens on a year over year basis.
This well above market growth is compounding our success as technology revenue significantly outperformed the market in the depths of the pandemic only declining 3% in the second quarter last year, we are clearly continuing to take market share, which we would attribute to our team's execution against the backdrop of an acceleration of overall.
Technology Center.
Our ethane flex revenues were up 26, 4% year over year on a billing day basis in the first quarter, primarily as a result of the contribution of approximately $24 million of revenue from our support of government sponsored initiatives tied to the economic fallout and recovery efforts from the COVID-19 pandemic.
<unk> revenue stream remains fluid as we expect net revenues could be in the range of $28 million to $33 million in the second quarter.
Our non COVID-19 FAA flex business was stable sequentially and declined 12% year over year on a billing day basis.
As we mentioned previously we began to intensify our efforts to migrate our business towards more highly skilled assignments such as analytics and decision support roles that are less susceptible to the technological change and automation and more synergistic with our technology footprint.
We will continue to support lower end skill sets for certain clients, where we have long standing relationships on our strategically important to K force ongoing success on our technology business we.
We have seen natural assignment and of lower skilled ethane rolls in the first quarter of 2021 were strategic client relationships do not exist and expect that to continue into the second quarter.
We expect our non COVID-19 FAA revenues.
To be up on a year over year basis, as our repositioning gains traction.
When combined with the midpoint of the range of the COVID-19 revenue total ethane flat may be up sequentially in mid single digits, but down slightly year over year on billing day basis due to the expected decline of COVID-19 revenue.
Direct hire revenues in the first quarter increased nearly 1% sequentially and 5% year over year on a billing day basis.
Direct hire remains an important part of our service offerings to clients, though we have not allocated significant investment here due primarily to the sensitivity to economic cycles. We expect direct hire revenues may see slight growth sequentially and increased approximately 50% are in the second quarter as clients demonstrate.
A high degree of confidence in the recovery through the addition of full time staff.
We are continuing to invest in strategic initiatives to better position our firm for long term sustainable profitable growth on.
Our most recent significant investment in our talent relationship management system, which went fully live in the first quarter.
Both our CRM anti RM systems are cloud based and seamlessly integrate with other Microsoft product offerings, thus, providing us significant efficiencies.
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.
The sale of our corporate headquarter building announced last week positions us to build out a steady into our facility with a smaller real estate footprint aligns with how work will be performed in the future deploying our high Tech high touch hybrid operating model.
These and many other efforts will position us for the continued evolution of an operating model that provides maximum flexibility regardless of what lies ahead.
Productivity metrics continue to improve across our experienced associated base. We are very bullish on our long term prospects and also began making selective investments to increase in the number of associates in our technology business late last year, so that would be able to take advantage of what we believe will be sustained strong growth in the tech.
Apologies staffing market for years to come on.
Overall capacity currently remains sufficient to support above market growth rates and should improve due to our continued investments in technology and greater enablement of communication and collaboration tools and processes that have been so successful for us during this transition to remote work.
This allows us the opportunity to continue to invest in growing our resources to address growth beyond 2021.
We have supported and retained our best people structurally reduce our fixed cost and our refining get more leverage able model that we expect will result in positive leverage as growth accelerates as we re imagine the future our customers employee satisfaction levels on an all time high we continue to carry the highest last day.
Our rating among our peers and maintain a world class net promoter score from our clients and consultants and on the most recognized firm by technology consultants are.
I greatly appreciate the trust our clients consultants and candidates have placed in K force and I couldnt be prouder of our team's attitude and efforts executing in a fully remote capacity, while operating under the circumstances of the past year I will now turn the call over to Dave Kelly K Force as Chief Financial Officer, David.
Thank you Joe.
First quarter revenues of $363 $2 million were near the high end of our guidance and the positive trends, we are seeing across our business, especially in our technology business lead us to provide second quarter guidance, which significantly exceeds our previous expectations.
Earnings per share of <unk> 62 from the first quarter grew 47, 6% year over year. We are also significantly increasing our EPS expectations for the second quarter due to the strength of our revenue growth.
On a gross profit percentage in the quarter of 27, 2% decreased 100 basis points year over year, primarily as a result of a decrease in overall flex gross profit margins, which also declined by 100 basis points to 25, 2%.
Specific to technology flex margins, we experienced a 70 basis point decline year over year. This decline was partially related to spread compression, which is driven by year over year growth in some of our largest clients with the margin profile slightly lower than the average of our tech business as a whole I should note that.
As we grow our business with these lower margin growth gross margin clients were able to continue to expand operating operating margins as the benefits of scale more than offset lower gross margins.
We also experienced higher payroll taxes in Q1 as states began to raise rates and also slightly higher healthcare cost versus the first quarter last year.
Sequentially spreads on our technology business expanded from Q4 as we continued to have success growing our higher end managed solutions offering.
Flex margins on our HAE declined 200 basis points year over year with our lower margin COVID-19 project portfolio being the primary contributor to this decline.
As we look forward to Q2, we expect spreads in both our technology and FA businesses to be relatively stable.
Should we begin to seeing wage inflation within our consultant population. We are confident in our ability to work with our clients to appropriately align bill rates. So that they can retain these valuable resources. We believe rising wages are a sign of strengthening demand for our technology resources and there is a long term net positive for our business.
We also continue to experience success in growing our managed teams and solutions business, which carries roughly 400 basis points higher margins on our technology staffing business. We expect this offering to help stabilize overall technology spreads and over the longer term create leverage to increase margins and overall profit.
Ability.
Flex margins should improve by 150 basis points approximately relative to Q1, principally due to the seasonal low alleviation of payroll tax resets that occurred in Q1.
Overall, SG&A expenses decreased as a percentage of revenue by 210 basis points year over year due to operating leverage provided by our revenue growth significantly improved associate productivity lower costs in areas, such as travel and office expenses and improving credit trends.
These reductions are offsetting higher performance based pay due to our strong results.
SG&A expenses as a percentage of revenue in the second quarter will decline from first quarter levels due primarily to the alleviation of payroll tax cost in Q2, and the $2 million gain on sale of our headquarters are.
Our first quarter operating margin was five 4%.
We believe the improving quality of our revenue stream continued productivity improvements and ongoing lower structural operating costs will collectively drive continued improvement and profitability levels.
Our effective tax rate in the first quarter was 27%.
EBITDA in Q1 was $24 $1 million, which represents a 32, 1% increase from the first quarter last year.
Operating cash flows were $22 $4 million from the first quarter we.
We returned approximately $21 million on capital to our shareholders in the first quarter through $16 $2 million on share repurchases and $4 8 million and dividends, we ended the quarter with $1 $3 million in low and net cash.
As we look forward to the second quarter. There are two items I'd like to discuss in some detail that are assumed in our guidance.
As we announced last week, we entered into an agreement to sell our corporate headquarters facility for $24 million.
On this transaction is expected to close in mid May and generate a roughly $2 million pre tax gain that will be recorded in SG&A in the second quarter.
The agreement includes a leaseback of the building for a period of 18 months.
This transaction monetize an underutilized asset on our balance sheet.
While we expect a negative impact to SG&A of roughly $300000 per quarter. During the brief leaseback period due to increased occupancy the occupancy cost as a tenant it is expected to provide one $5 million to $2 million.
Annual savings thereafter, as we identify a smaller more technology enabled footprint in the Tampa Bay area.
The second discrete item impacting second quarter results is an approximate approximately $2 million charge, resulting from the termination of our supplemental executive retirement plan, which is expected to be recorded in other expense.
Our compensation Committee and board of Directors made the decision to terminate this plan and eliminate a component of executive compensation not directly linked to performance.
The termination will also reduced P&L volatility and eliminate unnecessary expense given its cost to maintain.
In addition to the $2 million charge, our expected effective tax rate in the second quarter of 29, 5% reflects the loss of a previously anticipated $750000 tax benefit related to the circ.
Excluding the tax impact the surcharge in gain on sale of day building largely offset each other.
Our expected normalized tax rate in Q2, excluding the sort of impact would have been 26, 7%.
The higher levels of revenue, we are generating and the unpredictability of our COVID-19 revenue stream leads us to continue providing a broader range in our guidance.
Our billing days are 64 days in the second quarter, which is one more day than the first quarter and the same number of days as the second quarter of 2020.
We expect Q2 revenues to be in the range of 387 million to $397 million and earnings per share to be between 87 and <unk> 95.
Margins are expected to be between 28, 4% and 28, 6% while flex margins are expected to be between 26, 6% and 26, 8%.
G&A as a percentage of revenue is expected to be between 22% and 24% and operating margin should be between seven 7% and eight 1%.
Weighted average diluted shares outstanding are expected to be approximately 21 4 million from Q2 and as noted the anticipated effective tax rate is expected to be 29, 5%.
Our guidance does not.
<unk> the potential negative impact on the demand environment.
Significant increase in COVID-19 variant cases the.
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 in government funding or the firms response towards regulatory legal or future tax law changes.
Overall, we believe we are in an exceptional place.
The strategic decision to focus our business and domestic technology, which is expected to grow organically in Q2 at 15% or greater positions us for very strong overall revenue growth from Q2 and the foreseeable future.
As our revenue mix evolves, we expect COVID-19 related revenues to decline through Q3, and Q4 and to reach minimal levels by the end of the year.
We expect to enter 2022 with 85% of our revenue is focused on technology, which permeates every aspect of business in society and in a business that is directly focused on complementing those technology efforts.
Our shareholders continue to benefit from strong performance and efficient capital allocation as exhibited by our return on invested capital in excess of 30%.
On a predictable cash flows.
Lamented by the proceeds from our building sale provides significant future flexibility to continue making investments on our business and remain active repurchasing our stock at current levels.
On behalf of our entire management team I'd like to extend a sincere. Thank you to our teams for their efforts and outperforming market expectations through the adversity of 2020 and continuing to build on that success in 2021 on.
Operator, we'd now like to open up the call for questions.
And thank you.
And to ask a question during the session you will need to press star one on your telephone.
You require any further assistance please press star.
Apologize as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster and once again that is star one if you like to ask the question and on first question comes from Mark Matt Con.
From Baird. Your line is now open.
Hey, it's mark Mark on.
First of all congratulations on on the strong progress that Youre exhibiting I'm wondering if you can talk a little bit more on on the tech flex side.
You know, it's it's apparent across the board that the economy is improving and that the market is growing and that the secular trends in terms of digital technology or are continuing to gain steam but what I'm wondering about is Joe gave.
Dave you both made comments with regards to share gains and I'm wondering if you could elaborate a little bit there in terms of where are you seeing the share gains.
How pronounced our day.
Is it geographic is it by vertical.
Relative to who do you think youre gaining share how should we think about that going forward how sustainable is it.
Yes, Mark this is Joe on a very good question I would say from a broad standpoint, the referenced the share gain is really just benchmarking ourselves at a high level against what.
He's saying is taking place in staffing as a whole in terms of growth. So I think it's important to note that what we're seeing specific to clients that were involved with as we are continuing to see vendor consolidation.
And knock on wood fortunate to this.
Wait in time.
We've had very good outcomes when going through vendor consolidation and our opportunity to be a winner on that front and actually pick up more share associated with that could kind of give you. One example, large client.
Had about probably about eight or nine vendors working on engagement that had roughly about 100 consultants on that engagement. They wanted to consolidated down into into one vendor. We won that assignment, we actually had about 50% of debt share at that point in time and now we have 100 percentage of share. So we see that going on broad based within climb.
So I'd say, it's really client specific where we're doing business and enhance the overall market.
Great and then can you talk about the uniformity this from a regional perspective in terms of of the.
Of the growth that you're seeing I mean, you're talking about.
Hi, mid teens mid to high teens in terms of Q2 growth.
Is that across the board or.
Are there any specific drivers to that is it take is it looks as we look at tech flex.
I would say that the market as a whole.
What we saw on the beginning of the year as we saw our enterprise clients come screaming right out of the right out of the blocks in terms of ramping up their hiring for critical project initiatives that they were looking to get after part of why we referenced that we saw a little bit more growth in our in our enterprise clients versus what we'd call our market based clients on in Q1.
One I will tell you. It's we've entered the early part here of Q2, it's much more balance we're seeing growth broad based so we've really seen that across our top line the industry.
With four or five of those being in the double digits and we're seeing across all geographies so pretty much.
It's broad based large companies small companies.
Medium sized companies I mean technology the impact.
The Best example, that I could get on the imperative for organizations to adjust from a digital standpoint is if we look at online retailing and the impact of those they werent prepared for online retailing.
And then the kit on online retailing was growing at about 1% grabbing about 1% market share since the early days of Dot com in the first eight weeks of the pandemic online retailing captured close to 10% additional spend so that's just one example on one industry that's happening but.
That's happening within all sectors and all industry. So we're very confident in terms of what the ongoing prospects are so it's not a single line, it's not a single vertical with non single region.
It's basically broad based.
Great and then can you talk a little bit to staying on revenue can we talk about M&A and the special COVID-19.
Projects that Youre doing you gave the guidance here for the second quarter.
With regards to the anticipated spend that's well ahead of what we were previously anticipating how do you think the balance of the year is going to go and you know.
What caused the what caused your change in terms of.
Guidance for the second quarter in terms of the projected spend you had previously been conservative in terms of assuming it was going to fall off.
Yes, Mark this is David Kelley Yeah.
You are right now you know we've been talking about debt last quarter that we thought things would drop off and excited actually because it continues to give us an opportunity to invest in the business. So that we can.
Make those make those investments that we think are going to help us on the long term, especially with respect to our tech business.
Which we still think is going to be.
Existing this year about 85% of total revenues.
Basically what happened is we've talked about the strategic partners that have come to us and asked for us to participate with them. We actually had another project government a request, but with one of these partners and.
As a result, we had a little bit stronger growth in the second quarter than we had anticipated and matter of fact, as we look forward into the third quarter.
I think I'd indicated on second quarter.
Zinc thirtyish million dollars from revenue in the second quarter, probably about those levels now on the third quarter.
Unpredictable business I still would say are still our planning assumptions here.
Or that it will tail off and be relatively minimal at the end of the year, but we will get a little bit a revenue lift for both in the second quarter and in the third quarter.
So for US it's been a great bridge and as I said, it's been a great opportunity for us to take advantage of and invest further in our core business and particularly technology.
Great and then can you just talk about the margin implications here with regards to.
You know you are guiding to a nice improvement with regards to the EBIT margins here for Q2, and obviously that's complemented by some of the government business. The COVID-19 business, that's coming in but how should we think.
With the divestiture of the corporate headquarters with moving to.
More on line work.
What are the long term implications how should we think about the metrics that you've historically given us.
From a revenue and margin perspective, and the targets.
Sure Yeah, no problem market. Good question. So we had said last quarter.
We provided some updated guidance.
As to what we thought operating margins would be if certain revenue levels have not changed those expectations certainly.
When we were talking about that it was not with the expectation that some of this COVID-19 revenue, which frankly is a little bit lower margin than the rest of the business and we're doing it because we think it's the right thing to do would impact us. So so as we look into the second quarter, certainly that's having a slight operating margin impact as it is flex margin impact.
The corporate headquarters that I'd mentioned, we are going to be leasing that back for a year and a half.
It will cost us about $300000 incrementally because again, obviously as a tenant versus being an owner there are costs, but we still expect.
On that.
We're gonna say, one and a half $2 million a year for the foreseeable future and also give our people a very exciting new space to take advantage of the hybrid model that we've been really focused on so it is really a great opportunity we think for US there. So I would say all in all haven't changed our expectation is we grow op.
<unk> margins, we still expect to improve at the levels, We had said before approached.
Approaching 8% certainly as we get passed on $400 million markets more pure technology in our core ethanol business. So really haven't changed our posture, but just trying to trying to manage through this environment and take advantage frankly on some of this COVID-19 revenue to even better prepare ourselves for the future.
Terrific. Thank you.
And thank you and our next question comes from Tim Mulrooney Vermilion Blair. Your line is now open.
Good afternoon.
Okay.
You can hear me okay.
I just want to stick on that for a second I mean I. Appreciate all the color you guys gave for the second quarter.
But notice you Didnt update full year guide that you gave last quarter are you still comfortable with that annual guidance range. You gave previously or is that just no longer relevant given how I mean, I think you said in your prepared remarks, even things are coming in better than you expected yeah. Yeah. Tim Yeah. This is David Kelley I guess a couple of them.
So just.
The primary reason, we wanted to make sure. We provided some perspective was to share with you how the business post COVID-19 was going to change and still feel that way frankly, our technology footprint with the pace that it's growing right, 15% or more in the second quarter is certainly going on eclipse.
Some of the thought process that we had.
So yeah overall obviously.
Are the revenue trends that we're seeing in the bottom line trends that we're seeing are positive but but.
But we didn't expect that we would look at that and say, we're going to provide an update to that but clearly here.
Things are going quite a bit better both from a topline and bottom line perspective than we had thought our tech business growing certainly in a much stronger clip than we had expected.
And you know.
Frankly, we provided that.
It was really a courtesy to make sure you understood how the business was going to change.
Other than giving you guidance for the full year.
Yes.
I appreciate that I figured that was the case, but just wanted to clarify that for anyone that was.
Not sure. So appreciate that I'm sure on.
Let's see what else.
Oh, yeah. So one of your competitors, they recently talked about having a layer.
On costs back into the business over the coming quarters in anticipation of.
You're hiring more folks ahead of.
The strong demand for it staffing.
This may somewhat limit margin expansion on their side of their tech business for a little while it should we expect a similar dynamic with your company and maybe temper expectations around <unk>.
Tech flex margins, a little bit over the next several quarters.
Yes, Tim This is Joe because you asked that question in two different ways on when we make sure I give you the right answer because part of it you were talking about the tech flex margins and then with layer and head count really ripples to operating margin. So are you are you looking for more around the operating margins.
Im looking specifically for operating margin sorry to confuse things.
Yes, I just want I, just want to make sure I answered your question appropriately.
Yes, I guess for starters and David mentioned this we're committed to the operating margin targets that we've put out there irrespective of what we experienced and what changes go about as we all know as everybody comes out of the pandemic on them a lot of expenses have come out come out of the P&L.
On other certain expenses have gone into the P&L as we come out of this that's going to move around certain certainly those are expenses, you're going to have more travel expense come in you're obviously going to have more head count.
Wage expense is going to come in as you start to ramp up head count on that's going to be offset in other areas with things like what we're doing from a real estate footprint and various other things leveraging technology to a productivity improvement as I mentioned, we just completed the final rollout of our overall dynamics platform for our front office.
We have high expectations in terms of productivity gains on that front. So as I mentioned on on the call last quarter. Our intent here as we move through 2021 is we will be incrementally, adding to head count where productivity levels and capacity warrant that.
So that we can continue to fuel the business beyond 2021 into into the future as I mentioned in my opening comments. We are also going to continue to add head count into our managed teams and solutions area, which is.
Outpacing even on our overall technology growth that's been a big contributor to that growth. So but all of those things are built into we are going to obtain and hit the operating margin targets that we put into the marketplace.
Okay. Okay.
Sticking on that managed services since you since you mentioned debt I know this is an important growth driver for you, but if I just step back and think about how that's evolved over the last day, maybe last 12 months to 18 months.
Was that.
How did that perform during the pandemic was there disruption to that type of work or did it hold up better than you had expected. The managed services work and then you know are.
Are you seeing an acceleration in this type of work as we emerge from the pandemic.
Yes, I would say I would start with a probably a broader answer to that question, which is.
Our technology business was down 3% it does at the trough of the pandemic I mean, if you compare that to other sectors within staffing on.
And then going back into the.
The financial crisis on our business was down I think it was $6 six 5%. So theres no question technology isn't the cyclical cyclical play than it used to date back when I got into this business started three years ago. There is a secular shift that has taken place I mean, you can't do anything without touching technology at this.
In time, and with everything going more consumer facing.
So the our business and manage teams and solutions performed well just just as the overall technology business did during the pandemic I would say one of the things that we did experience that we did not anticipate realizing most of that work is really teams of people.
We thought it would be a little bit more complex to be able to staff and manage that work in a remote environment actually we found it to be very seamless in fact, some of our clients saw productivity gains on the teams that were being put in installed and remote versus even when we were had those teams fully physical.
So that business performed well during the downside of the pandemic.
It outperformed the overall technology business. So it was actually up on a year over year and sequential basis throughout the pandemic.
It's continued to perform we are seeing clients engage more on that type of work really because what they're looking for the right partners that can take on a little bit more responsibility. They are lean from a SaaS standpoint, so any leverage that they can get from additional leadership on their teams as well as to offload.
Certain engagements so that they had the bandwidth to be able to take care of the overall increase of projects that are coming their way.
Has has really demonstrated I would say, we've seen more and more engagements coming in here in the last quarter than what we were seeing on the back end of the year. So it's accelerating as overall technology spend is accelerating at a great value relative to solutions providers and everybody is looking.
And how to best manage their overall SG&A line items.
All of them on all the momentum is in the right places for that business to continue to prosper.
Okay I appreciate all the color there congrats on a great quarter. Thank you.
Thank you Tim.
And thank you and our next question comes from Josh Vogel from Sidoti. Your line is now open.
Thanks, Good afternoon, everyone.
First question you know.
Obviously seeing strong reception in the marketplace and managed services practice solutions practice.
Curious is there any opportunity to rollout this offering to FAA clients, especially as you continue to migrate towards those higher end skill sets that are more close to find with your tech trends.
Yes.
David kind of touched upon that a little bit in his opening remarks, it's really one of the one of many drivers of our migration of our traditional last day footprint.
Early into those types of skill sets that fit much more closely with what we're bringing to the market from a technology standpoint, so that absolutely is directionally, where we're headed and we believe we've engaged already on.
On certain types of projects, where those two blend together.
View that that is a great opportunistic based on the leverage what our historic core competencies are both from the FAA standpoint, as well as technology and bring those together from a managed teams and solution standpoint, especially when you look at all the momentum in and around that the.
The data driven type projects.
Which has a technology component they have.
They have a decision support type component and around analyzing the data so it fits real well. So yeah you are spot on.
Okay, great. Thanks, and I apologize I was bouncing back and forth between a couple calls so I did miss some of the prepared remarks.
As this business matures more.
I'm just curious is there a material difference in the margin profile on profitability versus traditional flex work.
Yes, I think yes.
Hi, Joe.
Okay.
And we had mentioned this as well Josh to your point. So we've seen on and this is a great complement to our technology business, but what we're seeing right now margins. In this business are about 400 basis points gross margins I should say from about 400 basis points higher.
This business.
This managed services managed teams business than in the rest of our technology businesses. So that's certainly one of the reasons why we've got a fair amount of confidence that.
Our margins are going to be.
Pretty stable as we move forward.
Even as we grow business from some of the larger client. So so it's a wonderful complement to the business. Both in terms of meeting client needs as well as bringing stability and greater opportunity and maintaining our margin profile.
Alright, great. It sounds like I missed all the juicy details on your prepared remarks, sorry about that.
Which actually kind of leads into my next question because.
I know you did discuss it but can you just tell me what the expected COVID-19 contribution is for Q2 and the balance of the year.
Yeah sure sure no problem no problem Josh.
So as we had indicated.
We had actually.
It's a pretty good Q2 Q1, certainly in our Q2 expectations had been raised as a result.
Pink.
We had indicated between $28 million to $33 million. So roughly 30 ish million dollars in the second quarter part of that is the result of our new projects on one of our partners came to us and asked that we assist in so as we look forward to the third quarter.
Those revenue levels, we think will sustain we still think that they'll tail off near the end of the year on the revenues will be minimal from that business as we go into 'twenty two.
Okay, Yeah that kind of led into my next question because it does seem like COVID-19 is around to stay whether it becomes the new flu.
And we potentially see yearly or biannual vaccination schedule is and I was just curious do you think there is an element of these government sponsored initiatives that could long term or from it.
Yeah again, I think we continue to see this is pretty fluid pretty volatile and clearly the circumstances surrounding the country are big driver certainly a driver to the new opportunity that we have so.
Hard for us to predict I think we can plan.
With an expectation that it isn't here and we're going to take advantage of if it is here.
Yes, Josh I'd add on.
Josh This is Joe and I would add on to that just so that it's crystal clear.
The businesses has come our way here through longstanding relationships. So we've supported this business really for two main reasons one in support of our partners who is dependent upon us in the past too given the nature of what the overall U S economy was going through and the impact of people the right.
Thing to do because we have the capability to staff. These engagements at scale, which few have the capability. So it was morally the right thing to do this is not business that we are pursuing from a long term standpoint.
It's for those really two drivers as David mentioned, we're 85% technology as we exit <unk>.
Migrated.
Our FAA footprint upstream to align much more closely with our technology footprint that is the future of K force. It is not in this space I just want to make sure we're crystal clear on that.
Yes totally understood. Thanks, and then lastly.
You know a lot of time on supply constraints, especially scarcity of resources.
Resources.
Higher level, what are you seeing today and on what's being done on your end too.
<unk> candidate engagement to meet current and potential order flow.
Or take share.
That's a great question I mean it.
It really never slowed down I would say it.
It does a little bit during the thick of the pandemic as everybody was trying to reset and figure out.
We.
Our delivery transformation initiative, which we've been after for the better part of three years now which are Trs is a sub component of that overall strategy has been an area that we've made great investments we have a lot of innovation going on so we're still we're after technology tools.
To improve our people's capability to access candidates quickly and move them through the process efficiently and we're going to continue to make investments on that front no different than what we announced.
While back with our relationship with with work Lama from R. K Force connect which is our referral platform as well as many other technologies that were starting to deploy that they have in their in their suite of services.
All coupled with I think the best measurement that's out there.
Our NPS scores telling us.
We continue to have world class from from a client and consultant standpoint, So we're going to continue to invest in technologies to drive.
Drive performance and give our people competitive edge on ultimately being able to access candidates more rapidly than anybody else in the marketplace that but it is a war out there for talent.
Yes of course, well clean impressive results last year and to start this year.
Thanks for taking my questions.
Thank you Josh Thanks, Josh.
Thank you and our next question comes from Tobey Sommer from <unk> Securities. Your line is now open.
Hey, good evening. This is Jasper bibb on for Tobey I wanted to circle back to your comments on capacity during prepared remarks.
Are you thinking about growing recruiter head count versus revenue going forward, given the productivity gains you're seeing there.
Yeah.
Yes, it's a good question I would say for starters.
We have capacity to do more across all of our 10 year groups. So we're very comfortable in terms of where we are we think we're in a great spot from a capacity standpoint.
Mainly driven by some of the things that we just spoke about because of the technology enablement investments. We spent a long time also looking at enhancing our overall processes and the really the ongoing strengthening of our culture I believe our culture has become stronger through these trying times, which has just been I can't tell you how proud I am of our teams.
In terms of what they've demonstrated in terms of team work working across the country because one of the things. We also have to realize is the world has changed drastically in terms of how you source and identified candidates for the end client you are no longer constrained by geographical boundaries that also provides our productivity opportune.
<unk> for our people to leverage candidates that are willing to go out of market and work with our teams across the country. So all those things play on Proteus productivity I mean pre pandemic, we were successfully driving 10% productivity gains with our technology associates and that has picked up.
Back up where it left off so.
From a hiring standpoint, the hiring that we're doing here in 2021 is not going to impact 2021 that is really the fuel 2021 forward. So we feel very comfortable with where we are in terms of <unk>.
Pasadena currently to support the business and then what we're doing to continually support the business on an ongoing basis.
Okay.
Hoping you could get go ahead, while I was just kind of I was just going to add.
His comments.
So when he talks about the technology investments from.
We're in a really great place to be able to do that right. So we as a firm we generate a lot of cash we think it's the right thing to do is invest in the future of the business.
We're sitting here.
And.
As we move into the second quarter was that additional cash rate, we're going to see.
Sell the building or we're going to generate proceeds we're going to generate significant cash to invest in the business.
And think about ways that benefits shareholders best rights and deploying that capital inclusive of thinking about.
Our stock so.
I think frankly.
<unk> be in a much better place from the ability to invest in this business.
Yes.
Thanks for that.
Last question from me I was hoping you could comment on the Perm business and should we expect the company to I guess fully participate in the cyclical rebound in that market given that you have I guess strategically shifted more resources towards Tamped in tech flex in recent years.
I would say and again I touched on this a little bit on my my opening comments, we expect that business to perform pretty comparable on a sequential basis, obviously drives year over year are up substantially given the big impact on the full time hiring was in Q2 of last year, it's been a very important part.
The service offerings that we bring to our clients from a tech standpoint, realizing 85% of our revenue stream exiting this year will be technology focus we service that business on a blended model.
So it's not dedicated.
Direct hire permanent placement teams within our tech offering that Matt so that our people can can provide the right employment opportunity for the candidate as well as service that client based upon what their need is there and so we view that yes, we will participate.
But unlike some of our competitors that might be out there that have very dedicated practices in and around this we view it as an integrated component of our overall, especially on the technology side the offerings that we're bringing to the clients. So.
Any of our clients in today's day and age they really look at bringing on resources with conversion opportunities, which again I think I've stated this multiple times I don't think Theres, a higher acknowledgment of us doing a good job for our clients and candidates and we put somebody on an engagement from our contracting strategy.
The endpoint and then that turns into a full time. So a lot debt is not really seen because many of those when they convert do not have fees associated with them, but they ultimately are a full time hire and that is a reasonable percentage of our population end up converting into full time opportunities.
That's an indirect way that we're participating in that overall permanent market, but we prefer to go this route com having grown up in this business starting in the search consultant 33 years ago, and then being on the <unk> side of the business and then running operations. There is no question that a blended model of this nature is much more client.
<unk> centric and candidate centric than when you partition. These two types of offerings in the marketplace.
Yeah.
I appreciate the color thanks for taking the questions guys.
Thank you and I am showing no further questions I would now like to turn the call back to David Dunkel, Chairman and CEO for closing remarks.
Thank you just on I appreciate it.
Let me just say thank you for all of your interest and support for K Force.
As we continue to persevere during these unprecedented times I, especially want to say, thank you to each and every member of our field and corporate teams just extraordinary effort.
And the very very difficult circumstances, and also to our consultants on our clients and thank you for your trust and K for us.
Allowing us to partner with you and allowing us the privilege serving you we delivered another quarter of exceptional results and we're very excited about how we're beginning 2021 and we look forward to speaking with you again at the end of the second quarter. Thank you very much.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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