Kforce Inc. Q1 2023 Earnings Call
Please standby were about to begin.
Good afternoon, ladies and gentlemen, welcome to Teekay <unk> first quarter 2023 earnings conference call. At this time all participants are in a listen only mode and please be advised that this call is being recorded after the speakers' prepared remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star one.
On your telephone keypad.
I'd like to withdraw your question simply press Star one again and at this time I would like to turn things over to Mr. Joe Liberatore, President and CEO . Please go ahead Sir.
Good afternoon. This call contains certain statements that are forward looking these statements are based upon current assumptions and expectations that are subject to risks and uncertainties. Actual results may vary materially from the factors listed in our K forces public filings and other reports and filings with the security and Exchange Commission, we cannot undertake any duty to update any forward looking.
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You can find additional information about our results in our earnings release and our SEC filings. In addition, we have published our prepared remarks within our investor relation portion of our website.
On this call we will discuss certain non-GAAP items. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid investors in further understanding the impact of these items and events have on our financial results.
Our earnings press release provides a reconciliation of the difference between GAAP and non-GAAP financial measures.
Let me start by offering a few comments about the current operating environment, which is informed by our internal metrics discussions with clients and other industry data points. There was a heightened degree of uncertainty in the macroeconomic environment as we sit here today versus one quarter ago with 225 basis point fed interest rate hikes, the collapse of several financial.
Institutions, a recent rise in unemployment claims and other factors that all point to a higher likely that the U S economy could fall into a recession.
Our clients broadly speaking continue to exercise restraint against the backdrop of this uncertainty as it relates to certain technology spend that can be moderated without significant impact we have not seen however instances of mission critical projects being postponed.
As to our financial performance in the first quarter revenues were at the low end of guidance and our technology staffing and solutions business continued to grow on a year over year basis, even off a tremendous prior year comps earnings per share were at the midpoint of our expectations. Despite revenues falling at the bottom end of our guidance, which reflects our highly variable and performance based call.
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The pace of decline as we finished the first quarter moderated significantly in our technology business as compared to the month following our last earnings call as to our second quarter expectations. We anticipate the average number of billable consultants on assignment to be relatively stable with current levels as.
As we look further into the future we remain steadfast in our belief in two areas first we believe the long term secular drivers of demand and technology are very much intact and will persist in the future irrespective of how the short term environment plays out.
The strength of the secular drivers of demand in technology accelerated coming out of both the great recession, and the pandemic and it remains clear to us that the broad and strategic use of technology, including the recent headlines. The Gen. AI technologies have garnered will continue said simply technology investments are simply not optional in today's competitive.
And disruptive business climate, where the talent necessary to make those investments remains in short supply.
Our core competency is rooted in the ability to identify and provide these critical resources real time at scale in virtually every industry.
While our business is not immune from the impacts of economic turbulence technology spend is increasingly resilient and less correlated than other areas where companies utilize flexible talent as was reflected in the two most recent economic downturn. There was simply no. Other market, we would want to be focused in other than the domestic technology talent solution.
Space.
We expect the sharpening our focus that has occurred over the last decade to continue to contribute to our market outperformance. We have built a solid foundation of K, forcing or partnering with stable world class companies to solve complex problems and help them competitively transform their business.
Our balance sheet is clean and we expect our strong cash flows to continue providing us great flexibility to return significant capital to our shareholders.
We have a solid highly tenured team in place with the expectation of continuing to capture additional market share. Our executive leadership team has been through multiple economic cycles and has the experience to skillfully navigate through whatever may lie ahead.
We have continued to make strategic investments to both enhance internal productivity and meet the needs of our customers in various engagement models. Our team also continues to meaningfully advance our multiyear effort to transform our back office operations.
In addition, we published our 2022 sustainability report in mid February 2023, which not only memorialized our recent accomplishments, but also a lot lined our opportunities for continued growth and evolution with our 2020 theory goals that push for even greater progress in each of the areas of ESG.
We remain.
And committed to our office occasional work environment, which continues to positively impact the lives of our associates by providing our people with maximum flexibility and choice and designing their workday that is grounded in our trusting them and supported by technology. This has resulted in improved retention of our associates and positions Kay forces a destination for top.
Talent K force is proud to be certified as a great place to work, which distinguishes K forces one of the best companies to work for in the country.
As we look ahead, we expect to continue making the necessary investments in our business to further advance our enterprise priorities to sustain our long term growth ambitions and attain double digit operating margins, while prudently managing our operating costs.
Hi, Mitchell, our Chief operations Officer will now get greater insight into our performance and recent operating trends, Dave Kelly K forces Chief Financial Officer will then provide additional detail on our financial results as well as our future financial expectations.
Thank you Joe revenues in our technology staffing and solutions business grew one 4% on a year over year basis overall revenues declined 2.6% year over year on our prior earnings call. We indicated the cell cycle had become longer than usual because of the uncertainty in the macro.
I'll make environment and select clients had begun training resources, we typically see a gradual increase in consultants on assignment throughout Q1, but that was not the case this year.
Clients are telling us that they are committed to starting new projects that are mission critical to them and we have seen many recent wins across multiple industries.
Our average bill rates in our technology business remained near record levels at approximately $89 per hour and were up four 7% year over year. The slight decline sequentially is primarily due to a change in business mix and we expect the average bill rates in the near term to be relative.
At least stable given the continued scarcity of highly skilled technology talent.
Our longer term view continues to be that average bill rates should help us in our business, especially as the mix of higher value service offerings increases.
Most of our consultants are in higher skill set areas, which are not as sensitive to the changes in the economy, we do very little business in lower bill rate areas, which are most affected by the economy.
This mix is expected to provide significant revenue and margin stability.
Our clients remain focused on critical technology initiatives in the areas of cloud does your UI UX data analytics project and program management clients are telling us that they have they want to keep investing in technology to stay competitive even if the economy is uncertain.
Well our clients are currently being more careful about which projects they choose to invest in our historical experience is that companies quickly shift their priorities and invest more in technology once the macroeconomic landscape becomes clearer.
Our clients want us to continue to expand our service offerings from traditional staffing can manage teams and project solutions are integrated strategy Leverages. The relationships, we have with world class companies and all our existing cells recruiters and consultants to bring higher value team.
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We have a broad portfolio, which includes large market, leading customers leading to our sustained above market growth rates. We believe that's customer base will be a positive catalyst for continued long term sustainable above market growth.
Our largest industry vertical financial services comprises less than 17% of our technology revenues and is concentrated in what we believe our large stable financial institutions layoffs within technology companies have continued to dominate the headlines in 2023 two.
Offer you some perspective only five of our top 25 clients are in the technology services, our technology manufacturing space.
Total revenues for those five companies were down approximately 4% year over year as compared to our overall growth of approximately 2% in the first quarter.
Even though we might be susceptible to short term disruption with certain clients or industries. We expect our first client base of world class companies will benefit our shareholders in the long term we.
We expect second quarter revenues in our technology business to decline sequentially in the low single digits and decline in the mid single digits year over year of very strong comps in the second quarter of 2022.
Our assay business declined approximately 28% year over year, which reflects the year over year impact of business, we no longer support due to our repositioning efforts as well as more challenging macro and macro environment.
Sequentially, our <unk> business experienced a 17% decline largely due to the expected wind down of a short term projects supporting hurricane and recovery efforts, we expect revenues to be down in the mid 20% range on a year over year basis in the second quarter, which reflects this.
Sequential decline of near double digit levels as short term project conclude we expect revenues to be down in the mid 20% range on a year over year basis in the second quarter, which reflects a sequential decline of near double digit levels as the short term project conclude.
We continue to support our business and improve its alignment with our technology business evidence of this progress is that our average F. A bill rates, excluding the hurricane and project in the first quarter of 2023 is $52 compared to $38 in the first quarter.
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As usual, we are managing associates productivity and are focused on retaining our most productive associates. So that we are positioned to take advantage of the market when it re accelerates.
We also continue to make targeted investments to improve our men's teams and project solutions capabilities. We are happy to announce that we recently received the highest rating for corporate culture from glass door as well as the highest ranking in our industry. We are thankful for the trust our clients consulting.
And candidates and employees have in us and we cannot have achieved our first quarter results without our incredible team. Our people are the reason for our success and we are grateful for their hard work and dedication I will now turn the call over to Dave Kelly, Kate Forces Chief Financial Officer, Dave.
Thank you Kai.
First quarter revenues of $406 million declined two 6% year over year and earnings per share were <unk> 82 cents.
Overall gross margins decreased 40 basis points sequentially, and 160 basis points year over year to 28, 1% in the first quarter due to a combination of a lower mix of direct hire revenue and a decline in flex margins.
Flex margins of 24 25, 9% in our technology business declined 20 basis points sequentially, and 90 basis points year over year due to higher health care costs and modest declines in bill pay spreads due to heightened price sensitivities and changes in business mix.
The year over year decline in technology Flex margins is fairly typical of what we have seen in prior slowdowns and we typically see margins recover as the macroeconomic environment stabilizes.
Our ability to maintain reasonably consistent margins even during times of economic slowdown is reflective of the supply demand imbalance for highly skilled technology talent as.
As additional reference margins in our technology business in 2022 were consistent with 2021 and 2020 levels technology talent has been scarce for more than a decade, and we expect to see continued wage increases over the longer term and a relative margin stability.
Flex margins in our assay business increased 10 basis points sequentially and have improved nearly 200 basis points over the last three years as our mix of business has improved.
As we look forward to Q2, we expect spreads in our technology business to be relatively stable with first quarter levels, though overall technology flex margins will be higher than Q2 due to the seasonal payroll tax resets that occurred in Q1.
We expect clients to be more price sensitive in the current macroeconomic environment. However, as clients increasingly engage us for projects critical to their ongoing success, including managed teams and project solutions engagements that are typically higher margin opportunities. This also supports overall margin stability.
Overall, SG&A expenses as a percentage of revenue decreased by 80 basis points year over year.
Given our exceptional growth in 2021, and 2022, our compensation plan structure rewarded our top performing associates with very significant bonuses and commissions.
With growth coming off those historically very high levels were generating leverage on our SG&A costs through overall lower compensation costs.
We've also been successful at driving greater cost efficiencies from our real estate portfolio, given our office occasional model, which has allowed us to reduce overall square footage by approximately 40%.
As we continue to transition our remaining office leases over the next three years, we expect to generate additional savings from further reductions in overall square footage.
It is also important to note that we are closely monitoring the landscape and maintaining significant diligence in every area of discretionary spend this allows us to generate additional SG&A leverage while also maintaining investments in critical strategic initiatives, we expect SG&A expenses as a percentage of revenue to decrease slightly sequentially.
In Q2.
Our first quarter operating margin was five 8%.
Which was at the top of our expectations, our effective tax rate in the first quarter was 27, 5%.
Operating cash flows were $19 million and our return on invested capital was approximately 45% in the first quarter.
We have a balance sheet with very little debt and expect to continue generating close to $120 million in operating cash flows in 2023, regardless of the operating environment.
We've had a long history of returning capital to our shareholders. Since we initiated our dividend in 2014, we've increased at 360%.
In addition, since 2007, we've reduced weighted average shares outstanding from $42 3 million to $19 7 million or more than 50%.
All in we've returned approximately $850 million in capital to our shareholders. Since 2007, which has represented approximately 75% of the cash we generated while significantly growing our business and improving profitability levels during.
During the last two years, we've returned over 100% of cash flows through through repurchases and dividends. Our plans going forward are no different as we remain committed to returning capital to our shareholders regardless of the economic climate.
With respect to guidance the second quarter has 64 billing days, which is the same as the first quarter of 2023 and the same as the second quarter of 2022.
We expect Q2 revenues to be in the range of $392 million to $400 million and earnings per share to be between 94 cents and one dollar in Tucson.
Second quarter earnings per share will be positively impacted by approximately 12 cents due to the seasonal impacts on annual payroll tax resets our guidance does not consider the potential impact of unusual or nonrecurring items that may occur.
While the current operating climate is certainly challenging we remain excited about our strategic position and prospects for continuing to deliver above market growth, while continuing to make the necessary investments in our integrated strategy and back office transformation efforts that will help drive long term growth and the attainment of double digit operating margin.
In the future.
On behalf of our entire management team I'd like to extend a sincere. Thank you to our teams for all of their efforts operator, we would now like to turn the call for questions.
Thank you Mr. Kelly, ladies and gentlemen at this time any questions again star one if you can.
Find your question has been addressed you can't remove yourself from the queue by pressing star one again, we will take our first question. This afternoon from Mark Mark Cohn Ed Baird.
Good afternoon and thanks.
Thanks for taking my questions.
I'm wondering with regards to on Tech flex.
Can you talk a little bit more about like what you were seeing in terms of monthly trends.
And in some of the discussions that you've had with with clients just in terms of the types of projects.
They are pulling back on are showing more hesitancy on relative to the ones.
You know that they are continuing with.
Sure Mark This is Dave Kelly I'll start then.
Follow up on some of the clients.
Just kind of reiterate.
We started obviously the year as we typically would.
Lower head count we saw as we had mentioned.
Especially in our larger clients. Some pruning. So we saw some declines in head count as we moved into February and March certainly those declines and the significant some of them dissipated as we kind of ended the first quarter and as we look forward to the second quarter.
We're at a point, where we are.
Relatively speaking stable in terms of headcount trends of technology. So.
So our expectation as we moved into the second quarters for that to continue.
At that level of parity.
Yes, and Michael I'll, just add a little bit in terms of client demand, there's still a big need for modernization and I think.
Microsoft has said Theyre cloud business for example, I believe.
Percent worse, the mice continue to investigate all continue to migrate.
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Recently, the RPE space, where they're trying to get a robotic process automation. So they can do more with less people. So we're seeing a lot of different trends in those areas.
<unk> continues to be made the sale cycles, we still longer than what we've seen in the previous two years back more in line with what we find 2019 just slightly.
Just over ourselves.
Great and then with regards to the consultants that you have out on assignment can you just describe like what percentage of them would be.
Stay below $60, an hour or might have you know lower.
You know levels of technical expertise like help desk things.
Things along those lines as opposed to you know some of the higher end skills.
Yes, so I'll start by repeating I think one of the comments I think our average bill rate is almost $90.
So generally speaking right I think one of the things I think is really important to note about our revenue portfolio technology is it's probably pretty highly concentrated around at high Bill rate. So we do very little amount of lower end skill set business part of the reason why I think.
We've had such success in the long term. These are mission critical roles at companies can't afford.
To let go of application development roles like that that's why we have such stability. That's part of the reason why we've had the length of assignment continue to increase on average with the portfolio so pretty highly concentrated around that $90 at our bill rate Mark, Yes, and I think that's why to me.
Well you know long term no strategic decisions, we made to move upstream to those higher bill rate. If you look at the areas where people are taking here and invest in some areas.
Yes.
Those are areas, where people have to continue to invest in so I I think you know where we've seen a little bit churn is a little bit in that lower level space, it's such a small percentage of our business that we're in.
You know I think it was right call several years ago to start moving that footprint.
Towards those areas, yes, Mark this is Jeff. This is all by strategic design. When you look at how these technology landscape is evolving.
Those lower end roles or more right for really disintermediation. So we've been after this for the better part of over 10 years in terms of migration out of that type of work as well as that type of work was also prime for offshore in those types of things. So we've been on this migration upwards.
The higher skill areas.
And so that's why it's such a small percentage of our overall revenue at this point in time.
That's great to hear and I know, it's obviously really early but we're getting investor questions about it and so I'm wondering if you could share your perspective with regards to.
The types of discussions that you're hearing even if theyre really preliminary.
From clients with regards to their initiatives as it relates to generative AI, obviously IBM made.
<unk> made some news recently in terms of what they were thinking but wondering how broad those types of discussions are what you're hearing and what the opportunities are for you too.
Enhance the skill sets of your current consultants.
Yes, it's a great question and as we all know obviously, we're early on here.
I would start by we view this as really exciting times.
Just the Gen II front, but just on technology as a whole.
Having been involved with the technology space for the past 35 years here at K Force, we've seen everything right I mean, we've seen things move from the mainframe to Pcs and then they move from Pcs and laptops and now mobile devices and over that same period of time.
Introduction of the Internet.
You remember the days of landline dial up connections now we're talking six G. And then data people couldn't leverage data now we're in this era of big data and I still think we're very early on in how people are managing that and we've seen everything moved from being housed in data centers.
Now everything has migrated to the cloud and then over that same time period.
You can pretty much purchase any product now from an ecommerce standpoint first we did that by website now we're doing it by App. So I could go on and on and on I guess my point.
And going there is there continues to be so much technological transformation occurring in the overall broader space. So our view of GBT as well as AI tools is this is just yet another error.
Yeah.
To further drive efficiencies and productivity and I mean, that's part of what gets US excited when we get out of bed every morning, with virtually 100% of our business focused on providing technology talent.
And the solutions to World class entities across all industries different industries are going to see different opportunities. So when we talk about the strength of secular drivers in technology.
That list that I went through and that AI is just another technology within that bundle really is what gives us the confidence in the long term sustained.
Demand environment of technology, So chat GPT another generated AI tools I mean, there is such early stages and we suspect that there is going to be many powerful.
And impactful applications, but with that said early on we I think and bring this from our clients everybody is taking a little bit of caution because of the reliability of the output from these four has got to be sensitive to privacy concerns and other potential uses of the technology. So net net for US we view this as a tremendous part.
Positive opportunity for our business on many fronts as well as our internal things we were already flushed out all of our use cases and I won't tell you most of those use cases really drive.
And productivity internal and I think we are an example of where the same thing we are hearing from our clients.
That's great Joe and then.
Dave can you talk a little bit about.
The operating cash flow target of $120 million.
What are you thinking in terms of Dsos and what are you thinking about with regards to capex over the course of the year.
Yes, Mark.
So I'll just kind of go backwards order rate so.
The Capex, obviously continues to be a small part of our business right. So I don't expect that to change materially from any prior years.
In terms of DSO.
I Didnt mentioned Didnt talk about the accounts receivable portfolio, but it continues to perform very well as you might expect right.
Product preponderance of our businesses.
500 high credit quality customers so.
I look at that.
And we manage it well and quite frankly, it's performing exceptionally well so as it relates to cash flows.
Our business, obviously very resilient as things increasing profitability improves we generate a lot of cash obviously revenues here have slowed a little bit that results in that portfolio.
Generates a lot of cash.
And so very strong cash flow business.
I guess I would be remiss, if I didn't say, we continue to prioritize returning cash flow to shareholders through dividends and repurchases I think I've mentioned in my remarks, we've returned actually the last couple of years, 100% of the cash flows almost 100% in the first quarter as well so.
The story here remains the same.
That's great I'll jump back in the queue. Thank you.
Thank you. We go next now to Trevor Romeo at William Blair.
Hey, good afternoon. Thanks, so much for taking the questions.
First it sounds like maybe there's a divergence between strong demand for some of the more critical managed teams and project solutions.
Versus clients kind of pulling back on spending which might be affecting the pure staffing side a bit more.
On that second part about clients pulling back does that feel more like a pause or a true pullback at this point I guess can you just give us a sense of what those conversations are like.
Yes.
I don't know.
I agree with that I think when you look at it clients are moving all of that.
And to that effort.
Consulting side of things.
We're seeing still demand pretty similar across the board I think.
It might in there, but from the overall staffing consultant side.
Let me see very similar trends on both sides I think clients are continuing to invest but you need to invest in technology to stay current.
Gary you have bad there candidly things, it's more like I said, even in Q1 of pruning.
With the smaller pod people interest extend along the project going.
Okay.
You know again I also think it's all about access to the right scale.
Still a very high unit.
And you know what the BLS numbers. This last time, they were off and even Wall Street Journal.
Companies have announced these layoffs.
And Microsoft.
Net.
Prices have been offset by hiring our flaring.
But we're seeing yes, let me give you a data point by the way right. So.
Talked a little bit about bill rates, our bill rates on new assignments continues to increase right. Even sequentially Q4 to Q1, So we talk about supply and demand.
I think that's a good reflection of the scarcity of talent and the high demand for that high quality talent.
Okay. Great. Thank you that was helpful. And then I guess, maybe on the <unk>.
More on the labor supply side of things what.
What are you kind of seeing on the talent and recruiting side right now and how would you kind of assess your ability to find top talent as talent competition intensified at all or changed given some of the macro pressure are there any kind of specific rules or skill sets that are very much in demand right now.
And as I mentioned in my comments, we're still seeing strong demand for digital for UI UX or cloud data those areas continued to remain strong demand.
The Canada market again like I mentioned, there is this perception that there's a plethora of candidates out there because.
And I think it's more aligned to what the Wall Street Journal reported.
Saturday, but that's been offset elsewhere and that's what we're seeing there may have been more pushed by those big Tech companies for National candidates, where they would go higher from anywhere, but as that dissipated and people are returning more to office youre seeing more of that demand across the country and I think.
Candidates are going.
There is a little bit longer in this cycle, though because you have this perception network.
Out there.
They mean, one in your view for <unk>.
<unk> purchases.
Let me follow up two year, so simply the trigger after one or two.
Interviews.
So I think that's the main change.
Okay got it. Thank you very much that was really helpful.
Thank you.
Thank you we'll go next to Tobey Sommer at Jewett.
Thanks.
I was wondering if you could.
Speaking about your bill rates and maybe disaggregate within the tech business.
The trends Youre seeing.
Excuse me in staff.
Versus the trade trends that Youre seeing in your higher margin managed teams and project solutions, because we've seen in March up as a blended rate for a while but.
I'd love to get your sense and some more color around the trends.
Those lines of business.
Yes, Tobey this is Dave.
So I'll go back to kind of work Cai was to the extent that youre looking for a specific skill set regardless of the type of engagement that our the scare supply bill rates continue to be strong pay rates continued to be to continue to move in tandem with those so.
I wouldn't differentiate for you frankly, because I don't believe there is significant differentiation between the trends we're seeing based upon any type of project managed service managed team staff augmentation assignment. This is about the skill set I think is what project agenda I agree with that statement.
Okay.
Maybe could you give us some color on what's the difference in the bill rates are between staff hog in the other lines of business, because even that would help.
Other than the blended rate yes.
So we.
Apologize Tobey so I don't have that data in front of you haven't really done that because they are really quite frankly isn't a significant differentiation differentiation.
Tobey This is Joe.
This is scale driven not nature of that type of work, where we see the differences between between when we're doing the managed teams managed solution. We stayed in the margin not necessarily in the bill rate because the demand for the skill set of the bill rate is about the same based on supply demand dynamics.
Interesting.
Okay.
Sorry.
Go ahead, sorry go ahead.
I was just going to say, we're really looking at it from the integrator perspective, we're not really breaking it out because we're using our existing sales team to go after it in one go.
Where the client right.
Client sales the best <unk>.
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<unk> NAND capacity those types of things that we're moving in that direction, but I think several sectors.
North apps like Snapchat anyway.
Thanks, if you were to double click into sort of.
Generative AI versus sort of machine learning are you seeing.
Change in demand at your customers more for.
Prompt engineers rather than.
Machine learning engineers from Keith AI code can kind of create the complex models by itself.
No we've been doing a lot in the machine learning space.
I mean, the AI, taking a little bit of a different path, but we are not seeing customers jumping full end to that and we're continuing and we offer those services in our big data practice, where we are helping customers.
Right.
She is machine learning issues that all goes back and has to be fed by data. So that's how we're approaching it is timing is there.
Yes.
How do we get these questions, sometimes reprice, how would you respond.
When investors wonder if the kind of extraordinary recruiting.
Market over the last two or three years, and it's been a robust strategy for longer than that but the last two or three have been pretty pretty outsized I think that that may have pulled some demand forward and that there.
Could could be a.
Pause or something more pronounced this go around again, depending on the trajectory of the economy.
Macro gets more severe and more.
More traditional professional unfolds.
Yes, there's no question I mean.
Till the back half of last year for whatever a better part of 18 months or two year period. Our people were doing a lot meaning they were moving all initiatives forward. Some of those we're mission critical some of those were opportunistic the main shifts that we've seen is the slowdown in those things that are opportunistic that maybe they can wait on the mission.
Critical so people are having mission critical stuff. This in today's in today's environment, just from a competitive standpoint from a disruptor standpoint, you don't have a choice.
Moving on those mission critical things. So I don't believe any of that demand was pulled forward I think what we saw just because of the nature of what the environment was like as people really some they were playing catch up.
Wouldn't call that being pulled forward because they were basically just catching up to their competitors, but it's really more of this work on the fringes to these things that arent really mission critical that they can they can to hold back on a little bit, especially when not knowing economic climate. So everybody has taken a little bit more conservative if they can push or delay or.
Slowed down those projects. So I don't believe there's was a pull forward of business, but I do think that the economic climate has caused some of those initiatives to really be slow down on.
Okay.
Last one for me could you talk about the <unk>.
Turnaround and FAA and where you are in.
Isn't it.
At least from an internal perspective, I know that.
Conditions.
It may change, but.
How are you feeling about the mix the transition and when.
No.
Good demand environment, you'll be able to march forward and grow and expand margins.
So we're still seeing really strong margins in our SBA business and we're continuing to see our bill rates.
During the sixties now where we were in the <unk>.
A few years ago. So we're pleased with that progress we need to have some hard comps that we've gone against we started catching up on those costs and then like I said in my comments, we had the project.
Third to help.
Support.
Hurricane and recovery efforts.
So with that coming up and that was in the back half of the year.
Q1, we're going to continue to see some things coming down there, but we do expect to see.
Continued bill rate improvement margins are continuing to be strong.
And we're continuing to outline it closer and closer to leverage technology.
And we're happy to be out of that lower level space. That's like I said in my comments are affected by the economy.
Thank you. We'll go next now to Kartik Mehta at Northcoast research.
Hi, good evening.
Obviously, you are a temporary staffing business is a lot different than a lot of the other companies as you said on the tech side, there's a lot of demand.
But that said how would you characterize revenue visibility for the company.
Especially with all of these projects.
I guess companies' ability to upscale or downscale.
Just thoughts on revenue visibility over the next six to nine months.
Okay.
Hi, Kartik. This is Dave Kelly, Yes, I think actually when we look at companies in our space I think we've got a reasonable amount certainly a near term revenue visibility I'd mentioned, our average length of assignment and technology is about 10 months.
It's clear obviously the debt there is uncertainty Joe mentioned in his comments.
It happened in the back half of the year from an economic standpoint, and that should obviously influence on what companies do but in terms of the business that we have the necessity of those folks.
Reasonable.
Expectation part of the reason why I had mentioned we're thinking.
The second quarter that we've got.
Relatively stable technology, workforces as billing with our clients.
Perfect and then just.
Second question just on price competition, I think you mentioned it a little bit in your prepared remarks, I'm wondering if there's been any change or if you anticipate any change based on maybe some of the assignments that you.
Looking at now.
Yes.
I'll reiterate.
What I said before I think for US we've been in an environment for a number of years and we're still seeing it as I've mentioned as it relates to new assignments that we.
Started in the first quarter.
Bill rates continue to increase on an assignment level.
Seen that for a period of time again, just to us in the long term hard to envision a place where there is a lot more demand than there is supply the bill rates are going to do anything but be stable or up.
I think we've been pretty consistent about that for quite a long period of time don't see that change.
Perfect. Thank you very much I appreciate it.
Yeah.
Thank you the next now to Marc Riddick Sidoti.
Hey, good evening everyone.
So I know we've got it.
Over a lot of it I was just curious as to you know.
What are the other ways to maybe parcel and this was sort of curious if you're seeing much of a differentiation in client behavior or client patterns.
For those of your clients who are consumer facing.
Particularly in your commentary around mission critical activities are you seeing.
Much of a differentiation there between client facing companies versus those that are more sort of <unk>.
If there are any particular industry call outs that we should be thinking about.
Yes, I would say when I made when I made that statement.
The mission critical is really cutting across all industries, because they are all being faced with the same dynamics obviously.
Obviously when you when we talk about and I think there was an earlier comment about pull forward, we did see certain industries, where I would say coming out of the pandemic, we're being behind the curve in terms of where they were at the monetization are moving from an ecommerce standpoint. There is no question from a retail standpoint, you add a lot of organization.
That had a lot of catch up to do there. So some industry I would say there were more catch up work to do but in terms of what we're stating in terms, where we're seeing the demand now on these mission critical that's broad based across its irrespective agnostic to industry yes.
Yes, the only other thing I would add mark.
I think I noted.
We have clients in virtually every industry so for us.
As we see changes obviously we are.
A portfolio are able to adapt to opportunities and demand opportunities.
Any particular industry I know your question underlying was you've seen softness in the industry, but for US. It's really about the fact that we've got business with 70% of the Fortune 500, as we have opportunities and won clients certainly there are occasions, where there might be something that we know.
We've seen some pruning at other clients. It's a wonderful mix of business to have gives us a lot of flexibility and resiliency I think of the word sky.
Scott.
Great. Thank you.
Thank you.
Yes.
And just a reminder, ladies and gentlemen star one please for any further questions. We'll take a follow up question now from Mark Mark on at Baird.
Thanks for taking my follow up questions I'm wondering with regards to capacity how much excess capacity do you currently have at this point.
When you take a look at your recruiters and your consultants.
Yes, Mark I would say from a capacity standpoint, we're very comfortable where we are from a capacity.
Our retention has gone up, especially with our office occasional model and so we feel very confident.
We're very well prepared for that for the upturn in terms of capacity and by the way.
We used to state this on our cost productivity continues to move up across all of our 10 year category. So it's not just it's not just capacity.
Even in our lower 10 year groups, we continue to see people performing at higher levels and I would attribute that to a lot of the investments that we've made over the past.
Six seven years in terms of tools and technology investments in leadership training.
And I would just say overall, it's just the team execution.
And team have done a tremendous job where <unk> been around over 35 years, we're executing the business better today than we have during my entire 10 year with NK for us and all of those things show up and that just really gives us even that much more confidence from a capacity standpoint.
Great.
You did a nice job with regards to managing the margins first of all how much of an impact was there from the healthcare the higher health care costs as it relates to the gross margins.
Yes. It was it was small mark.
As you can expect each quarter, you have maybe more or less with the number of large clients. So.
Maybe 10 basis points or so and there's also a nominal just to give you a flavor.
So nothing significant and nothing out of the ordinary I would say either.
Okay, Great and then and then when we're thinking about.
Managing the SG&A.
You did a really nice job there considering.
The environment.
Obviously.
We got some SG&A deleveraging, but.
And thats to be expected how should we think about it just ends up being a more.
Significant recession.
How should we think about the decremental margins on a go forward basis. Obviously, there are areas that you can flex, but just from a shorter term perspective.
How should we think about that.
Yeah, Mark so so first of all I think.
In terms of our press release SG&A expenses are expected to go down in the second quarter, so that variability of cost.
The ability to flex those costs.
Becoming apparent here.
Actually interesting comment Joe was talking about productivity productivity and retention also gives us opportunity to do more with the people, we have which means we have to hire less right, where you have the highest levels of turnover.
So that is also a degree cost variability that we have so for us.
We've always said, we've got a very highly leveraged compensation structure compensation is by far the biggest SG&A item here.
And so as we if we were hopeful I'm hopeful that you are not.
Speculating, but let's hope that revenues in the economy moves in a great direction, but if it doesn't certainly the variability of our cost our compensation structure gives us opportunity from an SG&A standpoint. In addition to I had mentioned real estate.
And other things right. So so we feel very good about where we are and of course, managing everything everything that we can manage as well so we're sensitive to it yes, mark again.
Been around our story for quite some time and I think our position remains constant with how we've navigated through multiple cycles.
We are going to do everything within our power to hold onto our highly productive and tenured people.
Irrespective of how challenging it yet because there is another side to everything and as you well know it takes a long time to ramp people up to get them productive.
So the good news is where our balance sheet is where our overall cost structure is we have a lot of room and a lot of firepower and we want to play for that other side, because we know if it were to get that tough we're going to have a lot of competitors go by the wayside and that just provides us that much more client and market share.
And we want to prepare to make sure we have the capacity to take advantage of those things no different and by the way that we did in the pandemic.
The front end the pandemic you saw many of our competitors, reducing head count and so on and so forth we held onto our head count and I think that paid a huge dividend.
And when you look at that 50% growth over two year period. Following that so we've been doing this for a long time, we've navigated through many of these cycles, but our people are very paramount to us I mean that that is our asset in this firm you don't rebuild relationships overnight. So I do want to at least put that out there.
We're going to do everything we can to hold onto our people if things were to get very challenging.
Fully appreciate that and obviously, it's worked really well over the long run.
Also can you talk a little bit.
Dave you mentioned in the in the press release.
This occasional is working well.
There is still more real estate that could be consolidated can you talk a little bit about the savings that we could end up seeing over the next few years on that front.
Yes, I don't think <unk>, given a dollar amount, but this has been actually something we've been after the last couple of years as we sit here today, we probably still got and we're making these decisions about 30% of our real estate portfolio is still left to.
We I'll say re imagine if you want to if you're an investor. So so theres still some opportunity of incremental savings over and above what we've already realized.
Great. Thank you.
Thank you.
And it appears we have no further questions today, Mr. Inhibitory I'd like to turn things back to you for any closing comments.
Great. Thank you for your interest in and support of K Force, while the environment has become more challenging I would like to say thank you to every <unk> for their efforts and their execution really resulting NK force performance is one of the top technology staffing and solutions providers here in Q1.
I would also like to say, thank you to our consultants and clients. After you exhaust the NK force in partnering with you and allowing us the privilege to serve you. So we look forward to talking with you again after our second quarter 2023.
Thank you, ladies and gentlemen that will conclude the <unk> first quarter 2023 earnings call, we'd like to thank you all so much for joining us and wish you all a great remainder of your day.
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Yes.
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Okay.
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