Q3 2023 Kforce Inc Earnings Call
Good afternoon, My name is Christian and I'll be your conference operator today at this time I would like to welcome everyone to the K Forest third quarter 'twenty twenty-three earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, we will have a question and answer session.
If you would like to ask a question during that time simply press star followed by the number one on your telephone keypad and if you would like to withdraw your question again Press Star One I would now like to turn the conference over to Joe Liberty, We're a K forces President and CEO you may begin your conference.
Good afternoon. This call contains 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 forces public filings and other reports and filings with the Securities Exchange Commission.
We cannot undertake any duty to update any forward looking statements 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.
The firm continues to operate effectively against the challenging macro environment, our laser focus on growing our business organically with a consistent refine business model tailored to provide highly skilled technology talent solutions to world class companies has been critical to our success.
Third quarter results were stronger than we anticipated and results in our technology business continued to be at the top of our peer group.
At this point, we saw notable improvements in consultant retention in the back half of the third quarter, which contributed significantly to our better than expected third quarter performance, we've experienced an improving trend in new assignment starts in October.
Our strategic position is solid and our prospects are excellent with that said tremendous uncertainty still exists in the macro landscape, though the improvements in our results over the last quarter leaves us cautiously optimistic there.
The prevailing view of economists continues to be that the U S economy will fall into recession in early 2024, following the aggressive monetary tightening by the federal reserve.
The challenges in the geopolitical landscape continue to grow with the ongoing war and Ukraine more recently with the war in Israel, along with U S political uncertainties and many others against this backdrop the labor markets continued to be remarkably resilient with unemployment remaining at very low levels. The message to our people has been simple there are many things that are.
On controllable in this environment, we've asked our teams to focus on what they can control such as staying close to our internal associates supporting our consultants and continuing to listen to our clients and partner with them solving their most significant and complex business problems.
As we announced on our last earnings call. We took action in July to reduce our structural cost of the lower revenues that we were experiencing and announce certain executive organizational changes in September one.
While actions that affect our K force team are tremendously difficult to make and never taken lightly. We believe these changes allow us to navigate through the ongoing macroeconomic uncertainties and situate us well strategically for the future.
Our third quarter results include charges related to these actions and certain other costs, which Jeff will address in greater detail in his commentary along with the annualized benefit we expect as a result of these actions our executive leadership team has been through multiple economic cycles and has the experience to skillfully navigate through whatever may lie ahead.
We also are blessed to have a solid highly tenured and highly performing team a K force the strength of the secular drivers of demand in technology accelerated significantly coming out of both the great recession with the advancements in mobility cloud computing, among many others and the 2020 pandemic with further digitization of business.
<unk> and the continued headlines around jet AI technologies I've seen a lot of economic cycles in my 35, plus years in the business and each one behaves a bit differently.
The acceleration in spend during the pandemic may have been a driver to the reduction in technology spend during early 2023 and more severely impacted technology towns relative to other staffing disciplines. The recent stabilization in our technology business suggests to US we are migrating to a more traditional pattern.
It remains clear to us that the broad and strategic use of technology will continue to evolve and play an increasingly instrumental role empowering businesses while.
While clients have been acting with heightened caution over the past year their backlog of desired investments continue to grow we expect these important technology investments the high priorities once the macro uncertainties begin to clear technology investments are simply not optional in today's competitive and disruptive business climate. There was simply no other market, where we want it be focus.
And other than the domestic technology talent solution space, our core comps C is rooted in our ability to identify and provide critical resources real time at scale to solve business problems for clients in virtually every industry. Our operating model also allows us to be flexible and partnering with our clients to meet their needs across a broad spectrum of engaged.
When Forbes from traditional staffing assignments to manage team engagements and also fully managed projects.
We have built a solid foundation of K force and are partnering with world class companies to solve complex problems and help them competitively transform their businesses our.
Our balance sheet is clean and we expect this and our strong cash flows to continue provide us great flexibility to return significant capital to our shareholders given our significant bias towards organic growth.
I cannot be prouder of the performance of our collective K force team.
Together against the challenging operating environment. They are more than stepped up and met each and every challenge I'm excited about the future of K force operating consistently as one firm.
<unk>, our chief financial Officer for the past 10 plus years.
David will provide commentary on our performance operating trends and strategic positioning.
I'd like to introduce Jeff Hackman to our call who was recently promoted as our new Chief Financial Officer, Jeff began his professional career with Arthur Andersen in 2001, and it's been with K Force for nearly 15 years. Most recently, serving as our senior Vice President of finance and accounting for the past eight years. He will provide additional detail on our financial results as well as <unk>.
Our future financial expectations, Dave Thank you Joe Rev.
Revenue for the third quarter meaningfully exceeded the top end of our guidance the performance of our technology business, which declined less than expected due to positive late Q3 trends was the most significant driver.
Overall revenues in Q3 declined 13, 44% year over year with flexible revenues in our technology staffing and solutions business declining about 11% a very difficult prior year comps as a reminder, our technology business grew organically approximately 60% on a year over year basis in the third.
Third quarter of 2022, and nearly 30% in the third quarter of 2021.
When you look at our technology business from Q2 to Q3 revenue declines moderated sequentially to only 2% as compared to a nearly 4% decline from Q1 to Q2.
As Joe mentioned, our consultants on assignment stabilized mid quarter in Q3, it actually showed a very modest improvement at the end of the quarter. This trend has continued into October.
The volume of new assignments and projects still remain at lower levels than a year ago. The assignment of retention was significantly better than we anticipated in new assignment starts have recently improved.
We believe this may be indicative of clients, reaching minimum staff levels necessary to perform required activities and execute on mission critical initiatives.
Based on our conversations with clients they recognize the need to retain highly skilled talent, while they wait a point of increased confidence to more aggressively address their increasing backlog of desirable and important technology and investments.
Overall average bill rates in our technology business remained near record levels at approximately $90 per hour, which improved slightly sequentially and 2.3% year over year.
Even in this uncertain environment highly skilled talent remains in short supply and the and high demand, which is reflective of the stability in bill rates.
We are also benefiting from an increase in the proportion of managed teams and manage project engagements within our overall technology business. Looking ahead. We believe average bill rates will continue to remain at or near these levels and will trend higher over time.
Our clients remain focused on critical technology initiatives in the areas of digital UI UX cloud data analytics business Intelligence project and program management in matters of modernization efforts.
Flex margins of 25.5% and our technology business declined 40 basis points sequentially due primarily to seasonal factors such as higher consultant paid time off and 50 basis points year over year as a result of higher price sensitivities and higher health care costs.
The year over year declines in technology Flex margins that we've seen recently are fairly typical of what we've seen in prior slowdowns and we normally see margins recover as the macroeconomic environment stabilizes.
As we look forward to Q4 flex margin spreads in our technology business are expected to be stable, though overall flex margins are expected to be slightly down due to seasonally higher pay time off in the fourth quarter.
Our clients expect us to continue to broaden our service offerings beyond traditional staffing to include manage teams and project solutions clients consider access to the right talent essential to their success and see our services as a cost effective solution for their project requirements, our integrated strategy capitalizes on the stronger.
Relationships chips, we have with world class companies, who are utilizing our existing sales recruiters and consultants to provide higher value teens and project solutions that effectively and cost efficiently address our clients' challenges.
Our client portfolio is diverse and includes large market leading customers market leaders typically prioritize technology investments to maintain their competitive advantage and our focus on addressing their needs have been and will continue to be critical in our ability to drive sustainable above market performance in the long.
Sure.
While short term disruption may occur with certain clients or industries. Our diverse client base provides an outstanding platform for consistent long term growth.
While our financial services and technology verticals were slightly down trends stabilize late in the quarter.
Health care and retail are experiencing some headwinds most recently, while transportation and utilities had been relative strengths.
October trends have continued to improve from Q3 levels and new starts activity in October has been meaningfully better than it was in early Q3.
As a result, the midpoint of our guidance for the fourth quarter contemplates slight sequential revenue growth in our technology business from Q3 to Q4 and low double digit decline on a year over year basis.
Full year flexible revenues in technology are expected to be down approximately 7%, which is consistent with what we saw during the great recession.
Our F a business declined approximately 5% sequentially and 25% year over year the year over year decline reflects the impact of business. We are no longer supporting due to our repositioning efforts as well as a more challenging macro environment.
We expect revenues to be down sequentially in the low single digits and approximately 30% year over year, which is partially driven by a hurricane Ian support project in Q4 last year.
Our average bill rate in the third quarter was $51 compared to $38 in the first quarter of 2020.
Not surprisingly our higher skill set business is where we're seeing relatively better performance.
Flex margins in our F. A business increased 10 basis points sequentially and have improved nearly 400 basis points. Since the first half of 2020 as our mix of business has improved due to repositioning efforts, we anticipate flex margins to remain fairly stable at these levels now that the significant majority of business that we are no longer pursuing.
As run off.
We've taken necessary and thoughtful measures to strike a balance between associate productivity in our revenue expectations as we've done in prior economic downturns, we are focused on retaining our most productive associates and making targeted investments in the business to ensure that we are well prepared to capitalize on the market demand.
When it accelerates we continue to invest in our managed teams and project solutions capabilities and the integration of those offerings within the firm.
We are fortunate to have one of the most recognized brands in the market for providing technology talent solutions. Our reputation has been established over 60, plus year operating history, and we're proud to carry a world class net promoter score as rated by our clients and consultants.
We also carry the highest overall glassdoor rating within our peer group. In addition, K Force was recently named to Fortune's 2023 list of best workplaces in consulting and professional services and the best workplaces for women I.
I'm extremely excited about our strategic positioning and ability to continue delivering above market growth. The success that we have as an organization that doesn't happen without the unwavering trust that our clients candidates and consultants place at us.
And I appreciate the dedication creativity and resilience displayed by our incredible team.
I will now turn the call over to my partner for many years and K forces, New Chief Financial Officer, Jeff Hackman well.
Welcome to the called Jeff. Thank you, Joe and Dave for your support over the years and your comments.
We are blessed to have the unwavering support and passion of the entire K force team and moving our firm forward.
I appreciate the opportunity to provide some comments about our financial position and forward looking expectations.
In the third quarter, we recognized expenses related to actions to reduce our structural costs to better align them with the lower revenue levels and also incurred expenses related to the executive realignment that we announced in September.
Mounted to $8.4 million.
As you remember we included $5.5 million within third quarter guidance. So there was an incremental $2.9 million recognized in the quarter.
These total costs net of the related tax benefit impacted GAAP earnings per share by 36 cents.
In my commentary I 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 costs on our financial results.
Our press release provides.
<unk> provides the reconciliation of differences between GAAP and non-GAAP financial measures.
Third quarter revenues of $373.1 million.
Declined 13.4% year over year.
GAAP earnings per share was 54 cents.
As adjusted for the previously mentioned costs earnings per share of <unk> 90 cents was at the high end of our third quarter expectations.
Overall gross margins declined 60 basis points sequentially and declined 130 basis points year over year to 27.7% in the third quarter due to a combination of a lower mix of direct hire revenue and a decline in flex margins.
Our compensation plan structure rewarded our top performing associates with very significant bonuses and commissions.
With growth coming off those historically very high levels, we are generating leverage in our SG&A costs through lower overall performance based compensation costs.
We have also been successful at driving greater cost efficiencies from our real estate portfolio, given our office occasional model and are exercising greater discretionary spend control in this macro environment.
Our operating margin as adjusted for the third quarter charges was 6.5%.
Which was at the top end of our expectations.
Our effective tax rate in the third quarter as adjusted was 27.8%.
Operating cash flows were $29 million and our return on invested capital was approximately 40% in the third quarter.
We are fortunate to have intentionally managed our business.
By driving solid organic growth that has resulted in a pristine balance sheet with very little debt.
We expect to generate close to $100 million of operating cash flows in 'twenty twenty-three.
And anticipate returning approximately 100% of the cash flow generated to our shareholders.
Our pattern of returning significant capital to our shareholders has been consistent over many years.
Not just in this operating environment.
In fact, since we initiated our dividend in 2014, we have increased it 360% and since 2007, we have reduced our weighted average shares outstanding from 42.3 million to $19.5 million.
All in we have returned nearly $900 million in capital to our shareholders. Since 2007, which has represented approximately 75% of the cash generated.
While significantly growing our business.
And improving profitability levels.
We remain committed to returning capital regardless of the economic climate.
And our threshold for any prospective acquisitions is extremely high.
Our balance sheet and the flexibility we have under our credit facility.
Provides us with the opportunity to get more aggressive in repurchasing our stock.
If there is a dislocation between expected future financial performance and the valuation of our shares.
The fourth quarter has 61 billing days, which is two fewer than the third quarter of 'twenty twenty-three.
And the same as the fourth quarter of 2022.
We expect Q4 revenues to be in the range of 359 million to $367 million and earnings per share to be between 74 and 82 cents.
Our guidance does not consider the potential impact of any other unusual or nonrecurring items that may occur.
As Joe referenced in his opening remarks, we implemented some very difficult changes this quarter that immediately reduced our costs to better align overall support of the firm with current and expected near term revenue levels.
It is worth reinforcing what we said on our last earnings call.
That the actions taken are expected to reduce annual operating costs.
By approximately $14 million or three and a half million dollars per quarter.
Our overall operating performance at these revenue levels remains well above what we have previously seen.
Which is reflective of the return we are seeing from previous strategic investments.
Looking beyond what we expect may be short term macroeconomic uncertainties.
We remain extremely 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 the ongoing transformation of our back office.
On behalf of our entire management team.
I'd like to extend a sincere thank you to our teams for their efforts.
Operator, we would now like to turn the call over for questions.
As a reminder, if you would like to ask a question. Please press star followed by the number one on your telephone keypad.
Your first question comes from the line of Mark Mccall from Baird. Please go ahead.
Hey, good afternoon, and thanks for taking my questions.
David Jeff Congratulations on the well deserved promotions.
<unk>.
Joe or David can you. Please talk a little bit more about what you were seeing intra quarter and.
You know the stabilization slash slight upturn with regards to.
The demand that you're seeing in tech flex how broad based was that.
How pervasive is that how confident are you that you know that may end up continuing and to what extent does the guidance contemplate.
Potential furloughs.
At the very end of December as you have gone through multiple cycles typically end of year, we do see some companies that do pull back and decide to send all the consultants home so wondering to.
Yeah, Mark this is Dave I appreciate the kind words. Thank you. So so yes, a number of questions there so.
So I think maybe a good place to start when we look at Q3 is how we've thought about it when we gave guidance about.
About 90 days ago.
As we had indicated we really took a mathematical approach to third quarter guidance.
Because if you recall, we've been seeing some consistent albeit small declines in the number of consultants on assignment in the first couple of months to the quarter and Eric I should say.
Couple of months of the quarter than the first month of this quarter and so our guidance contemplated that to continue.
So we really have experienced some stabilization in the number of consultants on assignment.
Allergy that really began midway through the third quarter and we saw that continue through the rest of the quarter.
The number of new assignments and projects they were that we had during the quarter.
<unk> was pretty stable, obviously, new starts activity being lower than it was during the pandemic, but I think the point here is that demand as we got into the mid point to the quarter was very stable versus what we had seen for the I would say that two quarters prior to that or so which was a decline.
I think also notable are a lot of this stability is coming from clients maintaining consultants on assignment. We saw we saw a very low a low level of attrition during the quarter as I think Joe made a comment that really indicative of clients and we think reaching staffing levels.
Or kind of minimum levels required to.
Execute on contracts that are really critical.
I think.
Increasingly encouraging for US though is that in addition to that as we've gotten into October.
<unk> seen improvements in in billable consultants on.
On assignment so I'm.
I'm not suggesting there isn't uncertainty, but those certainly are positive signs early in the quarter and a lot of that I should point out.
It is also coupled with.
A growing pipeline of opportunities that are managed teams.
Managed print projects space as well.
All in all if you think about that numerically that equates to slight we believe sequential billing day growth in the fourth quarter I would say generally speaking that's pretty broadly based mark there's not specific industry drivers to this is quite behaviors that we're seeing cross.
Rodley across the spectrum of client size and across industry really.
I think the second part of your question related to how we're thinking about the fourth quarter in terms of.
Our guidance in terms of flows et cetera.
I'd start out by saying the fourth quarter as you know has two fewer billing days in the third quarter.
And I think not surprisingly, we're still seeing very consistently with what we did last year.
We're seeing clients, who are and this is not different than last year or forcing some such shutdowns or soft closes around around the holidays and really encouraging time off.
K force, we do a soft close between Christmas and new year's.
We also in the fourth quarter are always see greater paid time off for consultants that impacts Q4 revenues.
I would say those things are normal so we're seeing very typical patterns from what we saw a year ago, we baked all of that into guidance and you kind of bake all that together, we're taking a pretty clinical view of billing days and those are holiday driven billing days and you bake all that together and we.
Still believe in technology that we're going to see some flat or slight sequential growth, which again, we see is pretty encouraging.
That's great. Thanks for the clarity there David and then.
This shooting a little bit ahead, I'm not asking for guidance, but just in terms of.
Broadly speaking when you think about the pipeline and how it seems to be building out.
And then thinking about kind of the normal seasonal variations.
When people go from Q4 to Q1.
Typically there is a little bit of a slower start in terms of Q1, we obviously have the payroll reset what are the some of the things that.
Investors should think about as they think about you know modeling ahead beyond the fourth quarter.
Yes, I think Mark this is Dave again, I'll, let Joe and Jeff have any other comments, but.
You're right to point out right. We typically see at the end of the year project and does that impact the business this year.
Upon what we're hearing of giving you some view of Q4 and what we have seen typical typically I don't think we're seeing anything exceptional relative to a <unk>.
A quote unquote normal year something like that.
That pandemic years, where we saw it really net increases so I think we're contemplating a more typical.
Year end ends picture based upon the visibility we have right now and Mark. This is Jeff I. Appreciate your comments at the front end of this.
Add to that is when you look at our typical year end assignment ends in our technology business over the last three years actually going into 2023, they were actually lower than the number of consultants that we lost at the end of the year than they were if you go back to the pre pandemic periods.
And this is not a crystal ball you know trying to forecast that mark will get some visibility and clarity as the fourth quarter that goes on here, but I think fair to say just given the criticality of the technology consultants to these resources and the projects themselves at the last three years has been lower than what we've historically seen pre pandemic.
Consultants, we retained through the end of the year.
Great and then can you talk a little bit about flex gross margins in this together.
The discussions are going with regards to.
You know Pedro ratio and what are you seeing in terms of the PE ratios, because you mentioned year over year, roughly 2% growth.
Slightly below inflation.
<unk>.
How are the pay rates going what is the competition like.
For the consultants do you have more flexibility.
With regards to managing those how should we think about the gross margins on the flex side going forward.
Yeah. So mark this is Dave again, I think I'd start out by saying in a very positive way same story different day right. So as you pointed out.
Bill rates continue to hold up well still north of $90. As you point out a couple of percent. We think that continues to be reflective of a low supply high demand for highly skilled talent, which is obviously <unk>.
Bill rate I made a specific comment.
Has been a consistent comment over the course of the last many quarters.
Nearly as an upward bias over the luck in the longer term for increased bill rates.
Given the dynamics in the marketplace and the need for this talent as it relates to margins and spreads.
The spread between Bill and pay rates continues to be very consistent.
In this lower environment, we did actually see.
See a slight decline, but as I'd mentioned that health care costs related predominantly so that spread between bill rates and pay rates continues to be very stable.
And the last comment I would make is kind of a reiteration at my prepared remarks as you know in the longer term not atypical in a slower environment as things improve although sometimes.
You might see lags, what we would typically see some expansion and longer term. So again the dynamics are playing out as they have historically here.
I appreciate the comments thank you.
Your next question comes from the line of Trevor Romeo from William Blair. Please go ahead.
Hi, good afternoon. Thanks, so much for taking the questions I will also congratulate Dave and Jeff on the new roles.
First I was just wondering if you might have any insights from client conversations on how.
Budgets are trending as we kind of move into the year end budget cycle and what that might mean for project spending for your clients next.
Next year.
Yes, Trevor this is Joe Laboratory I'd say most of our clients are still in the.
And the early terms of locking down 2020 for budget. However, as a whole what we're really hearing about is kind of flat to slightly increasing budgets over our 2023 with an emphasis on projects that are focused to gain efficiencies both internally and external.
Italy.
Needless to say, there's a industries and client specific drivers, which we believe play to our favor with the quality the diversity of our overall portfolio boat.
Budget discussions being allocated a little bit differently than prior years, there seems to be a focus on stretching the dollar to get more out of it I would say on the good news is that's really opening up more opportunities for us as clients are no longer exclusively looking at traditional consulting fee.
Firms are due to the cost differential between what those firms who are engaged versus a K force our firms like K. Four so we believe that that provides a lot of opportunity for us with a more efficient options to staffing and solutions with those clients that give you a feel for what youre.
Four.
Yeah. Thanks, Thanks, Joe that was a that was helpful.
Then I guess two to the team's credit I think papers as revenue on the tech side.
To hold up better than a lot of companies in the peer set.
And just wondering from your perspective are you seeing any notable changes in market share or competitive behavior across the market do you see further opportunity to take share in this type of environment.
Yeah, I think we've seen some of our competitors are performing well in this.
Challenging environments.
As much as we are and what I would say is probably.
We'd like to see your competitors do well because that's an indication of the overall opportunities in the market I would say probably not just us, but probably not as well I think it's probably more of the market share is coming from the more localized and regional operators on and that those that have very expanded platform.
And because we continue to see our opportunity pipeline build as a as we were moving through Q3 and into the early part of Q4.
Our existing projects and our strongest pipelines, they've really been in and around application development around digital transformation initiatives, which often focus on those customer and internal experiences realizing much of that work also touches our cloud practices, which we really like and we're also seeing them.
A lot of things happening from a data standpoint, which also often have a cloud requirements within their existing projects and pipeline opportunities in the data side are really more traditional although we are starting to see Ron aspects as customers are experimenting with in exploring AI and <unk>.
Early setting themselves up to take care of that so I think with all that said, we believe we're really focused on those areas where demand is their application development and cloud data and digital all continued to be robust areas and really position us well near term and long term. So I would say part of the driver arrived.
He has honed our focus so much over the years and we're focused in those areas where theres. So much initial critical stuff that's taking place.
Not inside competitors I don't know how focused they've become but I would say if I were to say a differentiator will be that aspect and then our team has just been crushing it from an execution standpoint, I mean, their resiliency and persistency is quite a big partner I guess I would say this we've seen probably a 15% year over year deteriorated.
<unk> in our largest customers and we've only seen 5% and those customers that we are more early on in our relationships and what I get excited about there are similar to the pandemic when some of our largest customers.
Things really tightened up and our team had a diversifying get into new customers and that's what they've done here. Once again and this is a tough time to penetrate into new client and what that really gets me excited about is as things stabilize and start to recover all of those larger clients back online and we're going to get more acceleration out of.
Are the customers that have been developed and diversified in our footprint and when you kind of put those two things together I would attribute a lot of our exponential growth coming out of the pandemic was because of both of those things happening simultaneously and I see those same things playing out because of our team's efforts.
As this recovery were to come about.
Alright, Thanks, John I appreciate the comments.
Sure.
Your next question comes from the line of Cartwright Metra from Northcoast Research. Please go ahead.
Thank you and good afternoon.
I was wondering Joe just on assignments. If you looked at three months ago, I think you and others have talked about assignments, we're just being delayed and not canceled which was a positive sign and I'm wondering.
If you are seeing some of those assignments that.
No were delayed coming back on or is it just that your existing customers or a.
Feeling a little bit better and spending more money.
Yes, I'd say its probably above the ladder, we haven't seen any major major changes.
Earlier in the year in terms of.
Your question, we're really more associating in.
Dave and Jeff touched upon this.
<unk> retention that we've seen with our with our consultant base, we have seen a noticeable difference as we move through the third quarter I would say one of the other things that we've been observing is that our conversions have actually come down on a year over year basis, our conversions are down roughly 55% so with those things really point to me.
In this industry in every recession or or cycle that I've been involved with the first thing that happens as clients start to exit consultants in the next the next segment as they start to tighten up on their Ftes and start to arrive online there full time workforce and then the third stage as they start to bring.
Flexible consultant back while they're waiting for certainty that the economy is off to the races, and so we could be seeing some of those earlier dynamics right. We experienced this last year I think we had three three sequential quarters of negative sequential growth in our tech flex there.
Historically, if you if you were to go back to the financial crisis, and you will go back to the pandemic.
No doubt sequential and if our if our stabilization holds as we put in within our Wall Street guidance basically here in Q4, we would start to turn positive on a sequential basis and then what would typically happen after that as you start to see the expansion as customers start to bring on more and more flex consultants. So.
I mean, I don't I don't have a crystal ball I don't know where that where the ultimate economy slowing, but I mean I'm just yeah.
History Richert are so we can kind of see this cycle is starting to play out similar to prior cycles.
That's helpful.
The last quarter or three months ago.
You weren't the only company.
<unk>.
The company that was in temporary staffing and others talked about the uncertainty in timing I don't think that uncertainty is gone away from some of the comments you've made but just out of curiosity based on your experience. What do you think what changed do think at where companies are feeling a little bit better about spending money or is it the type of project.
What do you think has changed from three months ago. When you gave guidance today, where you do sound a little bit more positive.
Yes, I would say and again just in listening to our people and what they're experiencing inside the clients and the client feedback.
And again I've seen this every cycle people cut too far and now they can't get the mission critical work done that has to be done and we could be seeing some of those things that are unfolding here, which is why and this isn't just K for us I mean, if you listen to our competitors that have announced prior to US you are hearing about a general stable.
Our station on the technology front, and that's typically what happens when they go a little bit too far because you got to realize.
The amount of backlog of projects and its not that nice to have projects. It's the must do project and when you start to cut those things start to not get impacted on those projects to move forward. So I think that's what really creates this stabilization that's going on so if anything were to change.
I would say basically if the pain points that organizations are feeling on having to get some of these projects moving and some of them over to go along.
Thank you very much I really appreciate it.
Sure.
Your next question comes from the line of Marc Riddick from Sidoti. Please go ahead.
Hey, good evening everyone.
Hey, Nathan.
Firstly, congratulations Dave and Geoff it's Adam.
Others have said congratulations on the on the roles and certainly looking forward to continuing to.
To move forward there I just wanted to follow up a piggyback on one of your comments earlier, Joe about the.
You know the the customer behavior that you had and I really appreciate all the color that you've already given I was wondering if youre seeing from a sense of are there sort of industry.
Customer segment leaders that are kind of further along that process of sort of making that trend that youre seeing or are you generally seeing that across the board.
Yes, Mark.
It's a bit of a difficult one obviously, we mentioned there are a number of industries residential services for example, our health care retail and they've got some headwinds right, but again just to Jos.
Those mission critical activities.
What market leaders need to do a.
Leading in the marketplace. Obviously, there are other industries may be a bit more conducive it up in a more positive environment I would mention transportation right Youre hearing about what's happening with travel utilities those are industries that we've had.
Relatively speaking better performance in but.
But I don't know that there is any specific industry or industries that are notably different from any other REIT as I said the market leaders in every industry are thinking critically about what is necessary to maintain pay on top.
Okay, and then last one from me actually is just around I Wonder if you could share some thoughts on candidate availability and maybe what youre seeing up there are certain pockets, where that's starting to loosen up a little bit or are you now versus maybe some others, where it's extraordinarily you know about I guess maybe.
It's the same or maybe more difficult to find that the type of tenant is that youre looking for.
Yeah, I would say the egg and then you know and especially in the technology areas that we play in which are the highest demand areas.
Candidates are always hard to come by they've been hard to come by or as long as I've been in this industry. The segments had changed the skill sets of change, but we've always focused in those areas of highest demand. So I mean again that's why.
Because if somebody ever asked me what is your number one core competency is the ability to go out and identify the best candidates available in the market bring them to our clients in a timely fashion and engage them. So yes.
That's one that's one that really doesn't change for us over time I will say one of the dynamics that has changed over the course of the last year is probably the amount of competing offers those those individuals on their table now obviously, so that helps a little bit in terms of when we do have a call client this interest at our ability to.
Engage that consultant with that client because we're not dealing with competing offers right. If you were to go back into that very robust 2021, 2022 time period.
A lot of individuals at our costs, our customers wanted to engage but they elected to pursue another opportunity just because there was so much demand out there.
To that we also see people more.
Lee considerate in terms of those opportunities.
Look at these types of clients, which means when you do engage with consultants that are in the marketplace and they are looking to make a move there much more serious about it because theyre not going to take risks and a little bit more of an uncertain climate. Those are the kind of dynamics that we deal with more versus availability of candidates and the only thing IBM. The other thing I would add.
So it always comes out in the numbers right being a former CFO Joe <unk>.
Bill rates and pay rates continue to rise right. So.
If there was a dislocation in it.
And an availability of talent you would see it in with clients are willing to pay and what candidates are willing to accept.
Great. Thank you very much.
Sure.
Your next question comes from the line of Josh Chan from UBS. Please go ahead.
Hi, good afternoon, and congrats Dave and Jeff as well.
I guess my first question, maybe a bigger picture question. So it sounds like you are.
Sound better and are guiding for some improvement into Q4.
At the same time, you mentioned that economists expect a recession next year or so.
How do you think K force would perform hypothetically if there is a recession coming you know are we at a bottom anyway from a need perspective, and therefore, a recession won't really impact us that much from hereon.
Yes, that's right and again going back to.
Every one of these cycles. It's different every one of them is unpredictable they react differently probably to answer that question. It would be what type of recession, meaning if it was short and shallow.
Been in this industry before where we've been experiencing things like we have been which is revenue deterioration and recessions hadn't been called in by the time of recessions called actually are flex.
Business was moving in a positive direction by the time, a recession caused by no means and I think that is what's going to happen. This time, but we have seen that in prior cycles.
It really just depends upon the nature of what that recession is how deep how long.
How sure our shallow.
It's that it's that equation, that's going to give us the answer to the question that you're asking which we don't have a crystal ball and again, we get economists information from some of the.
Our highest respected economists on a weekly basis, and we pay attention to those those dynamics.
A matter of hopefully this will be a soft landing of its a soft landing.
Absolutely we might we might have seen the worst behind us if theres a second step to this because of how the economy reacts and how clients react there could be another leg down and I really honestly do not know the answer to that question that I, probably wouldn't be sitting here on this call I'll be sitting on an island somewhere but.
End of the day it comes down to the confidence in our management team to navigate irrespective.
Those scenarios played out we are positioned and we will navigate through it.
Okay. Yeah I appreciate the color Joey that makes lot of sense.
For my second question normally this doesn't have a big impact, but it looks like the tech direct hire soften sequentially was that a function of the macro environment or your restructuring actions.
What's driving that.
Yeah, just the simple answer is absolutely with the macro environment right. When you Joe touched on it earlier I direct hire is typically as we go through these cycles.
The part of our business it would suffer votes, it's quite frankly that volatility is part of the reason why we are now 97% flex.
<unk> flexible and project solutions.
Because of the volatility there, but yes it is a macroeconomic.
Impact, that's driving and Josh I think part of the reason why Joe went through the history of what we typically see in the cycles I think thats part and parcel to where Joe is just going not only from a conversions and what we were seeing within our flex revenue base, but also the trends that we're seeing on the hiring a permanent staffing versus the trends that we saw in our flex business.
And technology being very stable mid quarter through the end of the quarter and actually starting to improve albeit modestly but improved to start October that's directly in line with where Joe went about it in the lab.
Couple of economic cycles.
That makes a lot of sense. That's thank you very much better you got some time.
Thanks sure. Thanks, Josh.
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I'm sorry, we have no further questions in our queue I will now turn the call.
Sorry, we deal.
Your next question comes from the line of Colby Summers from <unk> Securities. Please go ahead.
Hi, This is Jack Wilson on for Tobey.
Just when you think about AI as a long term driver is that mostly going to show up in demand for cloud and data work or do you have a direct exposure to sort of AI demand.
Yes, it's a great question and obviously one that everybody is paying attention to in fact, I think got it.
Was the international data Corp. They just came out with basically predicting $16 billion of worldwide Gen AI solutions in 2023.
Which is really in and around software related infrastructure hardware and IP business.
Business services.
By the way they expect that too to reach $143 billion in 2027, what we're seeing from our customers is we're very much in the early innings, where clients are preparing and experimenting and it's yet to really make any substantial investments.
There remains also by the way much to resolve around pricing privacy security and government intervention.
The fact is we heard today right with the U S. Government's first action with an AI executive order, but at the end of the day. Yes, you cannot you cannot do AI. If you have an address the data aspects and Thats why data has been front and center.
One of our four core offerings. So that's where we are seeing things everybody is working on cleaning up their data because youre not getting anywhere with AI. If you don't have pristine and share data the old garbage in garbage out.
Obviously with everything moving towards that towards the cloud. They both play which is another one of our core service offerings. So we like how will this end.
<unk> AI investments continue to ramp up we think our teams are very well positioned to take advantage of that.
Yes. Thank you for that color, that's very helpful and.
And then just sort of more of a modeling perspective is that $14 million in annual cost savings are achievable whatsoever, regardless of what the economic picture looks like in 2024.
Yeah, I think Jack that the point, we gave us obviously in our second quarter call. So we're sitting here in an economic environment, that's a bit challenging the structural cost reductions that we implemented back in July started to benefit the third quarter we.
We anticipated that when we issued third quarter guidance the full amount of the quarterly benefit in the fourth quarter would be realized so you've got effectively one additional benefit that would be realized in the fourth quarter compared to the third but the short answer Jack is yes, irrespective of the economic environment.
We would expect those annualized benefits.
Perfect. Thank you so much I'll turn it over.
And we have no further questions at this we have no further questions. At this time I will now turn the call back over to Jill and laboratory for closing remarks.
Thank you for your interest and in support of K for US I would like to say thank you to every day for us or for your effort and to our consultants and clients for your trust in Kay for some partnering with you and allowing US the privilege to serve you. We look forward to talking with everyone again after our fourth quarter 2023 have a great evening. Thank you.
And this concludes today's conference call. Thank you for your participation and you may now disconnect.
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