Q4 2024 Kforce Inc Earnings Call
[inaudible]
Speaker Change: Well, hello, everyone, and welcome to the QForce Q4 2024 Conference Earnings Call. Today's call is being recorded. I would now like to hand the call over to the President and CEO, Mr. Joe Liberatore. Please go ahead, sir.
Speaker Change: Good afternoon and thank you for your time today. This call contains certain statements that are forward-looking, that are based upon current assumptions and expectations, and are subject to risk and uncertainties.
Speaker Change: Actual results may vary materially from the factors listed in KFORCE's public filing and other reports and filings with the SEC.
we cannot undertake any duty to update any forward-looking statements.
Speaker Change: 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 the investor relation portion of our website.
Speaker Change: As to our performance, we have been operating in an uncertain macro environment for more than two years, though demand for our technology services stabilized in early 2024 and remained stable throughout the year.
Speaker Change: I am extremely proud of how our teams have operated in this relatively subdued environment as evidenced by our industry-leading performance in our technology business yet again in 2024.
Speaker Change: Our teams have continued to persevere and make the necessary adjustments within the business to maintain these high levels of performance while we have also maintained elevated investment on our critical initiatives.
Speaker Change: This provides a great foundation moving forward to return higher levels of profitability as revenues inflect. We have made tremendous progress related to the implementation of Workday as our future state enterprise cloud application for HCM and financials.
Speaker Change: Each of these strategic initiatives are transformational in nature and will be a meaningful contributor to us meeting our longer-term financial objectives of generating greater operating margins
Speaker Change: when we return to $1.7 billion in annual revenues, along with our standing goal of obtaining at least 10% operating margins at $2.1 billion in annual revenues.
Speaker Change: Conversations with our clients post-election and the preponderance of economic views suggest to us that the operating environment as we move into 2025 may improve as we get further into the year.
Speaker Change: With that said, we have not yet seen signs of positive inflection point in our key performance indicators.
Speaker Change: Rather, we have continued to experience stability in our business, other than normal seasonality at the end of the year as clients naturally conclude projects and begin to reassess budgets and technology priorities in the new year.
Speaker Change: Regardless of the ultimate environment, we enter 2025 well-positioned to take additional market share, as we have successfully been doing for years, while also continuing to lay the foundation to generate significant long-term return for our shareholders.
Speaker Change: While the political uncertainty has been resolved with President Trump and his administration taking office on January 20th, the impact from the potential policy changes is unclear.
Speaker Change: In addition, the prospects for further Fed rate cuts in 2025 appear less certain with inflation indicators proving a bit stickier and continued strength in the labor markets.
Speaker Change: We believe that clients, broadly speaking, have been exercising caution and delaying the initiation of technology partially in anticipation of a recession that has not materialized.
Speaker Change: which has resulted in an increasingly strong backlog of strategically imperative technology investments.
Speaker Change: We believe that clients will begin to incrementally invest in technology initiatives as they gain additional confidence in the U.S. economy.
Speaker Change: As for our fourth quarter performance, revenues exceeded the midpoint of our expectations with our technology business growing sequentially almost 1% per billing day. Earnings per share was at the midpoint of our guidance.
Speaker Change: As we move into the first quarter of 2025, we will continue to stay close to our performance indicator and trends and make any necessary adjustments to our business.
Speaker Change: As has been the case for the last several years, AI continues to dominate the headlines. Perhaps the most recent being DeepSeek's AI advancement.
and the announcement of Stargate Venture.
Speaker Change: to build new data centers in the U.S. to provide more computing power to OpenAI.
to develop and train their models.
as we have previously articulated.
Speaker Change: Over the long term, we believe that AI and other innovative technologies will continue to play an increasing role empowering businesses
Speaker Change: and that that impact will follow the historic Jevons Paradox pattern where improved efficiency ultimately drives greater demand for rather than replacement of technology resources and that the pace of change will continue to accelerate. We are ideally positioned to meet that demand.
Speaker Change: We have built a solid foundation at K-Force. As we look ahead to 2025, our priorities remain consistent.
Speaker Change: We will continue to make the necessary investments to transform our back office, advance our integrated strategy, and further evolve our near and offshore capabilities, inclusive of our India Development Center.
Speaker Change: Our organic growth strategy has resulted in us carrying a strong balance sheet and generating healthy predictable cash flows. This has again put us in a great position to support our ongoing objective of returning significant capital to our shareholders through share repurchase and our quarterly dividend.
Speaker Change: In support of this, our Board of Directors recently approved an increase in our dividend for the sixth consecutive year.
Speaker Change: Before transitioning the call to Dave, I wanted to reiterate how proud I am of the performance and resiliency of our collective K-Force team. Together we fought through a challenging operating environment, made some difficult decisions, and met every challenge that arose.
Speaker Change: We are blessed to have a high performing team that is tenured, dedicated, and passionate at K-Force. I could not be more excited about the future of K-Force.
Speaker Change: Our Chief Operating Officer will now give greater insights into our performance and recent operating trends. Jeff Hackman, K-Force's Chief Financial Officer, will then provide additional detail on our financial results as well as our future financial expectations.
Speaker Change: Thank you, Joe. Total revenues of $343.8 million exceeded the midpoint of our expectations for the fourth quarter, growing 0.4% sequentially on a billing day basis.
Speaker Change: Revenues in our technology business grew 0.6% sequentially and declined 5.2% year-over-year per billing day.
Speaker Change: Consultants on assignment were relatively stable throughout the fourth quarter at a slightly higher level than Q3 until we began experiencing usual year-end assignment ends.
Speaker Change: While we were certainly pleased with the sequential billing day growth in the fourth quarter, our results over the last four to six quarters, our KPIs, and conversations with our clients continue to suggest a slightly more optimistic, but still relatively stable demand environment.
Speaker Change: Though mission-critical initiatives still continue to gain priority investments, it appears that clients continue to await a period of increased confidence to begin more aggressively adding greater amounts of resources to address the significant backlog of other important technology initiatives that has built up over the last two-plus years.
Speaker Change: Our technology staffing service offering has evolved over the years beyond traditional staffing assignments to include more consulting oriented engagements based on the demand we are seeing from our clients.
Speaker Change: Clients continue to prioritize efficient access to highly skilled talent and see our services as a cost-effective solution to meet their technology project requirements, leveraging our superior delivery capability.
Speaker Change: Our integrated strategy efforts capitalize on the strong relationships we have with world-class companies by utilizing our existing sales force, recruiters, and consultants to provide higher value engagements that effectively and cost-efficiently address our clients' challenges.
Speaker Change: An increasingly important vehicle to providing cost-effective solutions is the ability to source highly skilled talent outside the United States. As Joe mentioned, our development center in Pune, India is now fully operational.
Speaker Change: We believe this facility puts KFORCE in a strong position to compete on client opportunities that we were precluded from bidding on in the past.
Speaker Change: This development center, when combined with our strong U.S. sales and delivery capability and a high-quality vendor network, will help us to more fully address the evolving needs of our clients, whether onshore, nearshore, or offshore.
Speaker Change: Overall average bill rates in our technology business of $90 were stable again in the fourth quarter, and in fact, have been stable for more than two years. The consistent demand for highly skilled talent on both traditional staffing assignments and consulting-oriented engagements have kept bill and pay rates stable, even as the overall industry trends have slowed.
Speaker Change: Our clients remain focused on critical technology initiatives in our digital, cloud, data, and application engineering practices.
Speaker Change: Our core competency is sourcing quality talent at scale for our clients as demand for various skill sets change and evolve.
Speaker Change: We expect this to continue as clients increasingly look to us to provide data and digital resources to support the data rationalization and cleanup activities that are at the front end of their AI investments. As technology has evolved over the decades, we've efficiently evolved with the changing skill set demands of our clients.
Speaker Change: Flex margins of 25.3% in our technology business decreased 10 basis points year over year. Bill pay spreads in our technology business have been stable over the past year, which continues to be an encouraging data point given the relatively tepid demand environment.
Speaker Change: Our sequential decline in flex margins in our technology business was 80 basis points due to a combination of higher health care costs that drove a 40 basis point decline and the usual seasonal declines due to paid time off over the holidays.
Speaker Change: Our client portfolio is diverse and is mostly comprised of large, market-leading companies. Our focus on addressing their needs continues to be critical in our ability to drive sustainable, long-term, above-market performance.
Speaker Change: From an industry perspective, we experience stability or sequential growth in nine of our top ten industries.
Speaker Change: Our largest vertical, Financial Services, experienced improvements sequentially for the third consecutive quarter. We also experienced notable growth in technology and telecom, as well as retail and transportation.
Speaker Change: Looking forward to Q1, year-end assignment ends appear to have approximated levels experienced over the last two years. Our current expectations, based upon the data we have and conversations we are having with clients, is for technology consultants on assignment to gradually improve over the remainder of the quarter.
Speaker Change: Revenue may be down sequentially on a billing day basis in the low to single mid single digits, which is consistent with what we were seeing in the years prior to COVID.
Speaker Change: Flex Revenues in our FAA business, currently 8% of our revenues, improved 0.5% sequentially.
Speaker Change: Our average bill rate of approximately $51 per hour has been relatively stable over the past year and is reflective of the higher skilled areas we are pursuing that are more synergistic with our technology service offering.
Speaker Change: We expect Q1 revenues in FA to be down sequentially on a billing day basis in the low double digits following greater than expected year-end assignment ends.
Speaker Change: Flex margins in our FAA business decreased 120 basis points sequentially, driven primarily by higher health care costs. We expect bill pay spreads to remain fairly stable in Q1.
Speaker Change: We continue to make adjustments to associate levels based upon productivity expectations.
Speaker Change: We remain 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.
Speaker Change: We have selectively invested in our sales teams, which have increased over the last two years, while rationalizing our delivery resources, which were down slightly 15% on a year-over-year basis.
Speaker Change: Even with these reductions, we believe we have ample capacity to absorb several quarters of demand should it improve without adding any significant resources. We also continue to invest in our consulting solutions business and the integration of higher value offerings within the firm, which is progressing well.
Speaker Change: While the uncertainty in the macro environment has persisted longer than most have expected, I remain tremendously excited about our strategic position and ability to continue delivering above-market performance in our technology business as we have for well over a decade.
Speaker Change: The success we have as an organization doesn't happen without the unwavering trust that our clients, candidates, and consultants place in us. I'll now turn the call over to Jeff Hackman, K-Force's Chief Financial Officer.
Jeff Hackman: Thank you, Dave. 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.
Jeff Hackman: They are included as additional clarifying items to aid investors in further understanding the impact of certain costs on our financial results. Our press release provides the reconciliation of differences between GAAP and non-GAAP financial measures.
Jeff Hackman: Overall revenues in 2024 of $1.41 billion decreased approximately 9% year-over-year. Earnings per share in 2024 was $2.68, which declined 14% year-over-year on a gap basis and 23% on a non-gap basis.
Jeff Hackman: The non-GAAP adjustments to EPS for 2023 related to expenses associated with actions to reduce our structural costs and the settlement of outstanding legal matters.
Jeff Hackman: Fourth quarter revenues of $343.8 million were above the midpoint of our expectations.
Jeff Hackman: Earnings per share of 60 cents were at the midpoint of our guidance as we experienced higher than expected health care costs from a handful of unexpectedly large claims in the fourth quarter which negatively impacted flex margins and SG&A.
Jeff Hackman: Overall gross margins in the fourth quarter decreased 90 basis points sequentially to 27% due to higher health care costs which drove a 40 basis points sequential decline, normal holiday seasonality, and lower direct hire mix.
On a year-over-year basis, gross margins declined 30 basis points.
Jeff Hackman: Flex margins and our technology business decreased 80 basis points sequentially due to normal holiday seasonality and higher health care costs.
Jeff Hackman: Notably, flex margins in technology only declined 10 basis points year-over-year as the higher health care costs in the fourth quarter were offset by a slight improvement in spreads year-over-year.
Jeff Hackman: This spread increase is attributable to the continued strong demand for highly-skilled talent and the evolution of our business to include a more significant amount of consulting-oriented work. As we look forward to Q1, we expect flex margins to decline sequentially due to seasonal tax resets, though be stable on a year-over-year basis.
Jeff Hackman: Overall SG&A expenses, as a percentage of revenue of 22%, were lower than our expectations.
Jeff Hackman: While we experienced higher health care costs in the fourth quarter, those costs were more than offset by leveraged gain from continued refinements in our headcount and solid management of overall spend.
Jeff Hackman: We are continuing to make targeted investments in our sales capabilities while managing down other areas of our business.
Jeff Hackman: We also continue to advance our enterprise initiatives, including the implementation of Workday, the establishment of our India Development Center, and further integration of our Solutions Offering, all of which are expected to significantly contribute to our longer-term financial objectives.
Jeff Hackman: and prepare us well for when companies more aggressively invest in their technology initiatives.
Jeff Hackman: We expect 2025 to be the final year of significant net investment in these initiatives, and for them each to begin providing a meaningful and growing return as we move into 2026 and beyond.
Jeff Hackman: Our operating margin of 4.5% was at the midpoint of our expectations. Our effective tax rate in the fourth quarter was 26.6%.
Jeff Hackman: Operating cash flows were approximately $22 million, and our return on equity continues to exceed 30%.
Jeff Hackman: We generated $90 million in EBITDA in 2024, operating cash flows were approximately $87 million for 2024, and we returned nearly $65 million in capital, representing approximately 75% of operating cash flows.
Jeff Hackman: to our shareholders via dividends and open market repurchases. As Joe mentioned, our Board of Directors recently approved an increase to our quarterly dividend which represents the sixth consecutive annual increase.
Jeff Hackman: We continue to execute our organically-driven business well, and we believe our industry-leading relative performance is a result of our intense focus in technology staffing and solutions in the U.S., augmented by our near-shore and offshore capabilities.
Jeff Hackman: We continue to carry a pristine balance sheet with minimal debt and return significant capital to our shareholders. This consistent repurchase activity continues to be strongly accretive to earnings.
Jeff Hackman: We have returned nearly $1 billion 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.
Jeff Hackman: Our strong, predictable cash flows and solid balance sheet allow us to remain committed to investing in our business while aggressively returning capital, regardless of the economic climate. Our threshold for any prospect of acquisition remains very high.
Jeff Hackman: The first quarter had 63 billing days, which is one more day than the fourth quarter of 2024, and one less than the first quarter of 2024.
Jeff Hackman: We expect Q1 revenues to be in the range of $330 million to $338 million and earnings per share to be between $0.44 and $0.52.
Jeff Hackman: Our guidance is based upon the assumption of the continuation of a stable environment and does not consider the potential impact of any other unusual or non-recurring items that may occur.
Jeff Hackman: We remain excited about our strategic position and prospects for continuing to deliver above-market results over the long term while continuing to make the necessary investments to help drive
Jeff Hackman: long-term growth and enable us to achieve our longer-term profitability objective of attaining double-digit operating margins at slightly greater than $2 billion in annual revenue.
Jeff Hackman: As Joe mentioned in his prepared remarks, we expect to generate higher levels of profitability when we return to $1.7 billion in annual revenues, which was our prior peak achieved in 2022.
Jeff Hackman: Based on the timing and extent of the expected benefits from our strategic priorities, we would expect to see 100 basis points or more of enhanced operating leverage when we return to that revenue level. On behalf of our entire management team, I'd like to extend a sincere thank you to our teams for their efforts.
Jeff Hackman: We would now like to turn the call over for questions.
Speaker Change: Thank you, sir. And everyone, if you would like to ask a question today, please press star 1 on your telephone keypad. Once again, that is star 1. If you have a question, we'll go first to Mark Marcon-Baird.
Good afternoon and thanks for taking my questions.
Speaker Change: and Tech and Telecom are starting to see a little bit of improvement. I'm just wondering if you can talk a little bit about
Speaker Change: what you're seeing from the clients, just a little more color.
Speaker Change: and maybe perhaps you can size, you know, what you're seeing in terms of that data clean-up, the AI initiative. To what extent, you know, could that end up being a driver as the year unfolds?
Thank you.
Speaker Change: Good afternoon, Mark. It's Dave. So, yeah, you're right. You know, when we talked a little bit about industries and we talked about AI and data and digital,
Speaker Change: We're hearing that a lot more, right? There's a lot of...
Speaker Change: conversation in and around AI, but all of what we are hearing, and this is true,
Speaker Change: with our consulting-based offering in particular. There's a lot of data cleanup work, especially because we work with very, very large companies, and we know we're going through a lot of even data rationalization in our efforts.
Speaker Change: to transform our systems as well. So, it is an increasing...
Speaker Change: topic of conversation, obviously. It has been, by the way, I would say, for the last couple years. But, I mean, it'll become probably over time a bigger and bigger part of the business opportunity as we move forward. Hard to size it right now. It certainly isn't a majority of what we're seeing today. And so, I think it's an opportunity. I mean, I think, and we've talked about it, Joe mentioned it,
Speaker Change: in his opening remarks about the fact that as companies rationalize their data, as we think about AI, right, it leads to a desire to move more quickly and improve things more and faster. So we think it's a real business opportunity for us. And I wouldn't say necessarily that this is industry specific. I'd mentioned, right, nine of our 10 industries grew, financial services for the third consecutive quarter as well, so it's pretty broadly based, I would say.
Right.
I mean, aside from just the data cleanup, I mean,
based on the conversations that you are having with clients.
Speaker Change: you know obviously there's a lot of policy uncertainty and policy seems to change intraday on some occasions but I'm wondering like how are they
Speaker Change: How are your clients actually talking about, you know, what they would need to see in order to have the confidence to pull the trigger and to see a meaningful move towards, you know, addressing some of these pent-up projects that they have?
Speaker Change: Yeah, Mark, it's a great question and I would say in, you know, in the client conversations that I've been involved with as well as here throughout the course of January and talking with our
Speaker Change: People that are meeting with our clients, which by the way, I would mention our client visits are significantly up here in the beginning of the year. So I think it's saying something that our clients are taking more of our meetings, and that's also translated into our job orders being up.
Speaker Change: but we haven't seen any of that manifest itself in outcomes at this point.
Speaker Change: But really, you know, there is no one thing. It's just, you know, sentiment has been much more positive, I would say, as we entered 2025, which has resulted in those additional client meetings.
Speaker Change: We're hearing more about clients, you know, looking at their budgets, trying to get after some of the backlog.
Speaker Change: whether that happens or doesn't happen. I mean, you know, we'll see how some of these policies ripple through because, you know, it's an unknown. I don't think any of us have
Speaker Change: really a general feel on which industries could be impacted, how they'd be impacted based upon the nature. So it's very fluid.
The one thing that I would say is...
Speaker Change: You know, having been K-Force, you know, around for over 60 years, we have a very diverse client base, we have a very diverse...
Speaker Change: Customer customer base and across all industries, you know, we're going to pivot one of the things with with professional staffing and solutions the friend of it our disruption change and growth
Speaker Change: So we feel very comfortable, but you know in terms of specifically what they're looking for They're looking for some predictability and stability, and so I think that is wrapped wrapped up in the sentiment I think now they're look starting to look for some of the pull through With consumer spend and things of that nature. I think would start to open things up
Speaker Change: Great. Can you talk a little bit about your initiative in Pune?
Speaker Change: What sort of client response are you getting? How big can that be, you know, over say in the second half of this year as it ramps up?
Speaker Change: what are your plans as you think about next year and you know are there any issues with regards to you know obviously there's
Speaker Change: varying thoughts with regards to immigration and work being done overseas. So just also how are you thinking about that element from a policy perspective?
Speaker Change: Yeah, so there's a few questions in there, so I'll try to remember them all. If I miss them, I'll obviously repeat one of them. But as it relates to the Development Center, we're very excited, and I couldn't be more thrilled with the work that the team did. We moved very quickly to stand this up, right? So what was the driver? Frankly, the driver was
Speaker Change: a desire by our clients for us to be able to meet their needs in a manner that obviously costs as a driver here, right? So we, especially in the consulting-oriented business that we are doing, have seen over the last couple of years,
Speaker Change: a desire for our clients to look at blended models to meet their needs.
Speaker Change: We, as you know, historically hadn't had that capacity outside of the United States other than through a very high-quality vendor network.
Speaker Change: But that, as I mentioned in the prepared remarks, precluded us from, in some cases, from actually being able to bid on business because there are some client policies.
Speaker Change: that require us to have employees providing that service. So we're really having done this.
based upon the desire of our clients.
Speaker Change: and what they want. So where's the opportunity? Clearly, and I think I've mentioned this on the last call, it's a huge market. We all know that, right? There is a lot of demand. There are more technology professionals being generated in India than any other place in the world on a year-to-year basis. There's still a significant cost arbitrage opportunity there. So you've got highly skilled workers at an attractive price. So I don't see necessarily that going
Speaker Change: in a very flexible manner, right? We've made a commitment of not a huge amount of capital, but we've built a lot of flexibility to be able to grow this.
Speaker Change: very quickly. If need be, it will be solely based upon what our client requirements are. Our objective here is to be able to meet those needs and not have to say no. So what can it be is going to be reflected by what our clients want. You've got examples in the marketplace.
Speaker Change: where these types of initiatives grow very, very quickly. Tens, then hundreds, then thousands, frankly. Hard for us to size it, but we're prepared in any respect as to what our clients want and we'll be able to meet those needs.
Speaker Change: Yeah, Mark, I would add we're really going after a niche market and what I mean by niche is
Mark Marcon-Baird: You know, really, and this has started to evolve coming out of the Great Shutdown, is we are seeing more of these blended teams, a combination of onshore, nearshore, offshore, and that's really the business that we're after. So we're not looking at wholesale offshoring to compete with the global providers.
Mark Marcon-Baird: you know, they just have the scale, so that's not the space we're going after. So we're really trying to fit this need that our customers are bringing to us with more of these blended teams. So that's also going to impact how we scale in those dynamics.
Mark Marcon-Baird: So Mark, I think the second question you may have had was related to immigration, some of the discussions.
Mark Marcon-Baird: from the administration around immigration. So obviously, we're paying attention to how immigration reform may impact our business. We've obviously been listening very carefully in recent comments.
Mark Marcon-Baird: from the administration, at least from our perspective, appear to be very pro-business and suggest to us that it's...
Mark Marcon-Baird: quite less likely that really highly skilled scarce workers such as those that we employ really will will be impacted. So at this point we don't expect
Mark Marcon-Baird: a significant disruption in our business, right? We deal with higher skilled individuals. I mentioned that, Jeff mentioned, we've got a $90 average bill rate. So you've got.
Mark Marcon-Baird: new, you know, we don't sponsor visas for people who are coming over directly from any country. We actually transition those visas from other clients. So again, for us.
Mark Marcon-Baird: Again, the pro-business stance, I think is the most important thing. If you look back at the first Trump administration, the impact on the highly skilled H-1B, for example, population was virtually nothing. So I don't think from our perspective, this is something that...
Mark Marcon-Baird: is of great concern. Actually, I think, quite frankly, potentially a bit of an advantage for us here in terms of regulations, right? There is a higher, I think, degree of compliance.
Mark Marcon-Baird: requirements from the Trump administration, at least in the first administration versus the Biden administration, and we have a competitive advantage there in terms of our compliance statistics. So actually, I'm going to be optimistic here and say, based upon what we've heard, based upon our structure and the years of experience, this could potentially be a positive for us.
Speaker Change: That's great. And then one last one, and then I'll jump into the queue. Just, Jeff, on your very last sentence in terms of, you know, expecting 100 basis points or more of enhanced operating leverage when you get to the 1.7 billion, is that 100 basis points over what you ended up achieving in 2022, which was roughly 6.9%?
Mark Marcon-Baird: Mark that you read that correctly that's that's the way that we're we're thinking about it and we've talked at length about the
Mark Marcon-Baird: contributors to you know certainly double-digit property margins at the 2.1 billion. I would tell you that the activities that we are driving
internally as a management team, you know, Joe and Dave.
Speaker Change: touched on the strategic priorities, you know, with the implementation of Workday, certainly our integrated strategy efforts related to our solutions offering, and then the IDC. Those are no different, of course, Mark, so we wanted to give a sense, given that we finished the year at $1.4 billion here in 2024, what that path looked like to $2.1 billion in double digits, so, but you're thinking about it the right way, Mark.
Terrific, thank you.
Speaker Change: Thank you, Mark. The next question is from Trevor Romeo, William Blair.
Trevor Romeo: Hi, good afternoon. Thanks, everyone, for taking the questions. First one, maybe just a slightly different take on sort of the overall demand environment question.
Speaker Change: You know, I think we've seen some of the CEO and business confidence surveys increase the past few months and here, point in prepared marks, there's still a bunch of them.
Speaker Change: you know uncertainties out there whether it's policy or what-have-you but
Speaker Change: we'll see if that confidence increase kind of sustains itself. But I was kind of just wondering, you know, if you could point to your historical experience through cycles. I mean, all cycles are different, but
Speaker Change: Is there some way to think about, you know, how long in the past it's taken for those increases in confidence to kind of translate into, you know, new hiring and project spend?
Speaker Change: Yeah, Trevor, I would say, you know, if I go back to the cycles that I've been involved with, you know, going back, really, we'll talk the dot-com forward.
Speaker Change: You know, the first thing you have to see is you have to see that sentiment shift. And we've been waiting for this for the last couple years. So I am optimistic.
Speaker Change: That we we've seen that shift take place because without that nothing else transpires
Speaker Change: You know, I would say all cycles have been a little bit different in terms of timing associated with that.
You know, here in January, this has probably been
Speaker Change: irrespective of those dynamics. And also we saw more activity between Christmas and New Year's this year than we've seen the last several years as well. Again, another positive indicator.
Speaker Change: So our hope would be, you know, as we start to move through Q1 and we start to move into Q2, we would start to see some of the staff augmentation type work.
Speaker Change: manifest itself and then the project work takes a little bit longer than that so that would start pushing us into the back end of Q2 into Q3 so that was why in my comments you know gives us some optimism towards the the second half of the year how early it manifests itself it's a
Speaker Change: It's a little bit tough to say, you know, and as I've said before on prior calls, remember the first thing we always see is organizations bringing back in contract temp work when they start to gain confidence.
Speaker Change: and then following that, then they start to rebuild their staff. So we also did see a good number of conversions coming into the beginning of the year, which again, I also take as a positive sentiment that clients were making those decisions to hold on to some of that intellectual capital that they had to retain that, which gives me some optimism in terms of the workload and the necessity for those people that they're seeing. So maybe that just gives you a little bit more flavor.
Trevor Romeo: Yeah, so Trevor, the only thing I would just add to Joe's point, right, so if we make a distinction on some of this client, this consulting-oriented work.
Trevor Romeo: That has continued to be relatively robust demand, right? That part of this business, and I think in the marketplace, has continued to be strong. So, you know, you've still got a piece of the business that has got quite a strong bit of demand in addition to how the staff augmentation portion of our business.
may play out.
Speaker Change: got it okay well thank you both I know it's hard to say but those are some helpful data points so thanks and then on my follow-up you know maybe another one for Joe I think you mentioned you know being well-positioned to take additional market share going into this year just on that subject
Speaker Change: Anyway, you can kind of quantify how much market share you think K-Force has taken over the past.
maybe a few years in the hands of...
Speaker Change: These are all competitive landscape You think the number of your competitors has increased or decreased over the past few years and just what did you come in seeking?
you know, continue to take sure going forward. Thanks.
Speaker Change: Yeah, I would say from a competitor standpoint, you know, we haven't really heard of any major competitors, disruptions there, so I think, you know, if you start to look at those top 100 or 200 providers in the space, I think the competitive landscape has remained pretty consistent. As we go through any tougher times, we see a lot of, you know, local and or regional entities that are not well capitalized, that might have a portfolio.
Speaker Change: you know they're in many instances one one client receivable going bad away from out of business so there's no question that that landscape is narrowed by how much I really couldn't tell you on that front
Speaker Change: In terms of what we're looking at, and I think SIA usually comes out with that information.
So, you know, on the market share standpoint,
Really what we look at is we look at
Speaker Change: SIA and what they're saying the market's growing by, how do we perform relative to that? And I think if we go back over the course of the last 10 plus years, we historically have performed two X on whatever that market dynamic is coming out from SIA. And we would anticipate that same type of performance.
Okay, great. Thanks so much for all the color. Sure.
Next up we'll hear from Kartik Mehta, North Coast Research.
Good afternoon. I just was wondering about capacity. Obviously,
Speaker Change: you want to maintain enough capacity just in case a thing turn around which you've taken out. Is there any way to measure maybe where you're running at or what capacity you're running at or how much more revenue could be added without adding capacity of people?
Speaker Change: Yeah, Karthik, this is Dave. I would say this, right, so and we've been very intentional about how we've thought about our associate population over the last couple years, right, so the dynamics
Speaker Change: in the marketplace have changed. I'd mentioned that we've actually added salespeople because the activity levels to find business and to generate additional business have needed to increase. So if I look at a particular, you know, capacity equation, it's hard because the dynamics of the marketplace
Change.
Speaker Change: In addition to that, I mentioned that the recruiters count in our associate population is actually down, I think I said down 15 percent.
Speaker Change: in the remarks that I'd made. So, we've been intentional about that because we measure this business based upon an expectation of productivity for our salespeople and our recruiting associates. And we know we always like to maintain enough capacity so that we're not caught short. I made a comment.
Speaker Change: that we've got a few months of time where we would, if necessary, have to add headcounsel. We feel very comfortable with that. Another comment that I would make is, you know, to the extent things ramp very quickly and recruiting resources are necessary, those are resources that are more quickly ramped in our model. So we feel very comfortable that we're well-positioned, right? So we manage this business by metrics, by the expectations of performance. We add people by the expectations of performance.
Speaker Change: through many years of expectations that we've built. So, I feel very comfortable that we won't be caught short here. I'm going to be optimistic and say when things improve, we will not be caught short. We've proven that.
Speaker Change: cycle after cycle, so I think you can rest comfortably that we'll manage this efficiently and we'll be able to meet the needs of our clients whenever they're necessary.
Speaker Change: Just one last question, you know your facility in India, is there an opportunity to maybe leverage that more than you initially thought if things come back and you have maybe leveraged the SG&A line so have a chance to leverage your operating income?
Speaker Change: Yeah, so I'll repeat what I said before just briefly. I think, you know, we built this to be very flexible. So as the revenue opportunities and the client dynamics shift, we'll be able to shift with it very comfortably.
Speaker Change: Our focus right now, I will tell you, is to make sure that we can meet our clients' needs. That's why we opened it. That's how we've originally built it. That's how we're currently operationalizing it. It's not lost on us.
Speaker Change: that wage arbitrage and cost arbitrage is something that can translate into profitability in the back of the house as well, right? So we're thinking about all those things as we grow. We're being very thoughtful about it because one of the things we don't wanna do is open up a new business and not be able to operate and meet our clients' needs. So yes, we're thinking about all of those things. We're gonna be thoughtful about that, but certainly our initial focus is on meeting the external client needs that we are seeing.
Thank you very much. I appreciate it.
Sure.
The next question is from Toby Summer, Truist Securities.
Bill.
Bill: Thanks. Of the hundred basis point operating margin improvement that you think you could get if you get back to prior peak revenues
Speaker Change: Are there several strategic priorities driving that? Could you give us a little bit more color on the largest pieces of those, sort of the biggest drivers?
Thank you.
Jeff Hackman: Yeah, Toby, this is Jeff. Good to get to chat with you.
Jeff Hackman: You know, I think one of the more significant drivers, of course, you know, so we've got the scale that gets us back to the 1.7 billion and everything that we're driving internally. Dave just talked about capacity and productivity management of our associate population. We're going to continue to make the necessary investments.
be it AI or any other productivity tools to make.
Jeff Hackman: the engine from a sales and delivery standpoint that much more efficient.
Jeff Hackman: We've talked about our back office transformation program. As you well know, we've been at this for a couple of years now. We are well into that project. I think we've quantified the anticipated benefits there at roughly 90 basis points.
compared to the level of investment that we're making today.
and certainly, you know, we sit here at 1.4 billion.
Jeff Hackman: We will be likely by 1.7 billion through that initiative and into some of the subsequent phases.
Jeff Hackman: and beginning to realize the benefits associated with that program. So that's a meaningful contributor to it.
Jeff Hackman: expect that mix to continue to improve for us. Given the margin differential there, expect that to be a meaningful contributor to profitability as we move forward as well. So those are, I think, some of the more significant contributors to that.
Jeff Hackman: what customers are saying there. You cited, now we've had I think three quarters of a little bit of improvement there, but what are you hearing from them as far as why they are more active and
Jeff Hackman: what it might take for that activity level to improve even further.
Speaker Change: Yeah, Toby, I think, you know, it's no different, I think, than what we've always seen, right?
Speaker Change: What work are they doing? They're doing the work that they've traditionally done. I've already touched on, obviously, there is data work, there's digital work, there's a lot of application development work on major projects. The successes that we're having are with large, market-leading companies that continue to invest in their technology infrastructure across a spectrum.
Speaker Change: of things. So I don't know that, generally speaking, there has been a specific area of focus that we're seeing that's driving revenue other than a broad spectrum of those things that we've always provided services for to these customers.
Speaker Change: If we could ask one more industry question, I'll get back in the queue.
Speaker Change: What's the firm's experience with demand from systems integrators and other sort of entirely focused IT consulting businesses to the extent you have relationships with those?
Speaker Change: Yeah, we do, Toby. I mean, I mentioned, right, we've got a very diversified portfolio and, you know, the the integrators that we do business with are, you know, less than 10% of our business.
Speaker Change: And so the work that they're doing and providing business for, you know, if we're talking about, for example, in the government space, right, they're, we're in, we are not in areas, I would first say, that we think are at significant risk.
Speaker Change: of disintermediation based on at least what we're hearing. You know, the type of projects that they are doing, I would say, are no different than what we would do for any industry. By the way, I would remind you, I'd mentioned the government, we don't do any prime work with the government, by the way. But I would say the type of projects that they are doing for their clients are no different than the type of business, the projects that we're doing across industries. I think Joe did a nice job talking about the fact that we meet skill sets.
Speaker Change: meet the customer's needs for skill sets across all industries, and I think most, all industries including these integrators, have the same type of needs as financial services clients, as retail clients do, as transportation clients do.
Thank you very much.
We'll take the next question from Josh Chen from UBS.
Josh Chen: Hi, good afternoon. Thanks for taking my questions. It sounds like you guys are saying demand is relatively stable, but then I also heard Joe say
Josh Chen: client visits, job orders are up. I guess, are these typically the indicators you would look at to get more optimistic? And if so, could you just kind of reconcile the, you know, that maybe a little bit of a hesitancy that, you know, maybe I'm picking up here?
Josh Chen: Those are the front-end indicators that we look at, so you have to see those indicators move before you start to get the poll through and the actual outcomes and placements or accelerated project wins.
Josh Chen: So all I was simply stating is we are seeing more of these front-end indicators.
Josh Chen: are at higher levels than we've experienced the last several years, coming into the beginning of the year. You couple that with a...
Josh Chen: positive sentiment, which one would have to believe is playing into that because as I mentioned, you know clients are more receptive to taking meetings, which means obviously they're thinking more about getting after backlog and
Josh Chen: budgets and funding and things of that nature, but that has not the stability pieces is that has not translated into
Josh Chen: More placements at this point in time, accelerated project wins, realizing that our project business has been growing at a faster rate than our staff augmentation business. So this is one of timing.
Josh Chen: whether that pull-through ultimately happens, only time will tell on that. And so all we're mentioning is
Josh Chen: From an optimism standpoint, these are the things that we look for and have been looking for. We did not see these things playing out in the beginning of 2023.
and so...
Josh Chen: We are seeing these things that we have not seen in the last several years. So that's all that we're putting out there, and whether it translates into ultimately an acceleration of, you know, billable consultants out, which would translate into revenue growth, only time will tell on that.
Josh Chen: Yes, so then the only thing I would add, right, so as we look at this year, right, I had mentioned the year end ads were about what we had historically seen, right? We as Joe said, we have not yet seen that
Josh Chen: optimism and some increased activity translate into a significant uptick in new starts. So our expectation here, because we don't want to get ahead of ourselves,
Josh Chen: given that there still is some uncertainty here that we're, at least in the first quarter, are looking for things to transpire similarly to what happened in 2023 and 2024.
Speaker Change: Great, yeah, thank you, that's really helpful. Thank you for the color there.
Speaker Change: I guess is there any thought about whether the tech direct hire market is bottoming? The numbers seem just a little bit better this quarter. Thank you.
Speaker Change: Yes, I think part of that is reflected in a statement I made a little bit earlier. We did see more conversions, which those conversions, some of those conversions show up in our direct hire number. So I would say overall sentiment.
Speaker Change: Organizations have continued to bring on full-time hires from a tech standpoint. We haven't seen an acceleration. We haven't seen a deceleration. I would really categorize it as
stability
Speaker Change: So that's kind of where we are at this point. You know, and tying back to the earlier discussion, you know, one of the things as I reflect upon the last couple years, which is a little bit interesting, you know, we've been operating in this subdued environment where there really have not been catalysts.
to drive the
Speaker Change: in terms of, you know, the growth areas that have really been supporting GDP are not areas that are big catalysts to, per se, our business. Also, you know, the M&A market has been very subdued, which is also very friendly to the services that we provide.
Speaker Change: So, you know, hopefully, you know, rates, if we if we continue to see a little bit more activity, and I'm sure you hear this as I do, I mean, I'm hearing more engaged in conversation about M&A activity, nothing would make us happier than to see that dam break a little bit, because I think that would also play well to our business.
Speaker Change: Great, thank you for your time and come back in Q1.
Sure, thank you.
Speaker Change: A reminder to everyone that it is star 1 if you have a question. We'll go next to Mark Riddick, Sidoti.
Thank you.
Have a good evening.
Go with Mark.
Speaker Change: So I wanted to touch a little bit on cash usage. One of the things that we get to touch a little more so on the increase in dividend which is certainly nice to see. I just wanted to talk a little bit about thoughts around
comfort levels as far as, you know, looking at
Speaker Change: I know there's not historically a lot of M&A from you guys, but I was wondering if you sort of are looking at some things that might make sense or whether or not there's anything attractive out there, or maybe just general thoughts on...
Speaker Change: what's out there in what is clearly a very fragmented industry, but also just sort of, you know, maybe some of your thoughts on share of purchase activity, you know, especially is, you know, as attractive as sort of where the levels are currently.
Speaker Change: Yeah, and Mark, good to talk with you. I think from a, I'll address maybe your second question first, I think from a share repurchase activity you saw.
us continuing a long-standing share buyback.
Speaker Change: In the fourth quarter, for the full year, you look at the total return on capital, and we were at about 75%.
Speaker Change: of what the business generated. I'll remind you that in 2023, we returned in excess of operating cash. You know, and when you look back, I think since 2007, I think I mentioned this in my prepared remark, we've returned about a billion dollars.
of Capital Through Dividends and Share Repurchases.
Speaker Change: As we move into 2025, you should expect more of the same. You know, we oftentimes say that, you know, we've been buying a really good company over the last 15 years.
Speaker Change: and that's K-Force and that investment for us has been bearing fruit.
from an accretion to earnings per share standpoint.
Speaker Change: From an M&A perspective, we always keep our ear to the ground on the market itself. You know, we do talk through potential opportunities, etc.
The filter within K-Force continues to be very very tight
Speaker Change: Back in our earlier days of Cape Forest, we did a lot of acquisitions. I think our historical experience has taught us that.
Speaker Change: One plus one rarely equals a number of two, oftentimes is less. So we've had an organic model. Mark, as you well know, we haven't done an acquisition in over 15 years.
Speaker Change: As we look into 2025, we'll continue to return capital to our shareholders, annually continue to evaluate the dividend, our Board of Directors approved, as we mentioned, an increase for the sixth consecutive year, and we'll continue to look at that, but more of the same as before, Mark.
Mark: And one of the other things I want to touch on, I know you made mention of the
Mark Marcon-Baird: the disasters in California, but it was sort of a reminder that you guys had your own challenges at the very beginning of the quarter, which you seem to have navigated fairly well. Maybe touch just a little bit on that.
Mark Marcon-Baird: any disruptions that you experienced there in the Tampa area. That was right at the very beginning of the fourth quarter. I know it's been a little bit now, but maybe sort of remind folks of some of the things that you guys navigated through to sort of get to where you are.
Mark Marcon-Baird: Mark, I think you're speaking to the three hurricanes that we dealt with towards the tail end of the third and into the fourth quarter, you know, aside from.
Mark Marcon-Baird: Just the remarkable support of our consultants and our clients during that and our internal people
Mark Marcon-Baird: Super proud of all the efforts there, you know, out in California, just as we always do, you know, support of our internal people and stay in tune with any clients that may be impacted, you know, fortunate for us.
Mark Marcon-Baird: The devastation out there has not impacted us from a business perspective, a lot of travesty obviously out in California, but business disruption for us, there's nothing there within the first quarter.
Speaker Change: No business impact from a revenue standpoint, however, I would be remiss if I didn't mention with being Florida-based and with the amount of disruption those hurricanes caused.
Speaker Change: the progress that what our people were able to accomplish on keeping all of our strategic initiatives moving forward and hitting deliverables.
with our back office transformation and various other strategic priorities.
Speaker Change: It is rather amazing that their fortitude, while dealing with personal situations, dealing with family situations, their own homes, and continuing to move all of that work forward, not setting us back as a firm on those timelines.
Speaker Change: I just commend our people for their commitments and their efforts, so I just wanted to at least get that out there.
I much appreciate it. Thank you very much.
Thank you, Mark.
Speaker Change: And everyone, at this time there are no further questions. I'd like to hand the conference back to Mr. Joe Liberatore for any additional or closing remarks.
Speaker Change: Thank you for your interest in and support of K-Force. I'd like to express my gratitude to every K-Forcer for your efforts.
Speaker Change: and to our consultants and our clients for your trust and faith in partnering with K-Force and allowing us the privilege of serving you. We look forward to talking with you again after the first quarter of 2025.
Speaker Change: And everyone, that does conclude our conference for today. We would like to thank you all for your participation. You may now disconnect.