Kforce Inc Q4 FY2021 Earnings Call

Welcome to the Kforce Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Mr. Joe Liberatore, President and Chief Executive Officer. Please go ahead.

Good afternoon. This call may contain certain statements that are forward-looking. These statements are based upon current assumptions and expectations and are subject to the risks and uncertainties. Actual results may vary materially from the factors listed in the Kforce public filings and other reports and filings with the Securities and Exchange Commission. We cannot undertake any duty to update any forward-looking statements. You can find additional information about our results in our earnings release and our SEC filings. In addition, we have published our prepared remarks within the Investor Relations portion of our website. Before I provide commentary on our fourth quarter and full year performance, let me first cover a couple of items. 2021 was a record performance year for Kforce. I would like to thank all our associates for their fortitude, creativity, innovation and resilience operating in these unprecedented times. Thank you for your daily efforts to have a meaningful impact on the lives we serve, uniting professionals to achieve success through lasting personal relationships. In the fourth quarter, we announced Dave Dunkel's transition to Chairman at the end of 2021 after holding the CEO post for the past 40 years. We are fortunate to have Dave's continued involvement strategically as we reshape where and how work will be performed in the future. I have been blessed to work side by side with Dave for the past 34 years. I am humbled and honored with the opportunity to uphold the standard of excellence Dave established. Our entire team's heartfelt thanks and appreciation goes out to Dave for his leadership, mentorship and support. Due in large respect to his leadership, our values which are foundational to the Kforce's strategy are extremely well entrenched. Our executive leadership team has extraordinary depth and tenure to lead our team forward, and our future prospects have never been brighter in our 60 plus year history. Joining us on the call today is Kye Mitchell, our Chief Operations Officer. Kye is a 30 year veteran in professional staffing and solutions space, who joined the Kforce family in 2005 through the acquisition of VistaRMS. Kye has responsibility for developing and executing the strategic vision across all our service offerings, which has contributed greatly to Kforce's successes. Kye will give insights into our performance and recent operating trends. Dave Kelly, Kforce's CFO will then provide greater detail on our financial results, as well as our future financial expectations. We have driven significant strategic change at Kforce over the last decade and our firm is ideally positioned to continue to provide exceptional results and return to our shareholders. We have concentrated Kforce's strategic focus and now have 85% of our business focused on providing technology talent solutions to innovative and industry-leading companies for their operations, exclusively in the United States. This percentage is expected to meaningfully increase as we exit 2022 given that our technology business continues to grow at multiples of the market. This strategic shift was bold and transformative, but well-founded in our belief as we exited the financial crisis that technology was going to be at the epicenter of every business strategy. This has played out to an even greater degree than we imagined as the pandemic accelerated what we already saw unfolding. The benefit of this strategic shift and the benefit of our focus on organic growth without the distraction of acquisition integration can be seen in the exceptional results that we have delivered over the last several years. While the broader economy has experienced fits and starts pertaining to the pandemic and related supply chain and labor issues, we continued to gain momentum. We have further advanced our strategic initiatives, including reshaping our client portfolio, investing in our managed teams and solutions offerings, pursuing skilled areas in our FA business, which are synergistic with our Technology offering and aligning our sales and delivery teams to our revised focus. The backbone supporting enterprise level change is the strength of our leaders, which we have supported through enhanced development and training. In addition to these strategic initiatives, we are equipping our teams with innovative and state-of-the-art tools and technologies. Our industry-leading growth rate, coupled with a debt-free balance sheet and strong predictable cash flows continue to allow us to invest in our future and return capital to our shareholders through share repurchases and substantial dividend, which we have once again increased. Our path forward is clear and we will remain consistent with the principles under which we have been operating so successfully. As to our results, we again delivered record revenues in the fourth quarter of $410.4 million, which grew nearly 18% year-over-year and meaningfully exceeded the top end of our guidance. Earnings per share of $0.98 grew 14% on a year-over-year basis. Fourth quarter results put a solid exclamation point on the tremendous 2021 for Kforce. We were successfully delivering record revenues of nearly $1.6 billion, which grew 14% year-over-year. Perhaps the most exciting aspects of our 2021 results was the 22% full year organic growth we delivered in our technology business. Earnings per share of $3.54, also a Kforce record, grew 35% year-over-year. I'm incredibly grateful for the tenacity and perseverance of our entire team over the past 2 years. Under the most extraordinary circumstances, you have embraced change and challenges, both personally and professionally, and helped deliver the most exceptional results in our firm's history. We continue to make significant progress in positioning Kforce as the destination for top talent during a time, where there is great disruption in the labor markets. Our future work environment will provide our people with maximum flexibility and choice in designing their workdays that is grounded in our trust in them and supported by technology. We will have a remote first approach to support the life/work balance our team has become accustomed to as we moved through the pandemic. Our people will leverage physical office spaces when desirable for activities best done through in-person, active collaboration such as training, team building, client, and candidate interactions. We are accomplishing this through our Kforce Reimagined initiative. In servicing our customers, there is simply no other market we want to be focused in other than the domestic technology market as it has, in our view, the greatest prospects for sustained profitable revenue growth. We have the right team in place to capture additional market share within what we believe will be a continued extraordinarily strong demand environment for our services. It's our belief that the pandemic has exponentially elevated the imperative for companies to rapidly digitize their businesses, transform business models and drive productivity gains through the technology investments.

Thank you, Joe. I really appreciate the opportunity to speak to this broader audience about Kforce's operations. It's clear to us that our Kforce team's hard work and dedication is leading to our current exceptional results. I'm very grateful to our team and would like to take this opportunity to thank them for their incredible efforts. Let me begin by providing some additional perspective on the strength of our outstanding fourth quarter revenue growth. Total revenues grew 17.8% year-over-year on a billing day basis. However, this overall growth rate includes the impact of declines in COVID-related revenues, which were substantially higher during the height of the pandemic. Excluding the impact from that reduction, revenues were up 7.7% sequentially and 26.7% year-over-year per billing day. The COVID-related revenues were always expected to decline but provides a bridge for continued investment in our technology business. The growth we are experiencing in our technology business reflects the benefit of our decision to pursue the temporary COVID-related revenue stream. Let me provide some color on the performance of our technology business. We achieved record levels of organic revenue growth of 32% on a year-over-year basis in the fourth quarter and grew nearly 8% sequentially on a billing day basis. This growth was on top of our strong performance during the pandemic, where our technology revenues were essentially flat, and we outperformed virtually every one of our peers. Our technology business grew nearly 33% organically over the fourth quarter of 2019, pre-pandemic, which we believe exceeds the growth rate of every public comparable company. We believe our growth speaks volumes to the secular drivers and demand for technology talent. Our clients are reluctant to lose key resources from Kforce, even during challenging macro-economic environments because our highly skilled consultants are working on mission critical projects. The operating trends we are seeing in our technology business have been impressive. Front end KPI's and new assignment starts have been at historically high levels. The average duration of technology assignments continues to lengthen and, just as we saw in 2020, we experienced much lower seasonal year-end assignment ends than we have historically seen. These trends provide us great momentum going into the new year. It is also a great indicator of our ability to sustain elevated year-over-year growth on an increasingly difficult comp. Not only did we see increased growth rates in the number of Technology consultants on assignment, we also continue to see increases in our average bill rates, which grew 3.8% year-over-year to approximately $82 per hour. There has been much discussion and headlines surrounding the recent talent shortages in other staffing end markets, principally in lower skilled areas that we do not support, as well as wage pressures at a more macro level. The reality for us is, we have been navigating a supply constrained environment for over a decade in our technology business. Our consistent strong results over this period reflect our ability to successfully navigate these shortages and access the highly skilled talent our clients need. With the environment moving to less geographic boundaries, our talent pool of candidates is increasing, which is a positive for our business. We also believe that wage inflation serves as a tailwind for us through future bill rate increases as our clients prioritize procuring the talent necessary to further their technology initiatives, despite any increasing costs. We are seeing strength across virtually every industry and across all geographies. We continue to see the acceleration of critical technology initiatives within our clients in areas such as cloud, digital, UI/UX, data analytics, project, and program management. Our clients are leaning into digital, not just for the consumer experience, but also to improve their employee experience. Technology and business strategy are continuing to intertwine, which is ideal for us given our technology focus. A significant accelerant to our overall technology growth has been the investments we've made and will continue to make in our managed teams and solutions capabilities to meet the evolving needs of our clients. We have continued to add highly talented resources to our team to support the demand we are experiencing from end-to-end solutions and teams. We feel extremely confident in the positioning of our technology business. We expect first quarter revenues in our technology business may grow to the mid-20% range on a year-over-year basis, with low single-digit sequential decline due to the seasonal year-end assignment ends. Thus far in the quarter, demand remains strong. With respect to our FA business, overall flex revenues were down 28.9% year-over-year on a billing day basis in the fourth quarter, including an expected $23.8 million year-over-year decline from our support of initiatives tied to COVID-19 pandemic as previously mentioned. These revenue streams were approximately $5 million in the fourth quarter, and we expect them to decline to nominal levels in the first quarter. Flex revenues in our remaining FA business grew 8.3% sequentially and declined 0.2% year-over-year per billing day. We made good progress transitioning our FA business towards more highly skilled assignments that are less susceptible to automation and fit better with our technology footprint as evidenced by bill rates increasing nearly 10% year-over-year. We will continue to support lower-end skill sets for certain strategic clients with long-standing relationships. We have seen natural assignment ends and lower skilled FA roles in 2021, where we chose to no longer support that business. We expect that effort to be materially complete in the first quarter of 2022. Our non-COVID FA revenues are expected to be down in the high teens on a year-over-year basis, given the repositioning of the business. When combined with the expected COVID revenue decline, overall FA Flex revenues may be down close to 40% year-over-year in the first quarter. Direct Hire revenues in the fourth quarter increased nearly 13% sequentially and approximately 62% year-over-year as the macro-economic environment has continued to improve. We expect that Direct Hire revenues may see a sequential decline in the first quarter, but may increase slightly more than 30% year-over-year as clients continue to demonstrate a high degree of confidence in the recovery through the addition of full-time staff. We are continuing to invest in strategic initiatives and technologies that best position our firm for long-term sustainable, profitable growth. From a technology perspective, our fully integrated CRM and TRM systems are cloud-based and seamlessly integrate with other Microsoft products. Investments to further develop these tools along with enhancing capabilities in other areas is continuing. We have made measured investments in adding talent to areas with the greatest expected return, but don't expect to make significant investments in the near-term. We believe great opportunities still exist to further enhance productivity. We have supported and retained our best people and as Joe mentioned, have made meaningful changes to provide our employees flexibility and choice in how we work. In partnership with our Chief Marketing and Talent Officer, Andy Thomas, an important measurement for me as COO is our reputation for delivering quality services to our clients and consultants. I'm pleased we continue to have the highest Glassdoor rating among our peers and maintain a world-class net promoter score from our clients and consultants. We were also named the most recognized firm by technology consultants per SIA. I'm grateful for the trust of our clients, consultants and candidates have placed in Kforce. Our teams continues to inspire me every day as we work together to position Kforce as the destination employer in our industry.

Thank you, Kye. We are extremely pleased with our performance in 2021 as full year revenues of approximately $1.6 billion and earnings per share of $3.54 increased approximately 14% and 35%, respectively, year-over-year. Our strategic position and the momentum we are carrying into 2022, against what we believe will continue to be a strong demand environment has positioned us well to continue delivering significantly above market revenue growth. Fourth quarter revenues of $410.4 million exceeded our guidance, growing nearly 18% year-over-year and approximately 24% since the fourth quarter of 2019 pre-pandemic. Earnings per share of $0.98 in the fourth quarter improved 14% year-over-year. Our gross profit percentage in the quarter of 29.2% increased 80 basis points year-over-year due to slightly improving flex margins and a greater mix of direct hire revenues. Flex margins in our technology business were up 30 basis points year-over-year in the fourth quarter. As pay rates have increased over the past year, we have been able to effectively pass these increases through to our clients. Bill pay spreads have also benefited from the growth in our managed teams and solutions offering, which typically carries a higher gross margin at both existing and new clients. The continued demand for managed services should continue to bring stability to gross margins, even in the face of increasing pay rates. Flex margins in FA expanded 80 basis points year-over-year in the quarter, due to a combination of the decline in lower margin COVID projects in Q4 2021 compared to a year ago and margin improvements in our non-COVID FA business due to the strategic shift to higher skilled roles. This strategic shift has allowed us to increase the average Flex margin for new assignments starts in our non-COVID FA business in the fourth quarter of 2021 by approximately 180 basis points versus the fourth quarter of 2019. In addition, average bill rates in our non-COVID FA business have improved 8% in the fourth quarter of 2021 versus the fourth quarter of 2019. As we look forward to Q1, we expect spreads in our Technology business to be stable with fourth quarter levels, though overall Technology margins will be lower due to seasonal payroll tax resets. In FA, spreads are expected to have moderate expansion. We have not seen meaningful wage inflation within our consultant population, but should that change, we are confident in our ability to work with our clients to appropriately align bill rates. Flex margins will be negatively impacted in the first quarter by approximately 110 basis points relative to the fourth quarter due to seasonal payroll tax resets. Overall SG&A expenses increased as a percentage of revenue by 170 basis points year-over-year, principally due to higher levels of performance-based compensation as a result of our exceptional revenue growth and higher costs related to an accrual for the expected settlements of a lawsuit. The accrual related to the expected legal settlement impacted SG&A percentage in the fourth quarter by $2.4 million, or roughly 60 basis points. SG&A expenses in Q1 are expected to be down from fourth quarter levels, due to the decline in legal accruals and seasonally lower performance-based compensation, given annual compensation plan resets, which will be partially offset by usual seasonal payroll tax resets. Our fourth quarter operating margin was 6%, which was negatively impacted by 60 basis points, because of the aforementioned legal accrual. Excluding this impact, operating margins fell within our expectations. Our compensation plans are structured to provide meaningful compensation to our talent at extremely high performance levels. While this creates higher than normal SG&A costs at fourth quarter growth rates, we believe this structure serves as yet another retention incentive for our most talented and productive people and benefits our shareholders over the long-term. Our effective tax rate in the fourth quarter was 11.6%, which was significantly lower than our expectations due primarily to a larger tax benefit upon the vesting of restricted stock as a result of an increase in our stock price. The lower effective tax rate positively contributed $0.09 to earnings per share in the fourth quarter, which offset the negative impact of $0.09, that was a result of the $2.4 million legal accrual. We generated $126 million in EBITDA in 2021, which represents an increase of 30.2% year-over-year. Operating cash flows were $72.9 million in 2021, which included a negative impact from the payment of payroll taxes deferred pursuant to the CARES Act from 2020 of approximately $19 million. We returned $74.5 million, nearly 100% of operating cash flows for the year and capital to our shareholders through $20.1 million in dividends and $54.4 million in share repurchases. Our return on invested capital was approximately 45% during the fourth quarter. We ended the fourth quarter with $3 million in net debt. Our business continues to generate significant operating cash flows and we were again active in repurchasing nearly $10 million in stock during the fourth quarter. Since 2010, we have returned in excess of $700 million in the form of dividends and share repurchases, which has represented approximately 80% of the capital we generated over that same time period. The strength in our balance sheet and availability under our $200 million credit facility allows us to be opportunistic in returning additional capital to our shareholders, while continuing to evaluate potential acquisitions. With that said, our belief is that a focus on organic growth provides us the best opportunity for long-term success. Thus, we will continue to apply very stringent cultural and financial filters to any transaction. Given our confidence in our future growth prospects, we expect to remain active in repurchasing our shares at current stock price levels. To support our intentions going forward, our Board of Directors recently approved an increase in share repurchase authorizations under our existing repurchase program to $100 million. As an additional sign of confidence going into 2022, our Board also approved a roughly 15% increase in our quarterly dividend effective in the first quarter. This increase will bring our dividend yield to slightly less than 2% at current stock price levels. With respect to first quarter guidance, the number of billing days are 64 days in the first quarter of 2022, which is three more than the fourth quarter of 2021 and one more day than the first quarter of 2021. We expect Q1 revenues to be in the range of $403 million to $411 million and earnings per share to be between $0.72 and $0.80. Gross margins are expected to be between 28.1% and 28.3%, while Flex margins are expected to be between 25.7% and 25.9%. SG&A as a percent of revenue is expected to be between 22.2% and 22.4%, and operating margins should be between 5.4% and 5.8%. As a reminder, first quarter operating margins are typically impacted by approximately 150 basis points due to the seasonal impacts of the annual payroll tax resets. This also impacts earnings per share by approximately $0.21. Weighted average diluted shares outstanding are expected to be approximately 20.7 million for Q1. The effective tax rate is expected to be 26.5%. Our guidance does not consider the potential negative impact on the demand environment from a significant increase in COVID-19 variant cases, the effect, if any, of charges related to any one-time costs, costs or charges related to any pending tax or legal matters, the impact on revenues of any disruption in government funding, or the firm's response towards regulatory, legal or future tax law changes. We are excited about our prospects for growth in 2022, given the significant momentum we have created in 2021. We expect this growth to result in continued expansion in our operating margins and significant increases in earnings per share, while allowing continued investments in technology and our people, both of which we believe benefit our shareholders in the long-term. To assist you in better understanding our expectations of growth and profitability, we have provided you with some additional information in our press release. Based upon current market conditions, we expect full year revenue growth in our Technology business should be at least 15%, more than twice current market expectations. Revenue for our FA business will likely decline more than 25%, due to the net impact of revenue declines from business that we are no longer pursuing due to our strategic migration to higher end skill sets and from the elimination of COVID-19 revenue streams. This would result in total revenues of at least $1.7 billion, of which greater than 85% will be Technology as we exit 2022. We also expect 2022 earnings per share to be $4.20 or greater and for operating margins to be at least 7% for the full year. Overall, we believe the strategic decision to focus our business in providing domestic technology talent solutions is paying dividends. We couldn't be more excited about our future growth prospects. Our shareholders continue to benefit from strong performance and efficient capital allocation. Our predictable cash flows provide significant future flexibility to make investments and continue returning capital to our shareholders. On behalf of our entire management team, I'd like to extend a sincere thank you to our teams for their efforts in outperforming market expectations through the adversity and uncertainty of the past two years and continuing to build on that success in 2022. I'd like to open up call to questions.

Thank you. Your first question comes from the line of Josh Vogel from Sidoti & Company. Your line is now open.

Thank you. Good afternoon, everyone. Certainly, really impressive results and performance and guidance. First question I have for you is, thinking about the outlook, can you quantify what direct hire added to EPS last year? And then given you full year what level of activity is baked into your base revenue and EPS guidance numbers? Thank you.

Hey, Josh. This is Dave Kelly. Clearly, direct hire contributed positively to EPS due to the strong overall market. We don’t have a specific breakdown of that. However, as I look ahead to 2022, I anticipate that our growth rates will differ significantly. The primary factor driving our earnings growth will be the technology revenues. Direct hire accounts for just a small percentage of our overall revenues, so the main driver is clearly the growth in technology.

And shifting gears a little bit and understanding how you strategically moved to focus on tech – domestic tech and clearly, you're taking share. Maybe just a little bit more thoughts on where it's coming from. Is it that competitors don't have the available pool of resources? Or are you seeing larger enterprises or clients that are just finding it too difficult to find the talent through in-house channels? Basically, what's driving it? What do you think are your key differentiators?

Yes, Josh. This is Joe Liberatore. I would say the market backdrop is a significant factor. The pandemic has accelerated everything, and as I mentioned last quarter, digitizing businesses has become essential. No company can afford to delay this process. I've been in the tech industry for 34 years, and I've never seen it so strong. High demand for resources and increased project requests are occurring because businesses are having to advance. The backdrop is the driving force behind it. If we look at SIA numbers, we are gaining market share, but the overall industry has been performing well. Our strong performance can be credited to our journey that began around 2015-2016 when we invested in technology to empower our team and revamped our go-to-market strategy with our K-way approach. We've also invested significantly in leadership development, and our team is performing better than ever. I attribute much of our success to our team's efforts. This is definitely a secular trend. We've been stating this since we emerged from the financial crisis—it's a fundamental shift, unlike how tech was perceived during cyclical downturns. Examining our performance during the last two downturns demonstrates that technology is central to every business. Additionally, our productivity has increased by 32% compared to pre-pandemic levels. All these factors are really driving our success.

Those are good insights. Thank you. Can you talk about the supply-constrained market, especially among specific skill sets? Please share some of the successes you're having with candidate engagement that perhaps some of your competitors aren't experiencing.

This is Kye Mitchell. I think we're doing a fabulous job on that front. Our recruiters are highly skilled, they are used to working in demand constrained environments that are tight like this. We've really invested in technology platforms consistent in doing their jobs and it's paying off. I think, there is a lot of struggle to find that talent. So with us, we have that reputation, like I said, we're the most recognized by technology professionals. We represent 70% of the Fortune 500. And consultants and candidates want to work for us. So I'm very pleased with the progress that our recruiters are making and how they're continuing to deliver time and time again for our clients.

Thank you. And just 2 more quick ones and I'll hop off. You noted, we're seeing bill rates in Tech Flex up just under 4% year-over-year. What were pay rates up year-over-year?

Yeah, Josh, Dave Kelly again. So pay rates we up slightly less than that. I think kind of interesting dynamics in our technology business, we feel very good about it, right? So bill rates were up. I think if you kind of look at in aggregate dollars, about $3 an hour. Obviously, as we've indicated, we see that as really a tailwind to our business, and additionally, a really nice improvement in spreads. So not only are we getting higher bill rates, we're getting higher margins. So bill rates are expanding as a result of that at faster rates than pay rates. So we feel really good about where we're going here in terms of being able to manage this with the mix of business that we have.

All right. Great. And lastly, I'm sorry, if I missed in your prepared remarks, but what was the nature behind the lawsuit?

Yes, Josh. This situation is somewhat unusual for us, and we have previously disclosed some details in our 10-Q and 10-K filings. It pertains to a wage and hour related lawsuit, which is not typical for our company, and we have reached a tentative settlement. Therefore, we felt it was important to highlight this matter.

Got you. Well, thanks for answering all my questions and congrats on a great year.

Thank you, Josh.

Thank you, Josh.

Your next question comes from the line of Mark Marcon from Baird. Your line is now open.

Hey, good afternoon and congratulations on the strong results. And I also want to pass on best wishes to Dave Dunkel, so nice to see the transition being as smooth it is. Can you talk a little bit about the opportunities to further increase the bill rates on Tech Flex, they were up 3.8%. Obviously, we've been operating in a talent-constrained environment for quite some time. So it's nothing unusual, but just wondering to what extent the higher level of wage inflation that’s going across the entire economy gives you permission to potentially increase bill rated on the tech side a little bit more?

Yeah, Mark. I would say, we're seeing it right. We have a lot of data in our hands now. So we're all out in terms of engaging with our end clients to bring data to them to tell them what's happening in the marketplace. Another interesting dynamic when we look at some of the escalation that's taking place is, we're seeing this migration from the coast to really into the Central US, which is kind of an interesting phenomenon where Central US is paying West and East Coast rates, because those people are working remote. So I’d say remote is playing into that in a big way in terms of the driving. I would say on our end, based upon the nature of how our business constantly re-prices itself, we feel very confident. And I think if you go back and look at history, and again, you've been around a long time like I have. Through every cycle, we've been able to manage through that irrespective of supply demand constrains and market pressures that are taking place there. I mean, Kye, is there anything else that maybe you want to add that you are hearing from direct end customers?

I think the only thing I would add is that customers recognize that demand is increasing and prices are rising due to the new trend of consultants being able to work from anywhere, as Joe mentioned. We have been fortunate to provide data that illustrates what is happening in local markets with new competitors and firms entering the Midwest. We are focused on training, data, and educating our customers about where this trend is headed. I believe we are currently managing it well, and we will continue to do so.

Great. And can you

I'm sorry, this is Dave Kelly. You asked kind of a trajectory. I think as we think about this and everything that Kye and everything that Joe said. Clearly, the expectations that we have, given the quality of our customer base, given the increasing managed solutions business that we're doing. And we've seen historically 3% or 4% increases a year in bill rates probably over the last 5 years or 6 years or 7 years. I don't know that we see that changing. So we see continuing opportunity to take advantage of that.

Great. And then can you talk a little bit more about the percentage of the business that you're doing on a remote basis? And how far along are you in terms of fully exploiting that dynamic? And to what extent does that give you competitive advantages relative to other players that could potentially expand your penetration of the existing clients, as well as gaining new clients?

There are two parts to your question: the internal aspect and the external client dynamic, which we don't control. However, we still observe a significant percentage of roles being carried out remotely. Many companies have begun to bring employees back to the office, not just due to Omicron, but also because of staffing issues. We have implemented new screening criteria regarding an individual's preference for remote work, similar to vaccination status. Currently, a majority of our consultants are working remotely, except for those who need to be on-site, such as in innovation labs. This situation will vary by company. As Omicron recedes and more opportunities arise, it remains uncertain how this will unfold. Reports indicate that many consultants have stated they would seek new employment if required to work in the office. In this environment of balanced supply and demand, they hold the advantage. Internally, we focus on differentiation. We committed in May 2020 to reshaping our business, investing heavily in technology and processes, and we are continuing to roll these out. We believe that providing flexibility and choice, alongside the best available platforms, is vital for long-term retention. I am excited about our initiatives in this area and confident in our commitment to this path. While others discuss remote work, we have invested considerably and engaged top talent, believing it to be the best model for retaining talent in the future.

Joe, I totally agree on that. How far along are you with regards to the rolling out of the current technology initiatives? When will that be complete? And I know it's a constant evolution, but just in terms of the current iteration?

We've been implementing new technology over the last 8 months, and while I can't share specific details due to competitive reasons, I believe these advancements will enhance our ability to utilize our national presence and place candidates across various regions. Instead of limiting candidates to a couple of local opportunities, we will be able to connect them with opportunities throughout the entire organization, which boosts their chances of being placed successfully and finding the right fit. We've also heavily invested in our cloud-based technology, and while I wish I could attribute all our success to strategy, there's an element of luck involved too. Choosing the Dynamics platform before the pandemic was a pivotal decision, especially with Microsoft’s continuous enhancements across their offerings and integrations, including LinkedIn. These strategic moves have been beneficial for us. There are many exciting developments on the horizon, and I commend our staff for adapting to these changes and embracing new technologies. Our leadership has played a significant role in this transition. I recall how swiftly we shifted to a virtual model on March 17, with everyone using Teams for video communication. Many Fortune 500 companies are still hesitant to fully embrace such tools, waiting for a return to pre-pandemic practices. While I believe in returning to some in-person interactions, having the flexibility of working remotely and avoiding long commutes ultimately contributes to productivity and an improved quality of life.

Absolutely agree. And appreciate the comments.

Thank you.

Your next question comes from the line of Tim Mulrooney from William Blair. Your line is now open.

Yeah. Good afternoon. Just a couple from me. Congrats on a nice quarter. So you just talked about a strong backdrop driving your results and I can appreciate that, but your IT Flex business has performed better than many of your public peers throughout the pandemic. So I'm hoping maybe you can just unpack that a little for us. What do think is driving that outperformance? And if you think you're taking share from other staffing firms, is it the sub-verticals you're focused on or maybe taking share from other traditional IT services companies?

Yeah. I'll kind of lead in, and then I'll let Kye add a little bit of color, because she's really been responsible for driving these strategies. So I'm not going to reiterate the things that I mentioned earlier in terms of the investments and the changes in our overall models that we've been getting after. But I would say, a big piece of this also is, we're continuing to move upstream with our managed teams and solutions business is playing a piece in that. Kye, maybe you can give a little bit of flavor on that front, just on some of the types of things that we're seeing.

Thank you for the question. I believe we are doing an excellent job of progressing upward. Our success in surpassing our competitors largely stems from the markets we are targeting. Digital transformation has become a major focus for us, and this has been the case for several years. Companies that were not considering it before the pandemic are certainly doing so now. This is our primary emphasis. Additionally, a few years ago, we recognized the need to reshape our business and decided to transition FA recruiters into technology roles. By avoiding distractions from acquisitions and concentrating on simplifying our business model, we are able to pursue areas where we consistently perform well, especially through digital strategies, cloud solutions, and big data. I am really proud of our team, as they are achieving unprecedented productivity levels. While there is significant demand, our capacity to meet it hinges on our team's abilities and the environment we've fostered for them to succeed and seize market opportunities. I'm very satisfied with the achievements of our teams.

You all are clearly doing an excellent job taking advantage of the situation and continue to excel. I have one more question regarding your operating cost structure. It seems that your SG&A expenses increased a bit more quickly than your gross profit during the third and fourth quarters of 2021. However, based on your full-year guidance for 2022, it appears you anticipate that trend to shift at some point during the fiscal year, correct? I understand you've been working on refining your cost structure. Can I assume that your guidance for the full year 2022 is predicated on achieving leverage with your SG&A and seeing it decrease as a percentage of sales throughout the year?

Thank you for the question, Tim. We expect operating margins to reach at least 7%, compared to 6.7% in 2021, mainly driven by leverage in our operating costs. We believe our investments in higher compensation will lead to significant growth, as mentioned, around 32% to 33% in tech from Q4 to Q4. Our pay structures reward exceptional performance, which we see as beneficial for our shareholders and crucial for long-term retention. While we anticipate slightly higher compensation costs due to this exceptional growth, we're also aiming for overall leverage. Additionally, in the fourth quarter, SG&A was impacted by a one-time item that increased costs by approximately 60 basis points. All in all, we feel we're making the right choices and investments.

Right.

Tim, I would add. Go ahead.

No. Sorry. Go ahead.

I may have missed if Dave discussed this, but for the past five to six years, we have been seeing a year-over-year productivity growth of about 10%. This growth has accelerated during the pandemic, rising by 32% compared to Q4 2019. We believe there is still significant capacity for improvement, and we are just starting to gain momentum from our investments. We expect to see continued increases in productivity across the board. Our teams have been performing well throughout the entire 10-year cycle, not just our most experienced employees. Even those with less than a year of tenure have shown substantial productivity gains. This is a strong indicator, and we anticipate that ongoing productivity gains will continue.

Understood. Appreciate the color. Thank you.

Sure.

Your next question comes from the line of Tobey Sommer from Truist Securities. Your line is now open.

Thanks. I was wondering if you could give us some color on how you're progressing in your higher value services. Some folks in the market called managed services, consulting or statement of work. Just update us on where that fits and what your kind of goals are for this year and beyond?

I'll let Kye discuss some of the goals, but I'll provide you with an overview, Tobey. We are truly excelling in a space that bridges traditional staff augmentation and conventional consulting. Our success stems from our ability to be flexible, more cost-effective, and deliver greater value. This aligns well with our past successes with existing clients, allowing us to gather proof points that drive our development with new clients. Our offerings position us to take on more responsibility while still giving the end client the control and input they desire regarding the solutions they want to implement. Kye, could you share some details about our recent successes, which will give a better sense of our progress and let you discuss how you envision future developments?

Thank you, Tobey. I believe we will continue to experience significant growth in these areas. Our customers, as Joe mentioned, are seeking us to enhance our value proposition with them. As we engage more deeply, we've achieved major successes, particularly in digital transformation, not only at the consumer level but also with one of our recent wins involving a Fortune 100 client. We are assisting them in digitizing their entire supply chain because, like many retailers, they are struggling to meet customer demand. They are committed to modernizing their system, and we are partnering with them in this effort. Additionally, we recently helped another client who decided to bring their digital experience in-house after previously outsourcing it to a well-known consulting firm. They aimed to centralize everything from mobile and web to call center services internally, and after working together for 20 years on staffing augmentation, they felt confident that we were well-suited to assist them in this transition and to support them with a managed team. We were thrilled to take on this challenge, and since they made this change, they have won the J.D. Power award in their category. I believe our customers are seeking more flexibility, and we can deliver the recruiting expertise they require. While they are looking for us to take on more responsibility for outcomes, they still need robust recruiting capabilities, which we are ready to provide. We are genuinely excited about this, and I think our strong recruitment efforts significantly contribute to our success.

Thanks.

To wrap your question from a goal standpoint, I will tell you, whatever you see as our tech business top line growth, we're growing at a much higher rate in terms of this offering. Now we haven't broken out percentages or anything else, but I at least wanted to give you a flavor there directionally. These offerings have been outpacing our overall growth.

Thank you. I have one follow-up question. Considering your business and the market you're competing in, how many traditional tech staffing companies are currently active in this market at scale?

It's a great question. Being at scale is essential because, as you know, the competitive landscape is quite broad. We compete with large brand consulting firms, regional and niche providers, and internal teams that clients may prefer to manage certain projects themselves. There are many players in the traditional staff augmentation space, and I believe we are all progressing at similar rates, barring any acquisitions that could alter the overall mix. This shift is largely driven by client demands, as Kye pointed out. I personally appreciate that some of our strong competitors in staff augmentation are moving into the same area. This reflects the direction of the industry and highlights the unique value that staffing-focused companies bring compared to traditional solution providers. I won't mention specific names, but the well-known larger firms are also heading in this direction.

Thank you, Joe. Thanks for the expansive response and congratulations on taking the helm.

Thank you.

There are no further questions at this time. I would now like to turn the conference back to Mr. Liberatore for closing comments.

Well, thank you for your interest and support of Kforce. In closing, I’d like to thank every Kforcer for their incredible efforts and to our consultants and clients for your trust in Kforce and partnering with you and allowing us the privilege to serve you. 2021 was a year of exceptional results, and we look forward to talking with you again after our first quarter 2022.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.