Kforce Inc Q3 FY2022 Earnings Call

Thank you all for being here, and welcome to the Kforce Third Quarter 2022 Earnings Conference Call. Joseph Liberatore, President and CEO, please go ahead with your remarks.

Good afternoon. This call contains certain statements that are forward-looking. These statements are based upon current assumptions and expectations and are subject to risks and uncertainties. Actual results may vary materially from the factors listed in Kforce's 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. I'm pleased with our overall performance in the third quarter as revenues and earnings per share were near the top end of our guidance, again, led by strong sequential and year-over-year growth in our technology business. The macro environment certainly became cloudier in the third quarter with persistently elevated levels of inflation and rapidly rising interest rates, which, among other reasons, is impacting prospects for global and domestic economic growth. We mentioned in our prior earnings call that we experienced a degree of moderation in our KPIs towards the end of the second quarter. While trends in the third quarter were below levels experienced in 2021 and the first half of 2022, they remain above pre-pandemic levels. Though certain of our clients have become increasingly cautious as they prepare for the potential of a U.S. recession, the criticality of the projects we are supporting is continuing to drive demand for highly-skilled technology talent. The war for technology talent is real with far more open jobs than available skilled talent. The strength of the secular drivers of demand in technology was accelerated coming out of the Great Recession by mobility, big data, the cloud, and the rapid expansion of consumer-facing technology initiatives. The pandemic has only accelerated a strategic imperative for all businesses to further digitize their operations to enhance consumer and employee experiences. These collective technology drivers give us an increased level of confidence in expecting our business to thrive during strong economic times and to be relatively insulated during adverse economic times. Technology is not optional and is core to all business strategies regardless of the industry, and we don't see that changing. In fact, the CEO of a large trade association representing technology and engineering sectors recently stated that even if some sectors of the economy soften and pull back in their hiring, demand for tech talent will continue to outstrip supply for the foreseeable future. With deliberate strategic intent, we have built a solid foundation with nearly 90% of our business concentrated in providing high-end domestic technology talent solutions to a diversified set of world-class companies in attractive end markets. Our debt-free balance sheet and strong predictable cash flow gives us the flexibility to continue investing to grow our business even in choppier economic times. Due to the strength in the secular drivers of technology demand and our client portfolio, which is primarily focused on serving Fortune 500 companies, our Technology business has consistently grown at well above market rates during strong economic environments and displayed great resilience through the last two recessions. For additional context, our organic CAGR is nearly 8% since 2007, significantly above the market rate. During the 2008-2009 Great Recession, flexible revenues in our Technology business comprised roughly 50% of total revenues and declined only 7% in comparison to the 25% to 30% declines experienced within the general staffing market. In the 2020 pandemic-driven recession, our technology revenues were approximately 75% of total revenues and were virtually flat in comparison to the general staffing market, which experienced declines of 10% to 15%. With 90% of our total revenues now in Technology, we feel extremely well positioned to take advantage of both strong and more challenging market conditions to continue growing market share. Our plans continue with the implementation of what we call office-occasional work environment, and we are extremely excited about the opening of our new state-of-the-art headquarters in Tampa tomorrow. Our unique work environment provides our people with maximum flexibility and choice in designing their workdays that is grounded in our trust in them and supported by technology. We are an industry leader in the technology talent solution space, delivering exceptional financial results and offering maximum flexibility to our people. We believe these factors, among others, are positioning Kforce as the destination for top talent. Our path forward is clear, and we will remain consistent with the principles under which we've been operating so successfully. There is simply no other market we want to focus on other than the domestic technology talent solution space as it has, in our view, the greatest prospect for sustained growth. We have the right team in place to capture additional market share and are prepared for the long term and whatever near-term environment may bring. My sincere thanks to our highly tenured leadership team and associates for continuing to stay true to our strategic vision and for their relentless execution. Our team continues to have a meaningful impact on all the lives we serve. It was inspiring to see how our teams rallied to support our clients, consultants, and employees that were impacted by Hurricane Ian and for their support of rebuilding the communities around us. Kye Mitchell, our Chief Operations Officer, will now give greater insights into our performance and recent operating trends. Dave Kelly, Kforce's Chief Financial Officer, will then provide additional detail on our financial results as well as our future financial expectations. Kye?

Thank you, Joe. Revenues grew 8.7% year-over-year in the third quarter. Normalized for our planned COVID-related runoff, year-over-year growth would have been 10.7%. As expected, our Technology business continues to be the primary driver of our success, with year-over-year growth of 15.8% off increasingly difficult prior year comparisons. We are anticipating close to 18% growth for the full year of 2022. We have continued to drive high levels of compounded growth in our Technology business, with revenues having grown organically 50% over the last 2 years, following resilient top-line growth throughout the pandemic. We believe our strong, consistent performance demonstrates an unmistakable correlation between the secular demand drivers of technology. These drivers are less susceptible to economic fluctuations in most businesses. Our technology growth has meaningfully exceeded the industry growth benchmarks over the last 15 years and has been consistently near or at the top of our industry for the past 3 years. As Joe mentioned, our current operating trends and activity levels have moderated to a degree, but demand remains strong and above pre-pandemic levels. Our clients are reluctant to lose key resources, even during challenging macroeconomic environments because of the mission-critical nature of our projects and consultants. Another strong signal we experienced is the continued acceleration in our average bill rates, which grew 1.4% sequentially and 8.3% year-over-year to approximately $88 per hour. The continued increase in bill rates reflects the strong demand environment for highly-skilled talent and the criticality of these resources to our clients' strategic priorities. With less geographic constraints, our talent pool of candidates continues to increase. We continue to see acceleration of critical technology initiatives among our clients in areas such as cloud, digital, UI/UX, data analytics, project, and program management. Conversations with our clients suggest that they will continue to prioritize significant technology investments to remain competitive, regardless of the economic environment. Many of our engagements are multiyear initiatives that we expect to continue despite any changes in the macroeconomic environment. Clients continue to look to us to provide managed teams and project solution engagements. We expect to bring even greater focus in driving disproportionate growth of these engagements as we move into 2023, which will help insulate margins. Our year-over-year growth was driven by a diverse set of industries. Sequentially, we are still seeing broad-based demand, but with some softness in select clients. We have not yet seen any industry vertical as a whole experience consistent reductions in demand. Rather, even in industry verticals where we have seen softness with particular clients, we have seen other clients actually increase spending and award new projects. We have a very diverse portfolio of large customers servicing 70% of the Fortune 500, which we believe mitigates our risk since we have no significant concentration in any particular client or industry. While we may be susceptible to short-term disruption with specific clients or industry-specific dynamics, we expect our diversification and concentration in world-class companies to serve our shareholders well over the long term. We expect fourth-quarter revenues in our Technology business to continue to grow sequentially on a billing day basis and increase in the high single digits on a year-over-year basis. Our overall FA business declined 28% year-over-year. The growth rate was negatively impacted, as expected, by declines in COVID-19 revenues. These revenues contributed nearly $7.5 million in the third quarter of 2021. Excluding this impact, our overall FA business declined 18.7% year-over-year, largely due to our repositioning efforts. While new assignment starts were relatively flat in the third quarter as we continue to reposition our business, we saw a 6% sequential increase and a 28% year-over-year increase in our bill rates to over $50 per hour. We expect overall FA revenues to improve slightly sequentially due to a project in support of Hurricane Ian recovery efforts and decline approximately 29% year-over-year in the fourth quarter. As a reminder, the fourth quarter of 2021 included $4.7 million of COVID project revenue. We continue to support our FA business in improving its alignment with our Technology business. The investments we continue to make in our strategic priorities, along with process improvements to increase productivity levels in our associate population, provide capacity to continue to grow. While capacity exists, we have continued to make select investments in associate headcount to drive sustainable growth. We have supported and retained our best people, and we have made significant changes to give our employees flexibility and choice in our office-occasional work environment. This is reflected in our top scores among our competitors on Glassdoor across all 7 measurement categories, including areas like diversity, inclusion, and culture. Kforce has earned Glassdoor's OpenCompany designation, which recognizes employers that proactively promote and embrace workplace transparency through sharing workplace culture, being responsive to all reviews, and sharing our updates related to DEI and CSR. I am so grateful for the trust our clients, consultants, and candidates have put in Kforce. I would like to thank our amazing people out there who continue to deliver our impressive results. They are truly the backbone of our success. I will now turn the call over to Dave Kelly, Kforce's Chief Financial Officer. Dave?

Thank you, Kye. We continue to make progress in growing our business and improving profitability levels as third-quarter revenues of $437.6 million grew 8.7% year-over-year and earnings per share of $1.09 increased 13.5% year-over-year. Gross margins decreased 60 basis points year-over-year to 29% in the third quarter, primarily due to a decline in Flex gross profit margins and a lower mix of direct hire revenues. Flex margins of 26% in our Technology business declined 90 basis points sequentially and on a year-over-year basis. This decline was largely expected due to higher utilization of paid time off by our consultants, slight spread compression, and elevated health care costs. Top technology talent remains scarce, and we have seen wage increases fairly consistently throughout the year. Over many years, we've had great success passing through these increases to our clients in our bill rates due to the critical work our consultants perform. This has led to very stable margins in our technology business. We believe the third quarter decline represents a fluctuation in margins within our typical range as there are always leads and lags in bill rate and pay rate dynamics. Flex margins in our FA business expanded 50 basis points sequentially and 240 basis points year-over-year due to a decline in the lower-margin COVID project work and repositioning efforts. As we look forward to Q4, flexible margins in our Technology business, which would typically decline sequentially, are expected to remain at Q3 levels as we recover from the higher-than-normal paid time-off impacts in Q3. Overall gross margins are expected to decline due to seasonally lower direct hire revenues. While we believe the clients may be slightly more price sensitive in the current macroeconomic environment, we believe our nearly 90% concentration in technology provides relative margin stability over the long term due to the desire by our clients to increasingly engage us for projects critical to their ongoing success. Overall SG&A expenses as a percentage of revenue decreased by 60 basis points year-over-year, mainly as a result of lower incentive-based compensation given significant prior year accelerating growth and real estate savings under our office-occasional model. These factors offset ongoing investments to improve our back-office productivity. We expect SG&A expenses as a percent of revenue to be flat year-over-year and increased sequentially due to 3 fewer billing days in the fourth quarter, along with continued investments in our business. Our third-quarter operating margin was 7.2%, which was down slightly year-over-year. Our effective tax rate in the third quarter was 26.8%. Operating cash flows were $7.3 million and, as expected, were negatively impacted by a $20 million payment to settle benefits owed under a previously terminated executive retirement plan. Our accounts receivable portfolio continues to perform exceptionally well, and we continue to prioritize the return of capital to our shareholders. During the quarter, we continued to be active in repurchasing $22.5 million of our stock. Given our confidence in our future prospects, we now expect to return nearly 100% of operating cash flows to our shareholders this year through share repurchases and dividends. This compares to historical levels of approximately 75%. Our return on invested capital was approximately 48% in the third quarter. The strength in our balance sheet and availability under our $200 million credit facility allows us to be opportunistic in returning significant additional capital to our shareholders while continuing to evaluate potential tuck-in acquisitions. With that said, our belief is that our results suggest that a focus on organic growth provides us the best opportunity for long-term success. With respect to guidance, the fourth quarter has 61 billing days, which is 3 fewer days than the third quarter of 2022 and the same as the fourth quarter of 2021. We expect Q4 revenues to be in the range of $414 million to $422 million and earnings per share to be between $0.88 and $0.96. Our guidance does not consider the potential impact of unusual or nonrecurring items that may occur. Our financial performance has put us in an excellent position to continue to make incremental investments in our business, which we believe benefits our shareholders in the long term while also allowing us to improve profitability levels as we grow. During our Q4 2021 earnings release, we indicated that we expected the 2022 revenues would be at least $1.7 billion and that earnings per share would be at least $4.20. The midpoint of our guidance for Q4 indicates that we expect to slightly exceed these levels. Overall, we believe our strategy has put us in an exceptional place, even with the ongoing macroeconomic uncertainties. We believe the strategic decision to focus our business on providing domestic technology talent solutions is paying huge dividends and provides us with unique resiliency in whatever may occur in the economy. Our shareholders continue to benefit from our strong performance and efficient capital allocation. On behalf of our entire management team, I'd like to extend a sincere thank you to our teams for their efforts. Operator, we'd now like to turn the call over for questions.

Your first question comes from the line of Tim Mulrooney with William Blair.

My first question is for Kye. Kye, you've been doing this a long time, and I know this isn't your first period of macro uncertainty. So can you just talk a little bit about client behavior in this environment? What you're hearing from clients these days both from the demand side as well as client behavior on the process side in terms of procurement behavior and bringing on the asset?

Yes. Thanks, Tim. We're seeing a little bit of slowdown in terms of just the hiring cycle. There's still very strong demand, especially in the places we're playing in technology, cloud, big data, digital transformation. Demand is strong. The clients are wanting to see where they might have seen 1 or 2 candidates. Now they want to interview 3 or 4. So that's elongating. Actually, it's really normalizing the process. It's not where it was in 2021, but it's much more normal to what we have seen and still higher demand and higher pay than pre-pandemic. So the visibility we're seeing client demand is still there. It's just maybe a little bit more selective with the candidate's level.

Yes, Tim. This is Joe. What I would add on to that is I think what we experienced in 2021 and early 2022 is very similar to what we saw during the dot-com era. It's probably the last time that we saw really the kinetic pace of hiring, and I think that's really what Kye is touching upon is everybody was shortening the process, skipping steps because everybody was fighting for the same talent. And what we're seeing at this point in time is really, as Kye mentioned, it's really more normalized to what we would normally see in a hiring cycle.

All right. That's helpful. And then Joe, I mean you've shared in the past how your demand for your services has kind of had more to do with IT spending by your clients and not so much the labor market. So I was hoping you could comment on what you're seeing with respect to IT spend relatively to a couple of months ago, what you're hearing as far as IT budgets as we head into 2023?

Yes. So it's a great question, right, because this is one of the things that we always try and clarify. And sometimes people miss the point when you're looking at everything that's in the press about tech companies aligning their headcounts and so on and so forth, right? We're a services-based organization and not linked to necessarily technology products and/or devices that people are acquiring. So I think that gets confusing sometimes. But all the data that we've been seeing in terms of budget, budgets were very robust pointing into 2023. They have tapped down slightly. But still, everything, the more recent pieces that I've seen, they're all projected to be up on a year-over-year basis. And realizing that we predominantly work with the Fortune 500, about 70% of them, they have to make the investments, especially in all the areas that Kye had mentioned and that I mentioned in my opening comments, and that's really where we're honed in. So we haven't really seen necessarily any budget pullback in terms of those areas we play. I mean, sure, we're seeing unique dynamics client by client. But when you go across an industry where we might see one client tightening their belts a little bit, we're seeing it across others in an industry, expanding their efforts. So nothing of a material nature has changed over the course of the last quarter on a budget standpoint looking into 2023.

Your next question comes from the line of Mark Marcon with Baird.

Regarding your last comments, Joe, could you elaborate on the types of investments that some clients are scaling back on? Additionally, what specific areas are you noticing other clients picking up these investments? Are there any common trends, or does it seem to be completely random, which would imply that we can't draw any conclusions?

Yes. I think your last statement, I don't really believe there's a conclusion to draw. I think it's very client-specific and based upon the load of projects that different clients are going after. As I mentioned in my opening comments, everything, especially in and around digitizing the business, whether it be from addressing the consumer or whether it be addressing the employee to drive efficiencies, all efforts are full tilt forward on those fronts. I would say, really, you see clients may be potentially pulling certain things back, and we don't do a lot of business in the device space as per se. But obviously, with inflation and consumer spend, you do see a ripple and a carry-through to some organizations that are really on more of those consumer-type devices, so I think you're seeing a little bit of a pullback on that front. Kye, I don't know if you want to have any other color you want to add.

Yes, I believe we are experiencing strong demand. However, CIOs and CMOs are examining their budgets more closely. Fortunately, most of our business is in sectors that require ongoing investment. Companies need to continue their migration to the cloud. As Joe mentioned, there is still a strong focus on digital initiatives, both for customer and employee experiences. We're noticing a significant interest in enhancing employee experience to boost productivity, and we have achieved some successes in this area. That said, there is certainly increased scrutiny in certain segments, especially with regard to device-related spending, which has decreased. Nevertheless, when speaking with CIOs and CTOs, it's clear they recognize the need to stay the course on their strategic paths.

Yes, Mark, we kind of close on this. The pandemic was a big wake-up call for all organizations. For those that were making the investments in these areas, they realized how they were competitively positioned. For those that were slow to the game and making investments in digitizing their business, they got caught flat-footed and really had a lot of heavy lifting to do to keep their businesses aligned as they were moving through the pandemic. So in both of those situations, those that were already making those investments, they've accelerated their investments to keep their competitive advantage. And those that were caught flat-footed, they're rapidly trying to catch up and make the investments so that they can better enable their business holistically from a digitization standpoint.

That's great color. And then can you talk a little bit about the bill rates? I mean, obviously, it's pretty impressive to see the 8.3% year-over-year increase in the bill rates. How much of that would you say is kind of apples-to-apples inflation as opposed to just moving up a little bit more in terms of the skill sets that you're providing or doing some consulting or consulting-like projects?

I think we've had the good fortune to be the beneficiary of both. We have seen some of the uptick from an inflationary environment, but we've also seen a really good uptick as, again, we're moving up that food chain into those higher-level spots. And so I think from that perspective, we're going to continue to see things approaching that $90 an hour bill rate. And a lot of that's being driven as managed teams and project solutions offering continue to be significant drivers to our above-market growth in technology, and we're really proud. We're at 16% again year-over-year and continue to see that acceleration taking place.

Yes, Mark. This is Joe. I think it's even more significant than that because Kye is not taking all credit that maybe is due here. That is against the backdrop, but we've actually seen more moderation in bill rate expansion in what I would call our top 25 of our largest customers, which means, disproportionately, bill rates are expanding in those organizations that we call really our market-based accounts or our major accounts, which those are really the customers that are in that really heavy evolution stage. So I mean, I think that even gives us more optimism in terms of how our business is positioned.

That's great. And I mean, what's your confidence level with regards to that bill rate inflation continuing? And to what extent does that insulate you a little bit in terms of volume declines if we do go into a significant recession?

Yes. We have observed some softening in bill rate inflation and wage escalation. While there is still some increase above normal market conditions, it is clear that there has been a loosening. Large organizations that may have overhired are now realigning their resources, and those resources are moving to more moderate-sized organizations. The supply and demand situation hasn’t changed, but we are seeing signs of softening. Looking ahead to 2023, I can't predict with certainty, but that's what we are currently experiencing. Kye, do you have anything to add?

We've never really experienced a decline in bill rates during a recession. As we continue to advance into higher-end skill sets, I believe we are well protected against any external changes. Our team is actively selling in key investment areas led by CTOs and CIOs. Therefore, I think we are operating in the right sector and moving up the value chain. There hasn't been a shift in demand for consultants; they remain difficult to find, particularly in the right technology. While some may be concerned due to developments in large tech companies, the situation does not impact the levels at which we are placing candidates. Roles such as cloud engineers and full-stack developers are still highly sought after, and there is effectively negative unemployment in these domains. Consequently, our teams are maintaining the ability to price confidently.

That's really great color. If I could squeeze one more in, which is a two-part. Can you talk a little bit about the pay rate expectations among the consultants that you're placing in IT Flex? And then also, just what we should think about, particularly going into next year in terms of comp levels for your own folks, in terms of dealing with the inflationary pressures that they're facing?

We have not seen pay rates for consultants decrease. The demand for highly-skilled technical workers remains strong, and as a result, there have been no changes in consultant pay. Dave, would you like to address the second part?

Sure. Yes. So as we kind of look forward, and we made some commentary even this quarter with respect to SG&A, right? So if you look at the last couple of years, we've been at extraordinarily high levels because of the performance of our people in terms of compensation. And as we get to, I would say, for us, more normal levels of growth that are up twice the market still, we've seen those levels as a percentage of revenue come down just based upon the structure of our compensation plan. So as we kind of look forward, if we maintain this somewhat more normal environment, we would see kind of that natural decline in incentive comp. This is true for our commissionable associates. Even our leadership is very highly leveraged in terms of how we compensate them. So it's kind of a natural way of thinking about where SG&A is based upon our growth rates.

Yes, and I would piggyback on that a little bit. With all the investments that we've been making in our business over the course of really going back to 2016 from a technology standpoint, from a leadership development, all the things that we're doing in and around our office-occasional, and equipping our people so that they can work anywhere and have the right tools and be able to communicate and collaborate against the backdrop of what's happening with the consultant population, a remote workforce, which is opening up additional candidate basis for all of our clients, likewise opening up additional opportunities for all the candidates that we're working with across the broader world-class client base. Yes. I think we're making those investments that are going to allow us to continue to increase productivity of our people. It's everything that we've been about. I mean, our productivity levels today are the highest that they've been. I've been here going on 35 years. So the highest levels and very, very experienced as a firm, which means our people are making more money than they've ever made. So we're going to continue to make investments to drive efficiencies and productivity, no different than our end clients are investing in their tools and technologies to drive those things. This is that whole digitization to address the employee; we're going to continue to make those. So I would even say against the headwinds of a more challenging economic climate. I think the competitive landscape changes, and you start to see competitors struggle, which means we're just going to go after greater market share and maybe a market that wouldn't be as large in that type of situation. So I have all the optimism in the world. Our people are going to continue to elevate their performance, hence, make more money, but we get more leverage out of those individuals from an SG&A standpoint as well. So everybody wins in that scenario.

Your next question comes from the line of Kartik Mehta with Northcoast Research.

I just wanted to get your feel for how you're feeling this quarter versus last quarter in the sense that it seems like maybe sequentially, there's been a little slowing, but you don't seem at all worried about 2023 IT budgets. And if you kind of think about 2023 today versus when you reported last quarter, any changes in behaviors from your customer? Or any concerns that would make you a little bit less negative or positive about 2023?

Yes. I would say there's a couple of dynamics. Again, our business performed exceptionally well through the pandemic and then 2021, beginning 2022, probably the best tech market that I've ever seen in the 35 years that I've been in this industry. I mean we're up 50% on a 2-year comp. I think that speaks volumes. So part of that is we're dealing with very challenging comps as a data point. But in terms of anything materially changing at our customer base, I think Kye added a lot of color on the front end of the call. If you're looking for something more specific, please, hone in on that, and Kye and myself would be more than happy to provide specifics, but I don't want to be redundant on what Kye had mentioned on the front end of the call.

I wasn't looking for anything too detailed. I was hoping to hear your perspective on the industry and your past experiences, along with what you're observing today and how that typically unfolds. Given the current situation and previous recessions, you have some insight into the future. I just wanted to get a sense of your thoughts.

I mean, Kartik, I think it's very important, though, to realize we're very different than we've been in past recessions. We are 90% technology today. And in the past, we had a much broader footprint in various different industries. And so I think we're better positioned today if something were to happen in the macroeconomic environment than we've ever been. And I do believe today, when you look at businesses in general, they're more dependent on technology, still continuing to innovate and still continuing to move things forward in their business. And like I said, there's clients looking to get more efficiencies out of their employees by investing in technology, whether that's looking at big data and how you're storing the data to figure out where you should be investing and expanding or pulling back in certain areas or whether that's in digital. We had an interesting win this last week where a client of ours in the health care space is really looking to improve their digital experience for their own employees because of what health care workers have been through in the last 2 years throughout the pandemic, and they know that they're facing some burnout and they need to help people be able to do more and administer the burden for those folks to be less. So I feel like technology is a big part of corporate America today, and you're going to see it continue to move forward in different ways than we've seen in other downturns, and I wouldn't want to be in any other position than 90% tech rate now to be honest with you.

Yes. Kye mentioned this, and when she refers to our differences, it's not only about our current focus being 90% on technology, but also about how our resilience has evolved through challenging economic times, including past downturns like the dot-com era. Each cycle affects us less, and technology has become essential; there's no opting out of it anymore. Our current emphasis on technology is concentrated in areas vital for organizations. As Kye pointed out, I wouldn't trade our market position with anyone, especially considering our strong client relationships and the services we provide alongside our solid balance sheet, which positions us well for any upcoming challenges.

Your next question comes from the line of Tobey Sommer with Truist Securities.

How are you approaching the hiring of your sales-focused staff at this time? You've mentioned significant productivity improvements over time, and during this call. Are you increasing your staff? If so, at what rate?

We're making careful investments where we see the need. There are various dynamics across markets that require us to maintain and support our investments. We remain flexible to respond to market demands. In areas like managed teams and solutions, we are still enhancing our capabilities. We are hiring, but we recognize that at some point we may need to refrain from that. Currently, we are assessing where to invest incrementally. Additionally, I'm sure Dave can highlight the technology that allows us to achieve more with our existing personnel. I anticipate continued productivity gains, but we aim to make investments that will help us gain market share.

Yes. I mean, I think, as Kye said, we've had for the last number of years an objective of increasing productivity, using that to reinvest to further improve productivity. It gives us a fair amount of capacity. It gives us a lot of flexibility. As Joe said, we're going to continue our office-occasional model, provide additional opportunities for our teams to become increasingly productive. So all the things that we do are really tailored to increase productivity. And if we have surges and opportunities, we can selectively add. If we see things change, we still got plenty of capacity. So as Joe said, we're in a great place.

Yes, and I would kind of put a bow on this. We've built out a very strong capability to hire into the marketplace. The team that has been built out is just world-class. I've seen many iterations of our internal recruiting capabilities, and this is the best team that I've seen at Kforce in my tenure at Kforce. And surprisingly, we're having to turn that down a little bit because one of the other things that we're seeing over the course of the last 12 months is we've really seen our voluntary turnover drop significantly. And I would say a lot of that has to do with the culture we're evolving here at Kforce, how productive our people are becoming. So we're not having to hire the same volume of people that we historically had to be netting up as well, but we're well positioned. And as Kye mentioned, there's a natural throttle on that so we can adjust to whatever market condition is there. But by the way, I'd be remiss if I didn't mention this. If things were to get more challenging, I would never want to imply that we're going to be reducing because that's an opportunity for us to go after market share and to continue to build because we are here for the long term. We're not here for playing for a quarter or any short term. We're going to do the right things. And I think if you go back and you look at our history, we are very prudent in terms of managing our overall capital budgets as well as our SG&A line items.

And I do think, Tobey, the office occasional has been a huge draw for us, as employees are seeing gas prices and different things come up. Having that option to work from home and then also the productivity that you don't have commuting back and forth has been a really good uptick for our people and our productivity.

Could you give us an update on your, some folks in the industry call it managed services, some people call it consulting? Where does that stand in terms of how important it is to the company size and growth rates? Any kind of update you can give us there would be helpful.

Great question. Let me start out by saying that the service offering continues to resonate with our clients, and we are really excited about the opportunities in this space as the total addressable market for that is several times larger than commercial technology staffing. So managed teams, project solutions, offerings continue to be a significant driver for us. So we will continue to be making investments and looking at that area.

Okay. I just feel like we used to talk about it more a few quarters ago and haven't heard much since in terms of the growth and contribution. Could you frame the hurricane project in maybe size, its contribution in the quarter or even give us an analog experience with maybe prior natural disasters that drove some business?

Yes. Tobey, this is Dave. Yes. So we've supported some important strategic clients who have been doing hurricane relief for years. Obviously, Hurricane Ian is important, and we want to make sure that we're supporting our partners. This is not a big program, though, for us, even in the fourth quarter. It's just a couple of million dollars, and it's not something that we focus on for time growing. So don't get the impression that this is a critical part of our F&A business. It's not. This is really in support of a long-time strategic partner of ours. So I wouldn't read anything more into it than kind of the right thing to do for an important partner, and that's it.

I believe we are close to achieving our goals, Tobey. We are consistently progressing. As I mentioned earlier, there is still $4.5 million in revenue for Q4 '21. However, we are nearing completion, and I am very pleased with the progress our team has made. Our billing rates have increased by 28% year-over-year to $50 an hour. I am truly impressed with what they have accomplished in this area and feel that our initiatives, similar to what we've done in technology, focus on advancing to sectors that are not easily automated. I think we are making good progress and beginning to approach the finish line on this.

Yes. The only other thing I'd add, Kye talks about that bill rate. It's also a more profitable business, right? So that margin is what, 50 basis points up sequentially; it is much more closely aligned with how we provide services to our technology clients. In technology, it's up more than 2% in terms of margins year-over-year. So even, as she said, where the repositioning is almost done, it's already bearing fruit for us.

Your next question comes from the line of Marc Riddick with Sidoti.

So I know you guys have covered quite a lot, so I'll keep it brief because I really do appreciate all the detail that you provided. I was wondering if you could talk a little bit about maybe some of the things you might be seeing as far as client industry vertical behaviors. Any standouts, call-outs, things that we should be thinking about as far as maybe some differentiation there? And then I have one quick follow-up after that.

I would say across all of our industry verticals, we haven't seen any material shift within any industry. There are puts and takes, meaning there are certain clients that are going through certain dynamics. But then the flip side of that, there are others that are really going to be very positive and ramping up their strategic initiatives and what they're doing with technology. I mean just when I look at the performance of our industry, our top 10 industry verticals, I mean we used to say they're all up nicely on a year-over-year basis. And then from a sequential, the majority of them are up nicely from a sequential standpoint. I mean a couple flat, but I would say that's less about that industry vertical and more specific to the client makeup that we have within that industry vertical.

Okay. Great. This may be a somewhat ambiguous question, but I have to ask it anyway. Are you receiving any recent feedback regarding whether your clients' activities are primarily focused on growth, or are you starting to notice any indication of clients pursuing projects aimed at cost savings?

I believe we're observing that cost savings are a key focus as clients aim to automate their processes, which helps reduce expenses. As they digitize operations, they seek to achieve more with fewer resources. I see this as a beneficial combination of factors. There's significant capital investment happening, but some developments are not affecting us negatively from a cost savings viewpoint. Clients are increasingly looking to technology to enhance their efficiency and effectiveness, thereby lowering their costs. For consultants, we've noticed that clients are sometimes shifting between investing more in consultancy services for flexibility and opting against hiring full-time staff, but this varies depending on the specific client.

I mean, we've been saying this for the better part of 10 years. I mean there has been a secular shift in terms of technology and how technology is embedded in everybody's strategic plan. And the reality is, even in a slowing environment or a recessionary environment, you have the flip side that is never talked about, which is companies accelerated their investments to move initiatives forward faster to claim through the other side, which, again, it comes back to technology; it's not an on-off switch any longer. Like when I got into this industry back in 1988, I mean it was an on-off switch. I mean the second things got tough, people put projects on hold, they held on to hardware longer. You can't do those things any longer and be competitive unless you're basically going to put your entire business at risk. So instead, I believe the opposite happens. Organizations sit there and look at what can I accelerate that I was already doing to play for the other side if it's going to drive efficiency and reduce costs and things of that nature and improve the consumer experience.

Great. And then the last thing for me. You actually touched on this a little bit earlier regarding some of the headlines we've seen from the big tech companies and some layoffs occurring. I wonder if you could discuss how that might eventually play out in terms of increasing available talent and how that could filter through. Or is that a reasonable perspective for looking at this going forward?

I would love to see that happen. If we observed some easing in the talent market, it would be very beneficial for us, but we haven't seen it yet. Talent is a complex issue; while people may notice the headlines, it doesn't apply to the specific areas we're involved in. We're not seeing it with cloud engineers, full-stack Java developers, or big data architects. However, if there were to be some loosening in the market, I know my recruiters would appreciate it.

Yes. As Kye mentioned, we are experiencing negative employment in many of these skill areas. A significant change would be needed for that trend to reverse. Additionally, larger organizations may be adjusting their costs after previously overhiring and acquiring a lot of talent. This talent is being absorbed by other organizations that haven't been able to compete for it.

There are no further questions. I'd like to turn the call back to Mr. Liberatore for closing remarks.

Well, thank you for your interest and support in Kforce. For those who might have missed it, there was a great piece in the Tampa Bay Times yesterday, a section talking about our opening of our corporate headquarters. So I'd like to say thank you to every Kforce for your extraordinary efforts and to our consultants and clients for your trust in Kforce and partnering with us, and also allowing us the provision of serving you. We look forward to talking with everybody again after our fourth-quarter call 2022. Thank you.

This concludes today's conference call.