Thank you for standing by and welcome to the Kforce Q4 2023 Earnings Conference Call. I would now like to welcome Joe Liberatore, President and CEO, to begin the call. Joe, over to you.

Good afternoon. This call contains certain statements that are forward-looking, based upon certain 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 SEC. We cannot undertake any duty to update any forward-looking statements. You can find additional information about our results in our earnings release and our SEC filings. In addition, we have published our prepared remarks within our Investor Relations portion of our website. I'm tremendously grateful for the extraordinary efforts of the Kforce team who executed well in 2023, in an environment that proved to be more challenging than originally expected. Our results driven by solid execution and a focused business model also allowed us to continue allocating significant capital towards strategic investments in our people and tools. As a result, we enter 2024 well positioned to take additional market share and create significant long-term returns for our shareholders. The investments we are making include a continuation of our efforts to transform the back office, implementing AI in certain areas to drive efficiency and productivity while further institutionalizing our one Kforce organizational design and operating principles. During 2023, we selected Workday as our future state enterprise cloud application for our HCM and financials which will complement our Microsoft front-end application and create a unified and streamlined technology suite for the Firm once fully implemented over the next few years. We are incredibly fortunate to be partnering with Workday and Microsoft, two companies at the forefront of investing in AI which puts us in an ideal position to take advantage of these technologies as they become available. The foundational transformation will be a meaningful contributor to us meeting one of our long-term financial objectives of generating at least 10% operating margins. Our decision to grow our business organically, with a consistent refined business model tailored to provide highly skilled technology talent solutions to world-class companies in the domestic market has been critical to our success over many years and we remain confident that our firm is positioned well for improving market conditions. We experienced a decline in technology revenues in 2023 that closely resembled what we experienced in the Great Recession in 2009. We believe the decline that we experienced in 2023 was due to an acceleration of strategic technology investments made during 2021 and '22, to address the implications of remote work and other digital transformation efforts, combined with the caution exercised by companies in a very uncertain environment. Companies remain cautious due to the continued economic and geopolitical uncertainties and we are encouraged to have grown our technology revenue sequentially in the fourth quarter of 2023 on a billing day basis in this difficult environment. We are blessed to have a tenured executive leadership team who has been through multiple economic cycles together and can quickly adjust to the changing market conditions. Our message to our people in 2023 was simple. And frankly, it is no different as we begin 2024. There are many things that are uncontrollable. We must control what we can control, stay close to our internal associates, support our consultants and continue listening to our clients while maintaining a long-term view in our decision-making. We made some difficult adjustments in July 2023 to reduce our structural cost which mitigated the impact of lower revenues on the profitability levels. Our strategic position is solid and our prospects are excellent. With that said, tremendous uncertainty still exists in the macro landscape and there are conflicting views of economists on whether we will avert a recession, see a soft landing or slip into a recession in the U.S. economy in 2024 following the aggressive monetary tightening by the Federal Reserve. The challenges in the geopolitical landscape continue to grow, with the ongoing war in Ukraine, the effects across the region of the war in Israel, including the loss of America's service members, with dozens injured in the drone attack on their base in Jordan, along with the 2024 U.S. election uncertainties and many others. We will continue to closely monitor our performance indicators and trends and are prepared to make the necessary adjustments to our business without jeopardizing investments in our long-term strategic priorities. The strength of the secular drivers of demand in technology accelerated significantly coming out of both the Great Recession, with the advancement of mobility, cloud computing, among others and with the 2020 pandemic, with further digitization of businesses and the continued headlines aroundGen AI technologies. I have seen a lot of economic cycles in my 35-plus years in the business and each one behaves a bit differently. What remains clear to us though is that the broad and strategic use of technology, including AI technologies will continue to evolve and play an increasingly instrumental role in powering businesses. Over the long term, we believe that AI and other technologies will continue to drive demand for, rather than replace technology resources and that the pace of change will accelerate. We are ideally positioned to meet that demand. Our core competency is rooted in the ability to identify and provide critical resources real-time, at scale, to help world-class companies solve complex business problems and help them competitively transform their businesses. Our operating model also allows us the flexibility in partnering with our clients to meet their needs across a broad spectrum of engagement forms, from direct hire, traditional staffing assignments to manage team engagements and manage projects. While clients have been acting with restraint over the last 12-plus months, the backlog of desired investments continues to grow. We expect these important technology investments to be high priorities once the macro uncertainties begin to clear. Technology investments are simply not optional in today's competitive and disruptive business climate. There are simply no other markets we would want to be focused on other than the domestic technology talent solution space. We have built a solid foundation at Kforce. Our balance sheet is clean which allowed us to be opportunistic in repurchasing over $67 million of our stock in 2023 and we expect to continue to generate strong cash flows in 2024. Our Board of Directors recently approved an increase in our quarterly dividend and share repurchase authorization to support our ongoing objective in returning capital to our shareholders. Before transitioning the call to Dave, I wanted to reiterate how proud I am of the performance and resiliency of our collective Kforce team. Together, we thought through a challenging operating environment, made some difficult decisions and met each and every challenge. We are blessed to have a high-performing team that is tenured, dedicated and passionate at Kforce. I am excited about the future of Kforce, as our team continues to advance our operational model, in combination with our integrated strategy, resulting in an overall team's ability to operate even more consistently as one firm. Dave Kelly, our Chief Operating Officer, will now give greater insights into our performance and recent operating trends. Jeff Hackman, Kforce's Chief Financial Officer; will then provide additional detail on our financial results as well as our future financial expectations. Dave?

Thank you, Joe. Revenue for the fourth quarter came in just above the midpoint of our guidance. We were encouraged to see overall revenues increased sequentially by 0.6%, led by sequential growth in our technology business. For fiscal 2023, overall revenues were down 10%, while Flex revenues in our technology business were down approximately 7%. As a reminder, our Technology business significantly outperformed the market in 2022 and 2021, growing 43.5% over that 2-year period. The Q4 sequential growth in our Technology business is reflective of the stability in the number of consultants on assignment we began to see beginning in mid-Q3, which was followed by a modest increase through the fourth quarter. As we look into early Q1 trends, year-end assignment ends in our Technology business were slightly greater than prior year levels, as clients were generally slower than usual to approve 2024 IT budgets which resulted in fewer redeployments of our consultants as projects were completed at year-end within the existing clients. This also contributed to a slightly later start in the typical acceleration of new orders from our clients at the beginning of the year. With that said, over the last 2 weeks, we've seen an improvement in our leading indicators. And as a result, we believe that the level of new assignment starts could improve from current levels as we get later in the quarter. This suggests we may see a more traditional pattern of growth in the number of technology consultants on assignment, albeit beginning slightly later in the quarter than usual. Our clients recognize the need to retain the highly skilled talent that we provide while they await a point of increased confidence to address their increasing backlog of critical technology initiatives more aggressively. Overall average bill rates in our technology business remained near record levels at approximately $90 per hour. While bill rates have been stable over the past few quarters, we expect them to increase over the longer term as highly skilled talent will remain in short supply as demand improves. In addition, we're continuing to benefit from an increased mix of managed teams and project engagements within our overall Technology business which carries an average higher bill rate. Our clients remain focused on critical technology initiatives in the areas of digital, UI/UX, cloud, data governance, data analytics, business intelligence, project and program management and modernization efforts. This represents a continuation of recent trends and reflects some of the front-end work needed by companies to take advantage of planned AI-related investments. Flex margins of 25.4% in our Technology business saw a seasonal decline of 10 basis points sequentially and 70 basis points year-over-year. As we've mentioned on prior calls, the year-over-year declines in Technology Flex margins that we've seen recently are typical of what we have seen in prior slowdowns and we normally see margins recover as the macroeconomic environment stabilizes. As we look forward to Q1, we expect bill pay spreads in our Technology business to continue to be stable, though overall Flex margins will be lower due to seasonal payroll tax resets. We've continued to broaden our service offerings beyond traditional staffing to include managed teams and project solutions. Clients consider access to the right talent essential to their success and see our services as a cost-effective solution for their project requirements, as demonstrated by more than the 90% of managed teams and project solutions being executed within existing clients. Our integrated strategy capitalizes on the strong relationships we have with world-class companies, by utilizing our existing sales, recruiters and consultants to provide higher-value teams and project solutions that effectively and cost-efficiently address our clients' challenges. Our client portfolio is diverse and includes large market-leading customers. Market leaders typically prioritize technology investments to maintain their competitive advantage. Our focus on addressing their needs continues to be critical in our ability to drive sustainable, long-term above-market performance. While short-term disruption may occur within certain clients or industries, our diverse client base provides an outstanding platform for consistent long-term growth. We experienced stabilization in some of our larger industry verticals in Q4, including financial services and technology services. Elsewhere, we saw a quarter-over-quarter improvement in transportation and retail trade and some headwinds in manufacturing. Looking forward to Q1, we expect technology revenue to decline between 10% and 12% year-over-year which is consistent with Q4 2023. Our FA business grew approximately 2% sequentially but declined 28% year-over-year as the prior year period included a project to support hurricane relief efforts. The year-over-year decline also reflects the impact of business we are no longer supporting due to our repositioning efforts in a more challenging macro environment. We expect revenues to be down approximately 25% year-over-year. Our average bill rate has continued to exceed $50 per hour, reflecting our success in repositioning this business towards a higher skill set that is more synergistic with our technology service offering. Flex margins in our FA business decreased 70 basis points sequentially due to a lower margin project with a strategic client but have improved 330 basis points since the first half of 2020 as our mix of business has significantly improved. We expect bill pay spreads to remain fairly stable at these levels now that the significant majority of business that we are no longer pursuing has run off. However, overall FA margins will decrease sequentially due to seasonal payroll tax resets. We've taken the necessary and thoughtful measures to strike a balance between associate productivity and our revenue expectations. As we've done in prior economic downturns, we are focused on retaining our most productive associates and making targeted investments in the business to ensure that we are well prepared to capitalize on the market demand when it accelerates. We continue to invest in our managed teams and project solutions capabilities and the integration of those offerings within the firm which is progressing well. We are fortunate to have one of the most recognized brands in the market for providing technology talent solutions. Our reputation has been established over our 60-plus year operating history and we continue to carry the highest overall Glassdoor rating within our peer group. I'm tremendously excited about our strategic position and the ability to continue delivering above-market performance. The success that we have as an organization doesn't happen without the unwavering trust that our clients, candidates and consultants place in us and I appreciate the dedication, creativity and resilience displayed by our incredible team. I'll now turn the call over to Jeff Hackman, Kforce's Chief Financial Officer.

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. They are included as additional clarifying items to aid investors in further understanding the impact of these costs on our financial results. Our press release provides the reconciliation of differences between GAAP and non-GAAP financial measures. Overall revenues in 2023 of $1.53 billion decreased approximately 10% year-over-year. GAAP earnings per share in 2023 was $3.13 which declined 15% year-over-year. As adjusted for the third quarter charges associated with actions to reduce our structural costs and the settlement of outstanding legal matters, EPS was $3.49 in 2023. This represents a decrease of 18% over the prior year period, as adjusted for a fourth quarter 2022 impairment charge related to a previous joint venture. Fourth quarter revenues of $363.4 million declined 13.4% year-over-year, while earnings per share of $0.82 was at the top end of guidance due to lower-than-expected SG&A costs. Overall, gross margins declined 40 basis points sequentially and declined 120 basis points year-over-year to 27.3% in the fourth quarter, due to a combination of a lower mix of direct hire revenue and a decline in Flex margins. Overall, SG&A expenses as a percentage of revenue was 21% which is a decrease of 150 basis points year-over-year, or a decrease of 100 basis points after normalizing for the joint venture impairment charge. SG&A costs were lower than anticipated in the fourth quarter of 2023 due to lower performance-based compensation, lower health care costs and lower professional fees stemming from the settlement of outstanding litigation. We also continue to exercise greater discretionary spend control in this macro environment and generate leverage from our real estate portfolio, given our office occasional work environment. Our operating margin of 6% exceeded the high end of our expectations of 5.8%. Our effective tax rate in the fourth quarter was 26.6% which was 160 basis points higher than we anticipated, due to adjustments to certain tax credits. Operating cash flows were $22 million and our return on invested capital was approximately 40% in the fourth quarter. We generated $116 million in EBITDA in 2023. Operating cash flows were $91.5 million for 2023 and we've returned nearly $95 million in capital, in excess of 100% of operating cash flows, to our shareholders via dividends and open market repurchases. We have prudently managed our business by driving solid organic growth over many years, that has resulted in consistently strong results and a pristine balance sheet with minimal debt. As Joe indicated in his opening remarks, our Board of Directors approved an increase to our dividend, the fifth consecutive annual increase and an increase in our share repurchase authorization to $100 million. These actions again demonstrate our financial strength and continued confidence in our business. Our pattern of returning significant capital to our shareholders has been consistent over many years, not just in this operating environment. In fact, since we initiated our dividend in 2014, we have increased it by nearly 400%. And since 2007, we have reduced our weighted average shares outstanding from 42.3 million to 19.5 million. All in, we have returned slightly more than $900 million in capital to our shareholders since 2007 which has represented approximately 75% of the cash generated, whilst significantly growing our business and improving profitability levels. We remain committed to returning capital regardless of the economic climate and our threshold for any prospective acquisition remains high. Our strong balance sheet and the flexibility we have under our credit facility provides us with the opportunity to get more aggressive in repurchasing our stock if there is a dislocation between expected future financial performance and the valuation of our shares. The first quarter has 64 billing days which is 3 more than the fourth quarter of 2023 and the same as the first quarter of 2023. We expect Q1 revenues to be in the range of $351 million to $359 million and earnings per share to be between $0.54 and $0.62. Our guidance does not consider the potential impact of any other unusual or nonrecurring items that may occur. Looking beyond what we expect may be short-term macroeconomic uncertainties, we remain extremely excited about our strategic position and prospects for continuing to deliver above-market growth while continuing to make the necessary investments in our integrated strategy and the ongoing transformation of our back office, that will help drive long-term growth and profitability improvements. Joe mentioned our longer-term financial objective of obtaining double-digit operating margins. We believe the key contributors are increased scale, productivity improvements, including through our back-office transformation program and advancements in AI technologies, driving a greater mix of managed teams and solutions business and further reducing our fixed costs such as real estate. As a point of reference, in 2022, our operating margin was approximately 7% at $1.7 billion in revenue. As we look forward, the anticipated benefits associated with our back-office transformation program are about 100 basis points compared to the current level of investment. When you combine this benefit with the benefit of scale, we believe a reasonable revenue level for us to attain double-digit operating margins is slightly more than $2 billion in annual revenues. We offer this data point as our confidence in achieving these profitability levels has further increased due to the returns we have seen in our front office technology investments and our progress with our transformation efforts. On behalf of our entire management team, I'd like to extend a sincere thank you to our teams for their efforts. We would now like to turn the call over for questions.

Our first question comes from Mark Marcon with Baird.

I'm curious about the Tech Flex. You mentioned there was a slower start, but in recent weeks, things have improved. Looking at the year-over-year trends, it appears there's been an enhancement in the fourth quarter. Could you discuss your confidence level and whether there's a specific area or vertical where you're seeing a rebound in assignments?

Yes, Mark, this is Dave Kelly. I want to start by acknowledging that a lot is happening right now. There is always some uncertainty, but I’d like to clarify a few points I mentioned earlier. You're correct that we experienced a higher number of assignments at the end of the year. Some delays in budget approvals contributed to that increase in follow-up. However, in the past two weeks, we've observed many of our key performance indicators, such as job orders, interviews, and send-outs, returning to the levels we saw in late Q3. As noted previously, we experienced sequential growth from Q3 to Q4 in our Technology business due to increased activity. We believe that the current levels and the feedback we're receiving from our clients regarding the backlog of technology investments are encouraging signs. Regarding your question about specific industries, I wouldn’t say there is one particular industry driving this; it’s quite broad. There are various clients and projects where we might win new activities, but it isn’t industry-specific. Overall, I would describe the current environment as similar to what we observed at the beginning of Q4, stable with some positive signs for potential improvement. I'm feeling optimistic about our position.

Great. Can you discuss the bill rates? In Q4, on the Tech side, they decreased slightly both sequentially and year-over-year, which corresponded with a small decline in the Flex gross margin both sequentially and year-over-year. I'm curious whether this was specific to any particular client or if it was a broader trend. Additionally, how should we anticipate the margin profile for Tech Flex in the upcoming year? Are you optimistic about stabilizing those gross margins?

Yes, Mark, this is Dave again. To clarify, we all recognize that 2023 has been challenging for the technology sector. Clients are naturally applying pressure on bill rates. Specifically, the bill rate in Technology decreased by 0.2%, which is less than 0.5%. So when we refer to it as relatively stable at $90, it really is just that—essentially stable. There’s no distinct reason for that 0.2% decline; it could be due to a project or a mix item, but it's a minimal change. Therefore, we don't view it as a significant year-over-year difference in bill rates. Regarding our margin expectations moving forward, we've stated that we do not anticipate any changes in spreads aside from payroll tax resets in Q1, as we've observed in the last few quarters. We expect margins in Technology, particularly Technology Flex, to remain stable at these levels in the near term. In the longer term, once some uncertainty dissipates and we hopefully see a positive shift in revenue trends, we would anticipate margin expansion, which follows the historical patterns we've observed. Thus, we feel we're aligning with traditional patterns in both revenue and margin perspectives.

And Mark, this is Jeff. Add on one comment to where Dave went and Dave touched on this but I think we've seen after the earlier declines that we saw in our Flex margin profile in our Technology business in the first half of 2023, we've seen really good stability in Q3 and Q4. The tick down that you mentioned in the fourth quarter has more to do with some of the seasonal impacts that we traditionally see Q3 to Q4. And Dave's right, I think as we sit here today, certainly, the economic skies clear up a bit. I would expect to recapture some of that lost margin earlier in the year. But in the near term, we expect good stability in our Technology business.

That's great. You did an excellent job managing discretionary SG&A and improving efficiency. You also mentioned the Workday implementation you're working on. The guidance for Q1 is quite clear. How should we expect that to develop throughout the year? Are you anticipating any significant increases in your internal SG&A due to project starts for your internal initiatives or any other factors we should be aware of?

No. I think, Mark, and thank you for your comments on the SG&A control going into the year. Joe said it, controlling what we can control, I think as it relates to our back-office transformation program, we mentioned in our prepared remarks the selection of Workday. Mark, that's been a program we've made comments on our earnings call historically. We've been after this for probably the last 2, 2.5 years and the selection of Workday in the second half of 2023, I think is meant to convey some increased kind of confidence in the road map that we're going under. And in 2024, Mark, I mean, we're continuing to invest at about the pace that we have been in '23 heading into '24. So I think from an SG&A standpoint, I wouldn't expect anything significant in '24 related to our Gemini program. So I think that's the short of it, Mark, I think, from that standpoint.

Great. And then last one for me. I'm encouraged to hear you talk about when we get to $2 billion, getting to double-digit operating margins. How are you thinking about, just in broad strokes, the gross margin for the company and the SG&A as a percentage of revenue. I'm assuming we're going to get more efficiency with regards to the SG&A and you mentioned the 100 bps but wondering if you could put just a finer point as we think about that $2 billion double-digit mark.

Yes. I think, Mark, there's a number of components to getting from where we were at the end of 2022 which was about the 7% to double-digit operating margin. I covered those in the prepared remarks. Certainly, Mark, you would expect the benefits. I know we've talked about to what degree is this linear versus a bit of a step function. But I think certainly, you would expect the benefits of scale as we continue to grow revenue would be more linear. I think it's also fair to assume that some of the linear progression that we've been after for quite a number of years, as we invest in technology to drive both front office and back office improvements, for that to largely be linear. I did mention in my prepared remarks that a significant contributing factor to our financial objective is our back-office transformation program. Certainly compared, Mark, to what our current investment run rate is to the benefits. We anticipate that being about 100 basis points, as you call out. We've got several years left in that program. I would expect us to step into some of those savings versus a kind of pure linear progression from a math standpoint. So we feel pretty confident there. The last component, I would say, we've been after for a number of years which is constantly getting after our structural fixed costs and things like real estate, etc. We've been driving that for a number of years. And in '24 and '25, we've got a bit of work left to do there, Mark. But hopefully, that helps a bit.

Yes. Just maybe just to add, Mark, right. So this is a path that we've been on for a long time, right, simplifying our business this is an increasing view of the confidence in being able to get there, right? We have built a, relatively speaking, a very focused model with a focus on improving productivity. We've done that over the last number of years had significant improvements in operating margins. So this is really just the continuation of the plan we put in place years ago that we've been executing on and expect to continue to execute on.

Yes, Mark, this is Joe. I would say as the most tenured person in the room, this has been a 20-year journey. I mean you can go all the way back to the dot com. And coming out of the dotcom, we made strategic decisions in and around taking down our percentage of focus within direct hire for a variety of reasons which we were never going to get back to operating margin when that happened. We've proven the firm is capable of doing that with that shift. And then even, as we move past the dotcom, when we made strategic decisions to divest of those units that weren't going to be able to compete for dollars, investment dollars because of our focus on IT and shedding that revenue and replacing it with healthy tech revenue. So long, long strategic plan to get us where we are today, we are highly confident and what Jeff spoke about, that as we get into that $2 billion range, we'll be able to achieve those double-digit operating margins.

Our next question comes from Trevor Romeo with William Blair.

First one, Yes, I know you talked about clients being slower to improve their budgets this year. But I kind of had a question about the size of the IT budgets you're seeing relative to last year. I think maybe last quarter, you talked about potentially flat to slightly up versus 2023. Is that kind of still your expectation? And then if we do happen to see an increase in macro confidence later this year? How quickly do you think those clients can adjust and potentially increase project spending?

I would say nothing has really changed at this point. Generally, we are hearing that budgets are flat to slightly increasing over 2023, with a focus on projects aimed at gaining efficiencies both internally and externally. As I mentioned last quarter, there are industry and specific client factors that play to our advantage regarding the quality and diversity of our overall portfolio. We are also seeing budgets being discussed and allocated differently than in previous years, with a strong emphasis on getting more value for each dollar spent. The good news for us is that this creates more opportunities, as clients are no longer looking exclusively at traditional consulting firms for high-cost work, allowing firms like ours to pursue this hybrid type of work with more efficient staffing and solutions through multiple channels. So, nothing has really changed in that regard. If interest rates start to come down and we see a positive reaction, clients could move quickly because their backlog is substantial. They are struggling to complete necessary tasks to remain competitive amidst various disruptions. Additionally, with the growing interest in Gen AI, most of our clients, not specifically tied to the technology sector, are still in the early stages of rationalizing their data and organizing it for future opportunities. They are making investments there, similar to our situation at Kforce, where I wish we had more SG&A dollars to expedite certain initiatives. There's a balance to strike. I think we represent a microcosm of what our clients are experiencing. As visibility and predictability improve, I believe we will see things start to loosen up.

Okay, great. That's helpful. And then I guess just following up on some of the improvement you've seen in the leading project indicators lately, does the Q1 guidance assume that, I guess, assignment starts to improve a little bit throughout the quarter as you described could happen, or would that be kind of more upside to the guidance that it happens?

Yes. I think, Trevor, there's obviously a lag as these indicators start to become more robust. So the improvement that we might see in the first quarter is pretty mild. But the trajectory as we look into the second quarter and beyond for the year will improve. So as we sit here, on the fifth of February, we've seen improvements and it takes a few weeks, right? So you only have a few weeks left in the quarter to see revenue improvement in the quarter. So we're not expecting a great lift in the first quarter. It's really the momentum as we move forward.

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

Joe, can you talk about leading indicators? And I just wanted to understand, are these resulting in conversion? Has there been a change in the sales cycle, I guess, ultimately getting from some inquiries to final sales? How is that progressing or what changes have you seen?

Yes, I would say in terms of those indicators, no, we haven't really seen anything change with the sales cycle. The sales cycle has been elongated for really since the back half of 2022 when uncertainty started to creep in. So no material changes there. I would say, you had asked about conversions, we've actually, over the course of the last 4 or 5 quarters, we've seen our conversions come down rather significantly as in comparison to where we were. And again, I think that's what the clients are looking for, a little bit more flexibility. So they're holding on to the consultants longer versus converting them into FTEs which, again, this goes back to what I've discussed on prior calls, it's the normal cycle that I've seen for the 35 years in multiple recessionary periods and tough periods of time where the first thing they do is exit consultants. The second thing, they rightsize their internal resources. And then the third thing they do is they start bringing consultants back on. And then the fourth phase is when they start to really start to bring on back FTEs. So I think that's all we're seeing, is that traditional cycle playing out.

And then you obviously talked about companies wanting to stretch their dollars which makes a lot of sense. I'm wondering, is this resulting in any changes from your competition or maybe more competition than you've seen in the past 6 to 12 months?

Yes. I would actually say from a competitive standpoint, all the traditional competitors we deal with are still viable competitors. One of the things that typically happens as we go through these cycles is you do see those organizations that were not well prepared, didn't have good balance sheets, maybe had a high customer concentration and they see a receivable go bad. So I don't think we're seeing anything different this cycle than we've historically seen in tougher times. If anything, we see the overall competitive landscape shrinking but it's really more of the smaller players that are exiting the marketplace. And we don't see as many new competitors coming in. But in terms of those that we typically see day in and day out, the larger or mid-tier providers, whether they're professional staffing or they're on the solution side, nothing's really changed materially with that landscape.

The thing I would add and Joe touched on it in the last sentence, right? So the larger players, the suite of services that they could offer from traditional staff to manage teams is really an important differentiator. So part of the reason why we can do what we can do is because we've got long-standing relationships with a lot of significant clients who have trust in our ability to deliver across the spectrum of services. And that's what, frankly, they're looking for in the competitive landscape and the winners are going to be those companies that can do that across the spectrum.

Yes. And that's why we're seeing the larger players are making those investments because they can afford to, the smaller entities, they can't afford to bring on the resources to bring those credentials to the table to get them in front of the organization because it's an expensive proposition. So I would say that's another strategic dynamic that is evolving in the marketplace versus if you're just in a traditional step of which is a much lower expense type model to get involved with.

Our next question comes from the line of Josh Chan with UBS.

You mentioned the slower ramp-up this year. So I was wondering, in the past years that have been slower to ramp up do you see or expect kind of a catch-up where you get back onto the pace? Or do slower start years usually suggest kind of a slower year overall?

Yes, I think each year has its own unique circumstances. This year, 2023, is marked by uncertainty, and companies are being very careful with their IT budgets, resulting in longer decision-making times. This is something we haven't experienced in previous years. As they've navigated these challenges, it's taken them more time to finalize their plans, and now they are ready to find the right people to execute those plans. Recently, we have noticed a delay in activity compared to what we would typically expect at this time of year. It’s not a change in our business model; rather, it seems we are just seeing a lag in getting things underway.

Yes. And what I would add to that, if we were to compare the beginning of 2023 to the beginning of 2024, probably the most material difference is we're hearing more optimism from our clients here in 2024 at the beginning of the year, even albeit the years have started out very similar. Whereas in 2023, there was a lot of concern with the customers. There were a lot of internal things going on within organizations, about holding back, about getting prepared to cut back, we are not necessarily hearing those types of things. So I think this is more of just a delay and pause. So it's kind of the equation of looking through that windshield. It was really cloudy in 2023. The windshield looks pretty clear at this point in time. And I think everybody is just a matter of where perception is of the overall economy, what's going to be happening with the Fed and rate cuts and all those dynamics. So I think everybody is still in a little bit of wait and see. But overall, I'd say a lot more optimism than what we were experiencing in the beginning of 2023.

Okay. That's really helpful color. Thanks for that characterization, Joe. I guess if we look at the long-term goal, thanks for the goalpost that you've kind of put up today, Am I reading it right, that to get to the 10% margin from the current profile. It sounds like most of the drivers are SG&A related, meaning that gross margins could be flattish at the current levels and then you're looking to take SG&A down to get to 10%? Is that the right read?

Yes. I think, Josh, this is Jeff. Good to speak with you. I think for the most part, Josh, when you look at the components of the benefit of scale, certainly, that is going to be leveraging our existing infrastructure at its leisure pace. When you think about the back office transformation program which we've been driving for a number of years now. But yes, that gives us the benefit of scale. Yes, that gives us better predictability of SG&A. The gross margin tie into that, when you think about Joe and Dave's comments earlier, gross margins were down, call it, year-over-year, about 120 basis points. As the economic skies start to clear to a degree, we would expect to recapture some of that gross margin. Obviously, in times where you've got a little bit more certainty in the U.S. GDP, certainly positive. Our direct hire mix would improve. Obviously, right now, it's a little bit depressed at about 2.5% but historically, we've been roughly 3.5%. So, I think as the economy starts to become more clear for our clients. We would expect to recapture some of the gross margin that we've lost but to your point, Josh, SG&A is a primary driver for us.

Yes, I would like to emphasize that we are focusing on stable margins as our planning mechanism. This is the strategy we are implementing, particularly in areas like direct hire. We continue to see success in the managed teams and project solutions sectors, which generally offer higher gross margins. While there are opportunities there, they are not currently part of our plan for improving profitability. We see that as a potential opportunity, but it is not something we are relying on at this time.

Our next question comes from the line of Marc Riddick with Sidoti & Company.

So a lot of my questions have already been answered. I was wondering if you could just touch a little bit on the cash usage, the announcement of the dividend boost and the share repurchase authorization. Maybe you touch a little bit on that and maybe share your thoughts on CapEx for the year.

Yes, Marc, good to chat with you. I know we put this in some of the prepared remarks but I think it's worth reiterating. I think the short answer on the capital side, as you should expect in 2024, very similar to what we have been doing, we've been at repurchasing shares for a long time. Actually before it was in vogue to be repurchasing shares in the face of a more difficult macro environment. We believe in our ability to generate significant long-term shareholder appreciation. I believe that organic revenue growth is naturally for us where to go. You avoid the disruptions that can tend to come from acquisitions in a human capital-centric business. So I think we've had this for quite a while, Marc. We gave the quote earlier on having 42 million shares in 2007 and about 19.5 million shares as we sit here today. When you take all in since 2007, we've returned slightly more than $900 million in capital through our dividend program and our share repurchases, that's significant. And yet again, our Board of Directors continues to support that deployment of capital by raising our dividend 5.5% which was our fifth consecutive year and also, at the same time, increase that share repurchase authorization to $100 million which I'll remind you, we also did last Q1 this time. So if you look at that, Marc and you look over the long term of what we bought back and we're probably in the high teens-to-low $20 range. So I think from a shareholder perspective, it's been very friendly and for us has been generating significant returns.

Excellent. And then any thoughts on maybe ballpark range as far as CapEx for the year?

Yes. I think CapEx, Marc, I would imagine somewhere between $6 million and $8 million in total for CapEx, it's about what we've been running at. We've obviously got our back-office transformation program which we talked about here that could tend to lift CapEx to a degree but the other thing is we've been rationalizing our real estate footprint over time. Leasehold improvements is another area of our CapEx that historically has been part of that, less so as we sit here moving into 2024. So I think it's got a netting effect as we move into '24. So I'd look at it as relatively flat with '23.

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

I was wondering if you could give us some color about how you're managing your sales people sort of account manager head count here after a couple of slow years. And what your recruiter head count looks like either sequentially or year-over-year, so that we can get a sense for what kind of capacity you would have to absorb and deal with an increase in demand should occur?

Yes, Tobey, this is Dave. I want to start by saying we have more than enough capacity to meet our current needs and to accommodate future growth. As you may know, our investments over the years aim to enhance our sales and delivery capabilities, enabling us to increase activity, which in turn adds to our capacity. This effort is ongoing as part of our investment strategy. According to Joe's earlier remarks, we've noticed some elongation in the sales cycle with increased activity. Year-over-year, there's been a slight decline in our overall sales and recruitment team. We are always reassessing the optimal allocation of resources. Ultimately, we've increased the number of salespeople compared to recruiters because our technology investments are aimed at making our recruiters more productive in sourcing candidates. We continually evaluate this situation, maintaining a long-term perspective. We are not solely focused on achieving maximum profitability during slower periods but are committed to long-term growth and feel confident about our position as we move ahead.

Yes. Tobey, we're playing for the other side, to Dave's point which is why we've actually netted up people on the sales side because as you well know, relationships take time to build. So we're in that build process playing for the other side because of what David mentioned, all the investments we've made on the delivery side, the recruitment side with technologies and we're also exploring other technologies. We have a pretty good model that we can ramp up recruiters very quickly. So we have great capacity right now. We also have to balance those things to make sure that we have enough requirements that our people can survive and we can feed them, that they can make the appropriate levels of income. So it's typically how we handle this point in the cycle, start ramping up on the sales side to prepare for the other side, balance the recruitment side. And then as we start to see job orders start to spike up and those types of things, we can quickly ramp up. We have a great internal recruitment function. Our leaders are locked and loaded. We know we can turn that down very quickly.

I was wondering if you could give some color from an industry vertical standpoint for your customers which ones are sort of relatively strong or relatively weak and include in there, if you could, financial services which I know tends to kind of be maybe a little bit more volatile than some other industry verticals.

Yes. I would start by saying it’s challenging to measure strength in any specific industry based on our quarter-to-quarter success because many drivers are tied to client-specific factors. That said, we have had sequential success in financial services, with a couple of solid projects there. We also saw good results in technology services, while energy and manufacturing were a bit weaker for us. Retail performed well in the fourth quarter. It seems that different industries excel or lag behind each quarter. So, I’ll begin my comment with caution and conclude on that note.

Okay. And last one for me. Any discernible difference in the cadence of demand exiting the fourth quarter and then here in the early part of the first quarter, between kind of the staffing business and managed services, anything you'd call out as better or worse in one of those areas?

Yes, to reiterate, we've observed a nice increase over the past couple of weeks. When I analyze the factors contributing to our business, our managed services segment has experienced more success during this phase of the cycle. This is a bright spot, and we've emphasized our ability to meet our clients' diverse needs more effectively. However, I wouldn’t characterize this as a seasonal trend; it appears to be a general pattern we've noticed, and not much has changed since our last discussion.

I would now like to turn the call over to Joe Liberatore for closing remarks.

Well, thank you for your interest in and support of Kforce. I'd like to say thank you to every Kforcer for your efforts, to our consultants and our clients for your trust in Kforce and partnering with you and allowing us the privilege of serving you. We look forward to talking with you again after the first quarter of 2024. Have a great evening.

This concludes today's call. You may now disconnect.