Kforce Inc (KFRC) 2021 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Kforce Q3 2021 Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to Mr. David Dunkel, Chairman and Chief Executive Officer. Please go ahead.

Good afternoon. I would like to remind you that this call may contain 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 this quarter's 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. We are very pleased that revenue and earnings per share both meaningfully exceeded our range of guidance for the third quarter driven again by the strong performance of our Technology business.

The nearly 30% year-over-year growth rate in our Technology business continues to be among the best in class in our industry. The exceptional growth rate in Q3 of this year follows on market-leading performance in 2020, where we saw only minimal revenue declines in technology during the height of the pandemic.

Strikingly, technology revenues are up nearly 24% from the Q3 2019 levels. It is clear to us that we have been successful at continuing to capture meaningful market share. The foundation for our current performance was built during the multiyear strategic journey that began more than 10 years ago to focus our business on providing high-end domestic technology services to innovative and industry-leading companies.

While this journey has neither been easy or perfect, we believe our strategic actions are the foundation of our success. The driver to our strategy was the recognition of the strategic role of technology will play in all functional areas within an enterprise, which has played out to an even greater degree than we had expected. There were simply no other market we would want to be focused in other than the domestic technology market as it has, in our view, the greatest prospects for sustained profitable revenue growth. Concurrently, we continue to make progress in our objective of migrating our FA business towards higher-end skill sets that are more synergistic with our technology offerings.

With our revenues now concentrated approximately 85% in technology, coupled with a complementary finance and accounting footprint, we are ideally positioned.

During the lowest point of the COVID-19 crisis, we identified several opportunities to assist our clients in providing resources to help key areas of relief efforts associated with the pandemic. The revenue streams from these projects provided us an important bridge to navigate through the pandemic. Not only did they allow us to retain the existing infrastructure in our business, but they provided an opportunity to increase investments that we believe will further enable sustained above-market growth in the future.

Our objective was to replace these nonstrategic revenue streams as they declined with a much higher quality technology revenue stream. Evident in our results is that we have executed consistent with our expectations, and I am grateful for our team's efforts in supporting these critical COVID initiatives, while also driving considerable success in our Technology business.

As we stated on the second quarter earnings call, we have not further pursued these opportunities. We continue to make progress in positioning our firm to have a more flexible hybrid-work environment through our Kforce reimagined initiative. Joe Liberatore, our President, will elaborate further in his remarks.

Our business continues to generate significant operating cash flows, and we were again active in repurchasing stock during the third quarter. The strength in our balance sheet and availability under our new $200 million credit facility allows us to be opportunistic with respect to returning additional capital to our shareholders while continuing to evaluate potential acquisitions. However, our belief is that a focus on organic growth provides us the best opportunity for long-term success.

Accordingly, we will continue to apply very stringent, cultural and financial criteria to any potential transaction as we are sensitive to the distraction an acquisition could create. Given our confidence in our future growth prospects, we expect to remain active in repurchasing our shares at current stock price levels.

As we look ahead, we are incredibly excited about our strategic position. I am so proud, in particular, of our highly tenured, strong management team and dedicated associates. We have the right team in place to capture additional market share within what we believe will be a continued strong demand environment for our services. It's our belief that the pandemic has exponentially elevated the imperative for companies to rapidly digitize their businesses, transform business models and drive productivity gains through technology investment.

I will now turn the call over to Joe Liberatore, who will give greater insights into our performance, recent operating trends and other insights into our operating environment. Dave Kelly, CFO, will then give greater detail on our financial results and position as well as our financial expectations and guidance for the fourth quarter. Joe?

Thank you, Dave, and thanks to all of you for your interest in Kforce. We continue to see unprecedented demand across our business and, accordingly, are experiencing record levels of revenue growth. Our exceptional overall performance continues to be propelled by the strength of our $1.3 billion high end technology business, which grew an excess of 8% sequentially and nearly 30% organically year-over-year in the third quarter.

The operating trends we are experiencing on Technology business have been impressive as front-end KPIs and new assignment starts have been extremely strong and the duration of our assignments continue to increase as well. Encouragingly, our new assignment starts were strong in September versus the full quarter and have strengthened further thus far into October.

Consultants on assignment increased 7% from the end of the second quarter to the end of the third quarter and has grown nearly 28% over the third quarter of 2020. We are seeing strength across virtually every industry we serve. We believe these trends are great indicators of our ability to continue delivering sequential billing day growth and sustaining our elevated year-over-year growth rates in the fourth quarter on an increasingly difficult comp.

While the clear driving factor to our technology growth is the number of consultants on assignment, we continue to see increases in our average bill rate, which grew 1.2% sequentially and 2.4% of already elevated prior year levels to approximately $82 per hour.

There has been much discussion and headlines surrounding the recent talent shortage and other staffing end markets, principally in lower skill areas that Kforce does not support as well as wage pressure at a more macro level. The reality for us is that we've been navigating supply-constrained environments for over a decade in our Technology business. So this is not new to us, and we believe that we are well equipped to address these challenges, and to believe, over time, wage pressure serve as a tailwind to our business through future bill rate increases.

We continue to see the acceleration of critical technology initiatives within our clients in areas such as cloud, mobile, data analytics, project and program management with a strong focus geared towards improving the consumer's digital experience.

The investments that we've made in front-end technology and process over the last several years have matured our capability to efficiently provide clients with highly diverse top talent at scale in a now boundaryless environment across the U.S. A significant accelerant to our overall technology growth has been the investments we've made and will continue to make in our managed team and solutions capabilities to meet the evolving needs of our clients. We have continued to add highly talented experienced resources to our team and are investing to arm them with state-of-the-art tools and technology. Data points that support the success we are experiencing in this higher-value capability are an increase in average bill rates of 11% from 2018 levels and a 25% increase in average assignment length from approximately 8 to 10 months over the same period.

We feel extremely confident in the positioning of our Technology business and the ability to continue expanding our market share beyond traditional areas of technology staffing. Given the momentum that we've carried into the fourth quarter, we expect revenues in our Technology business may grow approximately 29% on a year-over-year basis, which would represent in excess of 30% growth over fourth quarter of 2019. We are clearly continuing to take market share.

Our FA Flex revenues were down 41.3% year-over-year in the third quarter, which included an expected $44 million year-over-year decline from our supportive initiatives tied to the economic fallout and the recovery efforts from the COVID-19 pandemic. These revenue streams were approximately $8 million in the third quarter, and we expect them to further declined decline to approximately $4 million in the fourth quarter. We made a conscious decision to not pursue business beyond our existing commitments once it became clear the recovery is well underway, and this has allowed us to focus our efforts on our forward-looking FA strategy.

Our non-COVID FA Flex business declined 1% sequentially but grew 4% year-over-year. As we mentioned previously, we are transitioning our FA business towards a more highly skilled assignments, such as analytics and decision support that are less susceptible to technological change and automation and more synergistic with our technology footprint.

We will continue to support lower-end skill sets for certain clients where we have long-standing relationships that are strategically important to Kforce's overall ongoing success. We have seen natural assignment ends of lower-skilled FA roles in 2021, where strategic client relationships do not exist and expect that to continue into the fourth quarter. We expect our non-COVID FA revenues to be down in the mid-single digits on a year-over-year basis. And when combined with the expected COVID revenue decline, total FA Flex may be down over 30% year-over-year in the fourth quarter.

Direct Hire revenues in the third quarter increased nearly 11% sequentially and approximately 55% year-over-year as the macroeconomic environment has continued to improve. While this is not an area of heavy investment for us, it remains an important part of our portfolio to meet our client needs. We expect the Direct Hire revenues may see a typical seasonal sequential decline, but to increase over 30% year-over-year in the fourth quarter as clients continue to demonstrate a high degree of confidence in the recovery through the addition of full-time staff. We are continuing to invest in strategic initiatives and technologies that best position our firm for long-term sustainable profitable growth.

From a technology perspective, our fully integrated CRM and TRM systems are cloud-based and seamlessly integrate with other Microsoft offerings. Investments to further develop these tools along with enhancing capabilities and other areas are continuing. We believe great opportunities still exist to further enhance productivity, which will drive future profitable growth.

With great anticipation from our people, we announced in September that we signed a lease for our future corporate headquarters, which we anticipate occupying in the fourth quarter of 2022. This new space will be modern, open and technology enabled to provide a flexible environment for our people to work effectively. Our approach to the design of our corporate headquarters is consistent with the approach we are taking in the issue of our field offices across the U.S.

We are referring to this new era of Kforce work environment as office occasional, whereby, our people will have maximum flexibility and choice in designing their workdays that is rooted in trust and supported by the integrated technology aligned with our evolved operating model. We will have a remote-first approach but encourage our people to leverage physical-office space when desirable for activities best done through in-person active collaborations such as training, team building, client and candidate interactions. We expect our work environment to further improve the retention of our most talented associates as well as attract highly talented new associates.

Productivity metrics continue to improve across our tenured associates. We have continued to make measured investments in internal talent to take advantage of the heightened market demand while also investing in technology to further drive productivity improvements.

Overall, capacity remains sufficient to support our growth and should improve due to our continued investments in technology and greater enablement of our communication and collaboration tools and processes that have been so successful for us since we transitioned to remote work last March. We have supported and retained our best people, structurally reduced our fixed cost and are refining a more scalable operating model that we expect will result in positive operating leverage as our solid growth continues to compound, and we reimagine the future of how we work.

Our customer and employee satisfaction levels continue to be at an all-time high. We continue to carry the highest Glassdoor rating among our peers and maintain a world-class Net Promoter Score from our clients' consultants and are the most recognized firm by technology consultants per SIA.

I greatly appreciate the trust our clients, consultants and candidates have placed in Kforce. Our teams continue to inspire me daily as we work together, creating something beyond special for tomorrow and into the future to position Kforce as the most desirable destination for top professionals in our industry.

I will now turn the call over to Dave Kelly, Kforce's Chief Financial Officer. Dave?

Thank you, Joe. We are very pleased with third quarter revenues of $402.7 million exceeded the high end of our guidance. Profitability levels also exceeded the high end of our guidance with earnings per share of $0.96 in the third quarter.

Our gross profit percentage in the quarter of 29.6% increased 120 basis points year-over-year as a result of a greater mix of Direct Hire revenues and an increase in Flex gross profit margins, which improved 50 basis points year-over-year to 27.2%.

Flex margins in our Technology business were up 40 basis points year-over-year. As pay rates have increased over the past year, we've been able to effectively pass these increases through to our clients. Bill pay spreads have improved slightly year-over-year, partly as a result of our success growing higher margin, managed service and solutions revenues. We are also benefiting from slightly lower benefit costs.

Flex margins in FA expanded 130 basis points year-over-year primarily due to the decline in lower-margin COVID projects in Q3 2021 compared to a year ago as well as Flex margin gains in our non-COVID FA business as a result of the strategic shift of the higher-skilled roles. This strategic shift has allowed us to increase the average Flex margin for new assignment starts in our non-COVID FA business in the third quarter of 2021 by approximately 160 basis points versus the prepandemic comparable period in 2019.

As we look forward to Q4, we expect spreads in our Technology business to be stable with third quarter levels, though overall technology margins will be lower due to the usual seasonal holiday impacts of fewer billing days and increased paid time off.

In FA, overall margins are expected to have moderate expansion from our repositioning efforts and the further decline of lower-margin COVID projects. Should we begin seeing wage inflation within our consultant population, which we have not yet experienced in any meaningful way, we are confident in our ability to work with our clients to appropriately align building.

Overall SG&A expenses increased as a percentage of revenue by 130 basis points year-over-year, principally due to higher levels of performance-based compensation as a result of our record-setting revenue growth and continued technology investments. This trend is expected to continue for the remainder of the year.

Our third quarter operating margin of 7.3% exceeded the top end of our guidance by 30 basis points. We believe the improving quality of our revenue stream, continued productivity improvements and ongoing lower structural operating costs will collectively allow us to continue to invest aggressively in our business to drive sustained above-market growth rates while driving continued improvements in profitability levels.

On the second quarter earnings call, we mentioned that we anticipated to sustain and potentially accelerate investments in talent attraction within our Technology business and certain technologies to take advantage of the strong technology demand environment and to enhance our longer-term growth prospects. The impact from these incremental investments is expected to last through the first half of 2022, while additional leaseback costs from our recently sold headquarters will cease at the end of 2022.

We have previously stated that as revenues reached $400 million quarterly that operating margin would be at least 7.8%. We expect to return to this margin trajectory by Q2 2022, and also to derive annual savings of approximately $1.5 million as we transition to our new headquarters at the end of 2022.

We continue to investigate additional opportunities to improve our operating model to drive additional future profitability improvements. We've had great success in rebuilding our front-office technology processes and tools over the past 5 years. And as we mentioned last quarter, we believe that equal opportunity exists to drive significant efficiencies in the back office and dramatically improve how our back office supports the firm.

We are still in the preliminary phases of assessing the opportunities in this area. This transformation is expected to be planned in phases and involve upfront costs in each phase. With that said, once complete, this investment, along with other areas of opportunity, will enhance our ability to generate double-digit operating margins as we grow. We look forward to sharing further details on potential timing and impact on future calls.

Our effective tax rate in the third quarter was 27.5%, which was consistent with our expectations. EBITDA in the third quarter was $33.8 million, which represents a 9.2% increase from the third quarter last year. Despite the payment of approximately $19 million related to payroll tax deferrals stemming from the CARES Act of 2020, operating cash flows were $23.4 million in the third quarter.

We returned $20.2 million in capital to our shareholders via $14.9 million in share repurchases and $5.3 million in dividends. We ended the quarter with $15.6 million in net cash.

The number of billing days are 61 days in the fourth quarter of 2021, which are 3 fewer than the third quarter of 2021 and 1 less day than the fourth quarter of 2020.

We expect Q4 revenues to be in the range of $394 million to $402 million and earnings per share to be between $0.92 and $1. Gross margins are expected to be between 29% and 29.2%, while Flex margins are expected to be between 26.8% and 27%. SG&A as a percent of revenue is expected to be between 22.1% and 22.3%, and operating margins should be between 6.4% and 6.8%. We expect the seasonal impact to operating margins in the fourth quarter to be 70 basis points on 3 less billing days sequentially. Weighted average diluted shares outstanding are expected to be approximately 20.9 million for Q4.

The effective tax rate is expected to be 19.5% and reflects an anticipated tax benefit from the vesting of restricted stock that typically takes place in the fourth quarter. The reduced tax rate will provide approximately $0.10 of incremental earnings per share and is reflected in our guidance.

Our guidance does not consider the potential negative impact on the demand environment from a significant increase in COVID-19 variant cases; the effect, if any, of charges related to any onetime costs, costs or charges related to any pending tax or legal matters; the impact on revenues of any disruption in government funding or the firm's response to regulatory, legal or future tax law changes.

Overall, we believe we're in an exceptional place. We believe the strategic decision to focus our business in providing domestic technology solutions is paying dividends. And the range of guidance at the midpoint implies organic growth in our Technology business of approximately 29%. We couldn't be more excited about our future growth prospects with 85% of our revenues, focused in technology and an FA business that is more directly focused on complementing those technology efforts.

Our shareholders continue to benefit from strong performance and efficient capital allocation as exhibited by a return on invested capital of approximately 40%. Our predictable cash flows provide significant future flexibility to make investments and continue returning capital to our shareholders.

On behalf of our entire management team, I'd like to extend a sincere thank you to our teams for their efforts in outperforming market expectations through the adversity and uncertainty of the past 1.5 years and continuing to build on that success.

Operator, we'll now open the call up for questions.

(Operator Instructions) Your first question comes from the line of Josh Vogel of Sidoti.

A couple of questions here. First on when we think about managed teams and [solutions] offering, how big is of the pie is that today? What's the growth you've seen in the past quarters? And then I have follow ons from there.

Yes, Josh, this is Joe Liberatore. It continues to become a larger percentage of our overall tech business. It's outpacing the growth of our overall tech business by a considerable amount. So as we put out there a couple of years ago, our objective by 2024 was for this to be roughly 20% plus of our overall Technology business. And we're making great progress towards accomplishing on that objective that we got there.

That's helpful. And in the past, you've talked about it being about a 400 or so basis point higher margin versus tech staffing. Is that sustainable longer term? Or is there even a chance to expand upon that when you see even more economies of scale?

Yes, I would say, and then I'll let Dave Kelly add any additional color. Based upon what we're seeing to date, that's been pretty consistent for us over time. I think as we continue to get more experiences beneath our belt, meaning past performance, that provides us an opportunity to move to the next level in terms of the value add that we're bringing out to the clients. So as we move closer to what that true solution space to be, we do believe that there would be additional margin opportunity.

Now how that gets diluted across the overall business, it's really hard to say at this point in time. But where we're heavily focused right now is really in between that kind of staff augmentation and then when you consider what traditional consulting companies perform, mainly driven by our ability really to be nimble, a little bit more cost attractive than those legacy providers so that we can provide a higher value outcome, which is really more synergistic with the past performance that we've had with our clients. I would say these offerings really position us to take more ownership, while still providing the end client with the control over the solution that they're looking for. So this space really provides us an opportunity to improve margins from a long-term standpoint, really by leveraging our core recruitment capabilities. And we've elected to keep this business very pure within our Technology business within the defined offerings that we're bringing to the market.

So we're taking on varying degrees of responsibility, the more responsibility that we take on, the higher the margin profile starts to become. So very, very synergistic relationship between what we're doing in this space and staffing.

I think Joe said it well. And just as a point of clarification, right? So we talk about margins, right? So that's gross margin opportunity there of about 400 basis points, so yes.

Yes, of course. And clearly, a [dominant] player in tech capturing [structure]. But when we think about managed solutions offering and where you stand in the marketplace, in the past, you talked about it being a different buyer within your clients. So I was just curious when we think about the MSP work and opportunity today, is the business you're winning coming from an existing set of clients or more from those that you had and previously been working with?

Yes. The main business that we're capturing at this point in time, it's coming from existing clients. And when we talk about a different buyer, it's really -- there's different players that are involved in the decision-making process. But at the end of the day, the direct hiring managers that we have past performance with from a staff augmentation standpoint, it's those trusted relationships that are allowing us to capture this business. And these engagements are typically with those hiring managers that we've built relationships with over the course of many, many years.

Okay. Great. If I could shift gears, inflationary environment, well-documented labor shortages, especially in IT, I guess it's surprising to hear that you've not yet seen wage inflation amongst your clients. And I'm curious why do you think that is.

Yes. I would say, I mean -- and I mentioned it in my opening remarks, when you look at the business that we're doing, specifically in this managed teams and solutions where bill rates have escalated more than 10% over the last several years. So there is escalation that's taking place. I wouldn't say anything remotely like what we're seeing in the lower skill area.

I mean I share this with our team members. I go through this drive-thru car wash by a -- close to my house, and they're advertising for $17 an hour, full benefits. And I mean this is the person that's collecting cash as you go in. So I mean that's where a lot of the inflation -- wage inflation has happened. It is happening with technology specialists, probably not to the same degree on a percentage basis.

All right. Great. Just last one for me. And kind of fishing here. I know you're giving quarterly guidance, but I was just looking at FA next year and with the absence of the COVID work and as you transition to more highly-skilled assignments and away from lower bill rate work, we're basically looking at you, I'm backing into about $210 million this year.

I guess I'm trying to get a sense of what next year looks like, and how much more work do you have to transition away from offset by, I guess, organic growth in the other skill sets. Just like kind of an early read or targets you have for 2022 would be helpful there.

Yes. Yes, Josh, this is Dave Kelly. So obviously, what's going to change for 2021 to 2022, right? So we had north of $100 million of COVID revenue. So in the aggregate, obviously, you're going to expect your finance and accounting revenue to be down. I think as Joe said, we've had a nice bridge from that COVID revenue, obviously allowing us to continue to grow our investments in tech and have pretty good success in our strategic finance and accounting business, which is, he had mentioned, has performed as we had expected reasonably well.

So I think the strategic part of the business that we have is going to grow. We've done a good job. I think we made a comment at the beginning of the year that the business that we weren't going to continue to pursue would be burning off as we move through the year, that has been the case and the significant amount of that has burned off.

So as we look to next year, certainly, F&A year-over-year is going to be down, but that is really a business mix change that we are planning for and are very pleased with the footprint that we're left with, which is inclusive of, as I think Joe said, 85% to going on 90% tech. So a nice mix for us.

And Josh, I was just going to give you at least a little bit more for flavor so you get a little bit of better feel, right? When we talk about this repositioning that we're going through, some of the type of business problems that our team is now solving that historically we have and is, if you look at like a lean organization and lack of real-time data to make business decisions, we're currently working with a client to provide data analysts, data visualization, Power BI resources and analysts for shopper insights. So really, what they're trying to get after is looking at trend analysis for what's happening with consumer behavior. So we're supporting that multiple departments within this particular client from corporate logistics, e-commerce operations.

So I give that as the example because you can see how that really blends into the space that we're after from a technology standpoint and the synergy between where we're repositioning to with our Technology business, but yet getting after these analysts and senior analysts and compensation-oriented type roles above and beyond what one would traditionally call higher-end FA.

(Operator Instructions) Your next question comes from the line of Tobey Sommer of Truist.

This is Jasper Bibb on for Toby. I just wanted to ask about how you expect some of the remote work initiatives you talked about might improve your operating margins going forward. In practice, does this entail exiting some of the field office leases or just kind of leveraging the existing cost base across larger teams and recruiters?

Yes. I would say we're really looking at more so reshaping how the physical office is used on a move-forward basis, very similar to what I mentioned to my opening comments. So I think no different than what we're doing here with our Tampa corporate headquarters where we reduced our footprint by probably over 75% from where we were because our people will still be going into the offices. We'll still be utilizing the offices but not for the 9 to 5 daily in the office, when it really makes sense for people to get together for those human interaction elements that are more productive, whereas, you have to realize in the nature of our business, our people spend a lot of time on the sales front. They're out at the customer site a high percentage of their day, historically.

On the recruitment delivery side of the house, those people are on the phone a heavy percentage of their day. So what we found as we've gone through the pandemic and looked and observed how our people have been operating. If there's a lot of things that they can do from a remote standpoint actually more effective than when they're physically having to burn time going into the office and then time home on the commute. So we're really excited about the overall model. We've been working on this model almost from month 2 into the pandemic.

We pulled together our best people. And this is totally technology enabled. In fact, we're rolling out some technology that we've been working on for the better part of the year here in the coming month or 2 that really further operationalize our ability to keep everybody connected, whether they're in office or whether they're remote or whether they're working from a Starbucks. So we're very excited about the productivity gains that we've already seen. I mean our productivity is up another 20% this quarter on a year-over-year basis.

So we've continued to see our people become more and more productive with this much more flexible type of a workflow that we're really empowering with technology and processes.

Yes. So just to add just a couple of other details, as Joe talked about, great color from Joe. So how does this manifest itself? We talk about how we're changing the office footprint. This happens gradually over a number of years. Obviously, we've had offices around the country as we renew those, it gives us an opportunity to think about real estate opportunities and office occasional strategically over the next couple of years.

I also mentioned that this is not just a field office opportunity, and Joe mentioned, our headquarters at the end of next year, when we occupy that, we'll see some opportunity there for future -- for additional reduction of about $1.5 million a year in operating costs from a smaller footprint there. Technology-enabled, really points to what technology can do for you and part of the reason why we think technology is a great business to be in, right?

So that allows people, as Joe said, to work all around the country for our clients as well. So I think it is a change that we are seeing in the marketplace that benefits us both on the top line and the bottom line.

And I would say our -- Josh, what we're hearing from our people because we've constantly been surveying them throughout the course of the pandemic and now is moving into post situation, yes, what we're hearing from our people is different than what you read in the newspaper or any white paper out there. In fact, there were just a couple of surveys that came out on technology-specific individuals.

I mean, 7 out of 10 technology workers basically said, if they can't have that right balance of in-office and remote, they're looking for a new job. There was just actually a Kaiser Family Foundation survey that just came out as well, talking about vaccination, vaccinated, unvaccinated in mandates. And so we're really seeing a reshaping of the overall workforce where people are looking for choice and flexibility. And we've been out in front of this, like I said, literally since month 2.

And we're moving to where the people want to go versus trying to force individuals and doing things that they don't want to give up the freedom that they have. But yet, they do want to get together with the associates and get together with clients and so on and so forth. So there's a real nice balance that can be created here.

Yes. No, makes sense. And then I just want to ask, are you seeing any changes to procurement or customer behavior that might be contributing to some of your market share gains? I mean we've heard a bit about vendor consolidation at larger accounts. Is that something you're seeing at a material level at this point?

Yes. I would say the #1 driver to what we're experiencing, and I think the overall space is experiencing is digitization. It's table stakes in this new environment that we're in. I mean there's no company out there that can afford not to opt into digitizing their business. And they can't even opt into really slow adoption. I mean this is -- we're in a massive digital transformation across the board.

So I would say, one, the marketplace is there. I mean unlike anything I've seen in my 33-plus years, even in the craziness of the dot-com, we've never seen anything as structurally driven across all industries and all organizations of what's taking place right now. So I'd say one thing is the market is there. And you're hearing that from other comparable providers to Kforce out there that their business is performing well.

I would say, in addition to that, I think our people are executing on all fronts. And we're very blessed to have a blue chip customer base that are at the forefront on driving a lot of these things. So we probably have some momentum on those fronts that maybe some others don't have quite as much momentum just because of the nature of all the work that we've done on our strategic portfolio over the better course of the last 20 years, constantly refining it. So it's really twofold.

It's the markets there. And then our teams have just done a tremendous job of executing. And then I would say the third leg of that stool is our people become -- are more productive because of a lot of the things that we've put in place over the course of the last 18 to 20 months.

Got it. Last question for me. Some of the larger IT services companies were citing headwinds this quarter from higher-than-expected attrition. Is that something dynamic you've seen in your business with either recruiter churn or consultants just ending assignments or a way to pursue other opportunities?

Yes. I mean you don't have to go forward to read something on the great resignation, which is impacting organizations across the land. And again, I think part of this is driven by people trying to align their views and how they desire to work with how organizations are requiring them to work, not to mention that, obviously, the remote capability of individuals has opened up a much broader job opportunity.

We're starting to see more of what I'll call the cost impact, whether it's East Coast or West Coast going into Central U.S. paying comparable wages to try and attract talent and allowing those individuals to remain in their geographies. So I think everybody is feeling this. I think those organizations that aren't being progressive and listening to the employees and working with the employees are probably feeling a little bit more pain.

I'm going to give you a prime example. We have certain clients that we're working with that are preparing us to be prepared to help them staff up as they're implementing some of their vaccine mandates. So the good news for Kforce is we're not -- we don't have a designated pool of individuals that we're trying to redeploy like a large IT services organization that might not be aligning with what the individuals are looking for. Our objective is we go into the marketplace and we match those individuals, not just from a skill standpoint, but from what they're looking for from an overall employment experience, and we match those with the organizations that align.

So actually, I think a lot of the things that are taking place in the marketplace are really a great backdrop wind in our sales, I guess, for lack of a better term versus any type of remote headwind for us.

(Operator Instructions) Your next question comes from the line of Mark Marcon of Baird.

Congratulations on the strong results. Wondering if you can talk a little bit more about the last point that you brought up with regards to consultants basically reassessing where they want to work. Are you seeing any sort of behavior where people are becoming more confident in their ability to work when they want to work on the assignments that they want to work, and therefore, are more likely to stay in a contract role relative to seeking a permanent role?

Yes, Mark, I would say on the last part of that question, we haven't really seen anything shift with the consultant base, which means we have a high percentage of our consultants that end up converting to full-time employees with organizations over time. At this point in time, we're back to pretty much the same levels that we saw prepandemic. So I would say it's still pretty much business as usual there. I think these other things come into play as to is this organization the right match for me, not just what I'm going to be working on, but just some of the views and some of my desires. So I'd say that's 1 piece of the puzzle.

The other aspects that we're seeing is have the consultants really changed their tune. The consultants they realize this is all about reference, how referenceable they are. So consultants are finishing the obligations they have out there. Are you seeing some people that might be getting bought away for very large increases and ending assignments early? Yes. But that always happens at different points in time, whether it's something happening specifically within the organization, within an industry.

So I wouldn't say that there's anything pervasive out there. I mean the real key is the Canada pool today is really now more geographic agnostic than it's ever been. So that's really opened up their opportunities to explore a broader spectrum of opportunities. And one of the things we really like about the managed teams and the solution space is what we're seeing is those types of engagements actually are probably even more pro, people being in a remote situation than when somebody is just performing a straight-up staff augmentation.

So I mean it's exciting times. You've been around this industry a long time, as I have. And there's -- the pendulum is always in one favor or the other. It's either the employee or consultant is in really more control of driving the market or the employer is when you go through during the pandemic. People were not making moves at all because everybody was trying to hold on to the job they had. So employers had a lot of power then, but those employers didn't treat people right through those times. They're feeling probably a higher rate of attrition right now than those that were very empathetic and worked with the employees.

So I would say right now, the last time we've ever seen anything to the magnitude of where it is right now, where the employee and/or consultant or job seeker really is in control was probably at the peak of the dot-com, and I'd say it's even more exasperated right now than it was even at that point in time.

Yes. I mean I remember during that time period, there were some people who were leaving permanent positions in order to take contract positions just to control their work-life balance a little bit better and to take time when they felt like it. So I just didn't know if that was coming to the fore. Can you talk a little bit more about managed solutions with regards to the geographic agnostic behavior that you're seeing with regards to the consultants and the clients and what percentage of the jobs could end up being done remotely that you're filling on the IT side relative to, say, a year ago, 2 years ago?

Yes, I would say one of the facts that has come out of everything that the world has been through over the course of the last 20-plus months, if there is one skill category that has clearly proven the capability of being highly productive and effective in a remote environment, it's technologists, far and away from probably any other skill -- skill area that you could go out into the marketplace and define from a broad-based standpoint. And especially the higher up you go in that skill category, the more remote capable those skills are.

Obviously, if you're down at the lower end and somebody is dealing with brake fix or implementation at the desktop, those people have to be on site, but that's not a lot of where Kforce plays. I mean our average bill rate is $82 an hour. So there's no hiding from that. We're not doing a lot of that lower-end tech work. So very, very high percentage of our overall workforce is remote capable. And the clients see that as well.

You do have certain clients and a lot of this is, I would say, manager-driven of wanting to get back to the way that the world used to be that somebody is not productive or I can't tell how they're effectively they're really working unless I can see them. I mean there's been a plethora of articles that are out there that are guiding people and trying to wake people up on this front. But overall, I just think that when you're in this solution outcome-based scenario, there is a deliverable. So the client actually doesn't have as much of vested interest, am I getting every hour or work out of that person. So that's why I'm saying, especially in that world, we even see the clients being more receptive to remote workers in those scenarios. But even on the staff log side, many clients have realized that to get the best talent in the marketplace, that they're going to have to adhere to what individuals are looking for from this life-work balance.

Great. And then you've obviously done a great job in terms of raising the bill rates and maintaining the Flex gross margin. Wondering how you're thinking about that beyond the current quarter, but just thinking about next year and the following year, assuming that the environment stays the same, how would you assume that, that's going to end up evolving?

Mark, Dave Kelly. I quite frankly think that I wouldn't expect to see a change in those behaviors, right? So we've seen over the course of the last any number of years, even frankly, through the pandemic, rising wages, rising bill rates, and we've maintained margins. We've maintained gross margins in times that were of lower demand and now increasing demand. And I don't have any reason to expect that, that will be any different as we move forward.

And frankly, rising wages are a friend because we are able to pass those through higher bill rates. We have a bigger pool of gross profit dollars at the end of the day. It is, quite frankly, a positive for us to be in this type of an environment. So I don't see anything really changing. I think we've -- I mean, I've been here 21 years, not as long as Joe, but we've always done a good job managing those rising pay rates, and I expect that will continue to be the case. Our leadership is extremely well with win and they understand the value that we're delivering to our clients and our clients, quite frankly, understand it too.

So it sounds like gross margins -- Flex gross margins will probably be stable, obviously, bill rates going up. How should we think about the SG&A leverage? Obviously, you gave us color in terms of going out through Q2 of 2022. But like beyond that, like at what point should we think about the margins really expanding on a year-over-year basis in a material way? What revenue level would we need to see? You've obviously saw margins up, but just a little bit more color there.

Yes. I mean a couple of points that I would make, right? So as we talked about, we're making investments now, right? So as we get into 2022, the expectation, I think, that we have is that we're going to see some improvements in margin. And we're going to see them because of those investments diminishing. We talked about this office-occasional progression that we expect to make, the investments that we have been making in enhancing productivity.

And we've indicated at $400 million, that 7.8% margin is doable in the path that we were on -- we are on, I should say, will eventually, we think, lead to double-digit margins. So it will be gradual. We've got investments that are generating improvements, and we continue to expect that to be the case. So it will be gradual as we grow improving margin profile.

Dave, could you just give us a little bit more about -- you just said double-digit margins. What revenue level or what incremental margin should people build in, once we hit that -- get past that second quarter of 2022 and kind of the glide path?

Yes. Mark, I don't think I've put a revenue figure out there. And as we make investments, sometimes, it's not precisely linear anyway. So I think I would say it would be gradual. We're confident that we're on the right path, but haven't put a figure out there. So I think as we continue to grow and certainly as we grow at 29% year-over-year in tech, the opportunity to generate greater incremental profitability should manifest itself reasonably quickly. But we think we'll build -- continue to see -- continue improvements. And certainly, as we deliver the fourth quarter results, we'll certainly have more to say about it.

Great. And then lastly, just capital allocation priorities. I mean clearly, you've been buying back stock. How should we think about it?

I think you should think about that nothing has changed. It's clear that the organic growth trajectory that we have and not being distracted through acquisitions has served us quite well as evidenced by growth rates that I think are pretty darn good and don't want to stray from that path. We think that, over the years, and continue to return capital to shareholders through increasing the dividend as well as buying back stock is the right path for us. And unless something significant were to change, which I don't expect that it will, that path should continue.

There are no further questions at this time. I would now like to turn the call back to Mr. Dunkel.

Okay. Great. Thank you, and thank you all for your interest and support for Kforce. I really want to take this opportunity to say thanks to each and every member of our field and corporate teams for just extraordinary efforts and incredible results, and to our consultants and our clients for the trust that you've placed in Kforce in partnering with you and allowing us the privilege of serving you.

We delivered another quarter of exceptional results, and we look forward to talking with you again after the fourth quarter and early '22 and delivering more exceptional results. So thank you very much, and have a good evening.

This concludes today's conference call. Thank you for participating. You may now disconnect.