Kforce Inc (KFRC) 2023 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Kforce First Quarter 2023 Earnings Conference Call. (Operator Instructions)

And now at this time, I'd like to turn things over to Mr. Joe Liberatore, President and CEO. Please go ahead, sir.

Good afternoon. This call contains certain statements that are forward-looking. These statements are based upon current assumptions and expectations and are subject to risks and uncertainties. Actual results may vary materially from the factors listed in Kforce's public filings and other reports and filings with the Securities and Exchange Commission. We cannot undertake any duty to update any forward-looking statements. You can find additional information about our results in our earnings release and our SEC filings. In addition, we have published our prepared remarks within the Investor Relations portion of our website. On this call, we 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 these items and events have on the financial results. Our earnings press release provides the reconciliation of differences between GAAP and non-GAAP financial measures. 

Let me start by offering a few comments about the current operating environment, which is informed by our internal metrics, discussions with clients, and other industry data points. There is a heightened degree of uncertainty in the macro-economic environment as we sit here today versus one quarter ago with 2 25 basis point Fed interest rate hikes; the collapse of several financial institutions; a recent rise in unemployment claims and other factors that all point to a higher likelihood that the U.S. economy could fall into a recession. Our clients, broadly speaking, continue to exercise restraint against the backdrop of this uncertainty as it relates to certain technology spend that can be moderated without significant impacts. We have not seen; however, instances of mission-critical projects being postponed.

As to our financial performance in the first quarter, revenues were at the low end of our guidance and our Technology staffing and solutions business continued to grow on a year-over-year basis even off of tremendous prior-year comps. Earnings per share was at the midpoint of our expectations despite revenues falling at the bottom end of our guidance, which reflects our highly variable and performance-based cost model. The pace of decline as we finished the first quarter moderated significantly in our Technology business as compared to the month following our last earnings call. As to our second quarter expectations, we anticipate the average number of billable consultants on assignment to be relatively stable with current levels. 

As we look further into the future, we remain steadfast in our beliefs in 2 areas. First, we believe that the long-term secular drivers of demand in technology are very much intact and will persist in the future irrespective of how the short-term environment plays out. The strength of the secular drivers of demand in technology accelerated coming out of both the Great Recession and the Pandemic and it remains clear to us that the broad and strategic uses of technology, including the recent headlines that GenAI technologies have garnered, will continue.

Said simply, technology investments are simply not optional in today's competitive and disruptive business climate where the talent necessary to make those advancements remains in short supply. Our core competency is rooted in the ability to identify and provide these critical resources real-time at scale in virtually every industry. While our business is not immune from the impacts of economic turbulence, technology spend is increasingly resilient and less correlated than other areas where companies utilize flexible talent, as was reflected in the 2 most recent economic downturns. There is simply no other market we would want to be focused in other than the domestic technology talent solutions space. 

Second, we expect the sharpening in our focus that has occurred over the last decade to continue to contribute to our market outperformance. We have built a solid foundation at Kforce and are partnering with stable world-class companies to solve complex problems and help them competitively transform their businesses. Our balance sheet is clean, and we expect our strong cash flows to continue providing us great flexibility to return significant capital to our shareholders. We have a solid, highly-tenured team in place with the expectation of continuing to capture additional market share.

Our Executive Leadership team has been through multiple economic cycles and has the experience to skillfully navigate through whatever may lie ahead. We have continued to make strategic investments to both enhance internal productivity and meet the needs of our customers in various engagement models. Our team has also continued to meaningfully advance our multi-year effort to transform our back-office operations. In addition, we published our 2022 Sustainability Report in mid-February 2023, which not only memorialized our recent accomplishments but also outlined our opportunities for continued growth and evolution with our 2023 goals that push for even greater progress in each area of ESG. 

We remain committed to our Office-Occasional work environment, which continues to positively impact the lives of our associates by providing our people with maximum flexibility and choice in designing their workdays that is grounded in our trust in them and supported by technology. This has resulted in improved retention of our associates and positions Kforce as a destination for top talent. Kforce is proud to be certified as a Great Place to Work, which distinguishes Kforce as one of the best companies to work for in the country. As we look ahead, we expect to continue making the necessary investments in our business to further advance our enterprise priorities to sustain our long-term growth ambitions and attain double digit operating margins while prudently managing our operating costs.

Kye Mitchell, our Chief Operations Officer, will now give greater insights into our performance and recent operating trends. Dave Kelly, Kforce's Chief Financial Officer will then provide additional detail on our financial results as well as our future financial expectations. Kye?

Revenues in our technology staffing and solutions business grew 1.4% on a year-over-year basis. Overall revenues declined 2.6% year-over-year. On our prior earnings call, we indicated the sales cycle had been longer than usual because of the uncertainty in the macroeconomic environment and select clients had begun pruning resources. We typically see a gradual increase in consultants on assignment throughout Q1, but that was not the case this year. Clients are telling us that they are committed to starting new projects that are mission-critical to them and we have seen many recent wins across multiple industries. Overall average bill rates in our technology business remain near record levels at approximately $89 per hour and were up 4.7% year-over-year.

The slight decline sequentially is primarily due to a change in business mix, and we expect average bill rates in the near term to be relatively stable given the continued scarcity of highly skilled technology talent. Our longer-term view continues to be that average bill rates should help our business, especially as the mix of higher-value service offerings increases. Most of our consultants are in higher skill set areas which are not as sensitive to the changes in the economy. We do very little business in lower bill rate areas which are most affected by the economy. This mix is expected to provide significant revenue and margin stability. 

Our clients remain focused on critical technology initiatives in the areas of cloud, digital, UI/UX, data analytics, project, and program management. Clients are telling us that they want to keep investing in technology to stay competitive, even if the economy is uncertain. While clients are currently being more careful about which projects they choose to invest in, our historical experience is that companies quickly shift their priorities and invest more in technology once the macro-economic landscape becomes clearer.

Our clients want us to continue to expand our service offerings from traditional staffing to managed teams and project solutions. Our integrated strategy leverages the relationships we have with world-class companies and all our existing sales, recruiters, and consultants to bring higher value teams and project solutions to solve our clients' challenges. We have a broad portfolio, which includes large, market-leading customers, leading to our sustained above-market growth rates. We believe this customer base will be a positive catalyst for continued long-term, sustainable, above-market growth. Our largest industry vertical, Financial Services, comprises less than 17% of technology revenues and is concentrated in what we believe are large, stable financial institutions. Layoffs within technology companies have continued to dominate the headlines in 2023.

To offer you some perspective, only 5 of our top 25 clients are in the technology services or technology manufacturing space. Total revenues for those 5 companies were down approximately 4% year-over-year as compared to our overall growth of approximately 2% in the first quarter. Even though we might be susceptible to short-term disruption with certain clients or industries, we expect our diverse client base of world-class companies will benefit our shareholders in the long term. We expect second-quarter revenues in our Technology business to decline sequentially in the low-single digits and decline in the mid-single digits year-over-year off very strong comps in the second quarter of 2022. 

Our overall FA business declined approximately 28% year-over-year, which reflects the year-over-year impact of business we no longer support due to our repositioning efforts as well as a more challenging macro environment. Sequentially, our FA business experienced a 17% decline largely due to the expected wind-down of a short-term project supporting Hurricane Ian recovery efforts. We expect revenues to be down in the mid-20% range on a year-over-year basis in the second quarter, which reflects a sequential decline of near double-digit levels as the short-term project concludes.

We continue to support our FA business and improve its alignment with our Technology business. Evidence of this progress is that our average bill rate in FA, excluding the Hurricane Ian project, in the first quarter of 2023 is $52 compared to $38 in the first quarter of 2020. As usual, we are managing associates' productivity and are focused on retaining our most productive associates so that we are positioned to take advantage of the market when it reaccelerates. We also continue to make targeted investments to improve our managed teams and project solutions capabilities.

We're happy to announce that we recently received the highest rating for corporate culture from Glassdoor, as well as the highest ranking in our industry. We're thankful for the trust our clients, consultants, and candidates have in us, and we could not have achieved our first quarter results without our incredible team. Our people are the reason for our success, and we are grateful for their hard work and dedication.

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

First quarter revenues of $406.0 million declined 2.6% year-over-year and earnings per share were 82 cents. Overall gross margins decreased 40 basis points sequentially and 160 basis points year-over-year to 28.1% in the first quarter due to a combination of a lower mix of direct hire revenue and a decline in Flex margins. Flex margins of 25.9% in our Technology business declined 20 basis points sequentially and 90 basis points year-over-year due to higher healthcare costs and modest declines in bill-pay spreads due to heightened price sensitivities and changes in business mix.

The year-over-year decline in Technology Flex margins is fairly typical of what we have seen in prior slowdowns; and we typically see margins recover as the macroeconomic environment stabilizes. Our ability to maintain reasonably consistent margins, even during times of economic slowdown is reflective of the supply/demand imbalance for highly skilled technology talent. As additional reference, margins in our Technology business in 2022 were consistent with 2021 and 2020 levels. 

Technology talent has been scarce for more than a decade and we expect to see continued wage increases over the longer term and relative margin stability. Flex margins in our FA business increased 10 basis points sequentially and have improved nearly 200 basis points over the last 3 years as our mix of business has improved. As we look forward to Q2, we expect spreads in our Technology business to be relatively stable with first quarter levels, though overall Technology Flex margins will be higher in Q2 due to seasonal payroll tax resets that occurred in Q1. We expect clients to be more price sensitive in the current macro environment. However, as clients increasingly engage us for projects critical to their ongoing success, including managed teams and project solutions engagements that are typically higher margin opportunities, this also supports overall margin stability. 

Overall SG&A expenses, as a percentage of revenue decreased by 80 basis points year-over-year. Given our exceptional growth in 2021 and 2022, our compensation plan structure rewarded our top-performing associates with very significant bonuses and commissions. With growth coming off those historically very high levels, we are generating leverage in our SG&A costs through lower overall compensation costs. We have also been successful at driving greater cost efficiencies from our real estate portfolio given our Office-Occasional model, which has allowed us to reduce overall square footage by approximately 40%.

As we continue to transition our remaining office leases over the next 3 years, we expect to generate additional savings from further reductions in overall square footage. It is also important to note that we are closely monitoring the landscape and maintaining significant diligence in every area of discretionary spend. This allows us to generate additional SG&A leverage while also maintaining investments in critical strategic initiatives. We expect SG&A expenses as a percentage of revenue to decrease slightly sequentially in Q2. 

Our first quarter operating margin was 5.8%, which was at the top of our expectations. Our effective tax rate in the first quarter was 27.5%. Operating cash flows were $19 million and our return on invested capital was approximately 45% in the first quarter. We have a balance sheet with very little debt and expect to continue generating close to $120 million of operating cash flows in 2023, regardless of the operating environment. We have had a long history of returning capital to our shareholders. Since we initiated our dividend in 2014, we have increased it 360%.

In addition, since 2007, we have reduced our weighted average shares outstanding from 42.3 million to 19.7 million, or more than 50%. All in, we have returned approximately $850 million in capital to our shareholders since 2007, which has represented approximately 75% of the cash we generated, while significantly growing our business and improving profitability levels. During the last 2 years, we have returned over 100% of cash flows through repurchases and dividends. Our plans going forward are no different as we remain committed to returning capital to our shareholders regardless of the economic climate.

With respect to guidance, the second quarter has 64 billing days, which is the same as the first quarter of 2023 and the same as the second quarter of 2022. We expect Q2 revenues to be in the range of $392 million to $400 million and earnings per share to be between 94 cents and $1.02. Second quarter earnings per share will be positively impacted by approximately 12 cents due to seasonal impacts of annual payroll tax resets. Our guidance does not consider the potential impact of unusual or nonrecurring items that may occur. While the current operating climate is certainly challenging, we remain 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 back-office transformation efforts that will help drive long-term growth and the attainment of double-digit operating margins in the future.

On behalf of our entire management team, I'd like to extend a sincere thank you to our teams for all of their efforts. Operator, we would now like to turn the call over for questions.

(Operator Instructions) We'll take our first question this afternoon from Mark Marcon at Baird.

I'm wondering with regards on Tech Flex, can you talk a little bit more about like what you were seeing in terms of monthly trends and some of the discussions that you've had with clients just in terms of the types of projects that they're pulling back on or showing more hesitancy on relative to the ones that they're continuing with?

This is Dave Kelly. I'll start and then I can follow up on some of the clients. So just to kind of reiterate. We started, obviously, the year as we typically would with a lower headcount we saw, as we have mentioned, especially in our larger clients, some pruning. So we saw some declines in headcount. As we moved into February and March, certainly, those declines and the significance of them dissipated. And as we kind of ended the first quarter and as we look forward to the second quarter, we are at a point where we're relatively speaking, stable in terms of headcount trends in technology. So our expectation as we move into the second quarter is for that to continue at some -- at that level of parity.

Yes. So Mark, I'll just add a little bit. In terms of client demand, there's still a big need for modernization. I think Microsoft has said their cloud business, for example, I believe, it was up 16%. We're seeing clients continue to invest in cloud, continue to migrate there, continue in digital transformation to try and make complete more productive. We saw recent wins in the RPA space, where they're trying to get the robotic process automation, so they can do more with less people. So we're seeing a lot of different trends in those areas, investments continuing to be made. The sales cycle is probably still longer than what we've seen in the previous 2 years, but that's more in line with what we saw in 2019, 2020 in terms of just overall sales process.

Great. And then with regards to the consultants that you have out on assignment, can you just describe like what percentage of them would be say, below $60 an hour or might have lower levels of technical expertise like help desk things along those lines as opposed to some of the higher-end skills.

Yes. So I'll start by repeating I think one of the Kye's comments, I think our average bill rate is almost $90 right? So generally speaking, and I think one of the things I think is really important to note about our revenue portfolio and technology is pretty highly concentrated around that high bill rate. So we do very little amount of lower-end skill set business, part of the reason why I think we've had such success in the long term. These are mission-critical roles that companies can't afford to let go, application development and roles like that. That's why we've seen such stability and that's part of the reason why we've had the length of assignment continue to increase on average with the portfolio. So pretty highly concentrated around that $90 an hour bill rate mark.

Yes. And I think that's why too, we feel long term, those strategic decisions we need to move upstream to those higher bill rates and to look at the areas where people are going to continue to invest in some areas I just mentioned, those are areas where people have to continue to invest. And so I think we've seen a little bit of churn in a little bit in that lower level space, but it's such a small percentage of our business that we're -- I think it was the right call several years ago to start moving that footprint up towards those areas.

Yes, Mark, this is Jeff. This was all by strategic design. When you look at how the technology landscape is evolving. Those lower-end roles were more right for really disintermediation. So we've been after this for the better part of over 10 years in terms of migration out of that type of work as well as that type of work was also primed for offshoring and those types of things. So we've been on this migration upwards to the higher skill areas for Placement. So that's why it's such a small percentage of our overall revenue at this point in time.

And I know it's obviously really early, but we're getting investor questions about it. And so I'm wondering if you could share your perspective with regards to the types of discussions that you're hearing, even if they're really preliminary from clients with regards to their initiatives as it relates to generative AI. Obviously, IBM made some news recently in terms of what they were thinking. But wondering how broad those types of discussions are what you're hearing and what the opportunities are for you to enhance the skill sets of your current consultants?

Yes, it's a great question. And as we all know, obviously, we're early on here. I mean I would start by -- we view this as a really exciting times on not just the Gen AI front, but just on technology as a whole. Having been involved with the technology space for the past 35 years here at Kforce, we've seen everything, right? I mean we've seen things move from the mainframe to PC, and then they move from PC to laptops and now mobile devices. And over that same period of time, we experienced the introduction of the Internet. You remember the days of landline dial-up connections.

Now we're talking 6G. And then data, people couldn't leverage data. Now we're in this era of big data, and I still think we're very early on in how people are managing that. And we've seen everything move from being housed in data centers. Now everything is migrated to the cloud. And then over that same time period, you can pretty much purchase any product now from an e-commerce standpoint. First, we did that by website. Now we're doing it by app.

So I mean I could go on and on and on. I guess my point in going there is there continues to be so much technological transformation occurring in the overall broader space. So our view of ChatGPT as well as AI tools, is this is just yet another area to further drive efficiencies and productivity. And I mean that's part of what gets us excited when we get out of bed every morning with virtually 100% of our business focused on providing technology, talent and the solutions to world-class entities across all industries. 

Different industries are going to see different opportunities. So when we talk about the strength of secular drivers in technology, I mean, that list that I went through and AI is just another technology within that bundle really is what gives us the confidence in the long-term sustained demand environment of technology. So ChatGPT, and other generate AI tools, I mean they are in such early stages and we suspect that there's going to be many powerful and impactful applications. But with that said, early on, we -- I think -- and we're starting this from our clients.

Everybody is taking a little bit of caution because of the reliability of output from these tools, you got to be sensitive to privacy concerns and other potential uses of the technology. So net-net for us, we view this as a tremendous positive opportunity for our business on many fronts as well as our internal things. We're already flushed out all of our use cases. And I will tell you, most of those use cases really drive efficiency and productivity internal. And I think we are an example with the same thing we're hearing from our clients.

And then, Dave, can you talk a little bit about the operating cash flow target of $120 million. What are you thinking in terms of DSOs? And what are you thinking about with regards to CapEx over the course of the year?

Yes, Mark, so I'll just kind of go in backwards order, right? So CapEx obviously continues to be a small part of our business, right? So I don't expect that to change materially from any prior years. In terms of DSO, I think that I didn't mention, I didn't talk about the accounts receivable portfolio, but it continues to perform very well. As you might expect, right? Our preponderance of our business is with the Version 500 high credit quality customers. So I look at that and we manage it well. And quite frankly, it's performing exceptionally well.

So as it relates to cash flows, our business obviously very resilient as things increase and profitability improves, we generate a lot of cash. Obviously, revenues here have slowed a little bit. That results in an accounts receivable portfolio generates a lot of cash. And so very strong cash flow business. And I guess I would be remiss if I didn't say we continue to prioritize returning cash flow to shareholders through dividends and repurchases. I think I mentioned in my remarks, we've returned actually in the last couple of years, 100% of cash flows, almost 100% in the first quarter as well. So the story really remains the same.

We go next now to Trevor Romeo at William Blair.

First, it sounds like maybe there's a divergence between strong demand for some of the more critical managed teams and project solutions versus clients kind of pulling back on spending, which might be affecting the pure staffing side a bit more. On that second part about clients pulling back, does that feel more to you like a pause or a true pullback at this point? I guess, can you just give us a sense of what those conversations are like?

Yes. I don't necessarily agree with that. I think when we look at it, clients are moving all of that into that SOW, consulting, side of things. And we're seeing still demand pretty similar across the board. I think if we look at retire, it might impact things there, but from the overall staffing, consulting side, and we see very similar trends on both sides. I think clients are continuing to invest. They need to invest in technology to stay current. Very few have said they're canceling things.

It's more, like I said, even in Q1, a pruning of may be able to do this with the smaller pod of people and just extend how long the project is going to take us. Again, I also think it's all about access to the right scale. It's still a very tight candid pool. And what the BLS numbers came optics last month, they were up. And even all Street Journal states, but companies have announced these layoffs like even on Microsoft and Meta. This has been offset by hiring elsewhere in the industry, and that's what we're seeing.

Yes. Let me give you a data point, by the way, right? So we talked a little bit about bill rates. Our bill rates on new assignments continue to increase, right, even sequentially Q4 to Q1. So we talk about supply and demand. I think that's a good reflection of the scarcity of count and the high demand for that high-quality count.

And then I guess maybe on the -- more on the labor supply side of things. What are you kind of seeing on the talent and recruiting side right now? And how would you kind of assess your ability to find top talent? Has talent competition intensified at all or changed given some of the macro pressure? Or are there any kind of specific rules or skill sets that are very much in demand right now?

As I mentioned in my comments, we're still seeing strong demand for digital, for UI/UX, for cloud, data. Those areas continue to remain in strong demand. The candidate market, again, like I mentioned, there is this perception that there's a plethora of candidates out there because of what the media said. And I think it's more in line to what the Wall Street Journal reported on Saturday, that's been offset elsewhere. And that's what we're seeing.

There may have been more of a push by those big tech companies for national candidates where they would go higher from anywhere. But as that dissipated and people are returning more to office, you're seeing more of that demand across the country. And I think candidates are going down. There is a little bit longer in this cycle, though, because since they have business perception that we're a plethora out there. They may want to interview 4 or 5 units versus what we saw the last 2 years has been pulling the trigger after 1 or 2 interviews. So I think that's the main change.

We go next now to Tobey Sommer at Truist.

I was wondering if you could speak about your bill rates and maybe just aggregate within the tech business, the trends you're seeing in staff aug versus the trends that you're seeing in your higher-margin managed teams and project solutions because we've seen it march up as a blended rate for a while, but I'd love to get your sense and some more color around the trends within those lines of business.

Yes. Tobey, this is Dave. So I'll go back to kind of where Kye was. To the extent that you're looking for a specific skill set regardless of the type of engagement that are in scarce supply, bill rates continue to be strong. pay rates continue to be -- to continue to move in tandem with those. So I wouldn't differentiate for you, frankly, because I don't believe there is significant differentiation between the trends we're seeing based upon any type of project managed service, managed team, staff augmentation assignment, which is about the skill set. I think look I tend to agree with that statement.

Okay. Well, maybe could you give us some color on what the difference in the bill rates are between staff aug and the other lines of business? Because even that would help. Rather than the blended rate.

Yes. So we -- I apologize, Tobey. So I don't have that data in front of we haven't really done that because they're really quite frankly, isn't a significant differentiation.

Yes. Tobey, this is Joe. This is still driven, not nature of that type of work. Where we see the difference between when we're doing the managed teams, managed solution, we see that in the margin, not necessarily in the bill rate because the demand for the skill set at the bill rate is about the same based upon supply/demand dynamics.

I was just going to say we're really looking at it from an integrated perspective, too. We're not really breaking it out because we're using our existing sales team to go after it, and we're going where the client drives this, too. So if the client feels the best solution for them is to have a new managed team manage capacity, those types of names, then we're moving in that direction. But I think the whole sector is moving more north up towards that path anyway.

If you were to double-click into sort of generative AI versus sort of machine learning, are you seeing a change in demand of your customers more for prompt engineers rather than machine learning engineers since the AI code can kind of create the complex models by itself?

No. We've been doing a lot in the machine learning space and AI. I mean the AI has taken a little bit of a different path, but we are not seeing customers jumping full into that, and we're continuing and we offer those services in our Big Data practice where we are helping customers address AI issues, machine learning issues. That all goes back and has to be said by data. So that's how we're approaching it is timed into there.

How do you -- we get these questions sometimes from clients. How would you respond when investors wonder if kind of extraordinary recruiting market over the last 2 or 3 years, and it's been a robust IT for longer than that, but the last 2 or 3 have been pretty outsized. I think that may have pulled some demand forward and that there could be a pause or something more pronounced this go around, again, depending on the trajectory of the economy if the macro gets more severe and more traditional recession on ports.

Yes, Tobey, there's no question. I mean until the back half of last year for whatever a better part of 18 months or 2-year period, people were doing a lot, meaning they were moving all initiatives forward. Some of those were mission-critical. Some of those were opportunistic. The main shift that we've seen is the slowdown in those things that are opportunistic, that maybe they can wait on. The mission-critical stuff. People are happy to move mission-critical stuff in today's environment, just from a competitive standpoint, from a disruptor standpoint, you don't have a choice but moving on those mission-critical things.

So I don't believe any of that demand was pulled forward. I think what we saw just because of the nature of what the environment was like as people were really some they were playing catch-up. So I wouldn't call that being pulled forward because they were basically just catching up to their competitors. But it's really more of this work on the fringes. These things that aren't really mission-critical that they can hold back on a little bit, especially when not knowing economic climate. So everybody is taking a little bit more conservative if they can push you or delay or slow down those projects. So I don't believe there was a pull forward of business, but I do think that the economic climate has caused some of those initiatives to really be slowed down on.

Okay. Last one for me. Could you talk about the turnaround in FA and where you are in it, at least from an internal perspective. I know the market conditions may change, but how are you feeling about the mix, the transition and when in a good demand environment, you'll be able to march forward and grow and expand margins from there?

So we're still seeing really strong margins in our FA business, and we're continuing to see our bill rates, like I mentioned, we're in the 50s now where we were in the 30s just a few years ago. So we're pleased with that progress. We have some hard comps that we've gone against. We started catching up on those cuts. And then like I said in my comments, we had the project surged to help support -- here and recovery efforts.

So with that coming up and that within the back half of the year and into Q1, we're going to continue to see some things coming down there. But we do expect to see continued bill rate improvement. Margins are continuing to be strong, and we're continuing to align it closer and closer to what we're doing in technology. And we're happy to be out of that lower-level space. That's like I said in my comments, more affected by the economy than anything.

We go next now to Kartik Mehta at Northcoast Research.

Obviously, your temporary staffing business is a lot different than a lot of the other companies, as you said, on the tech side, there's a lot of demand. That said, how would you characterize revenue visibility for the company, especially with all these projects and, I guess, company's ability to upscale or downscale? Just thoughts on revenue visibility over the next 6 to 9 months.

Kartik, this is Dave Kelly. Yes, I think actually, when we look at companies in our space, I think we've got a reasonable amount, certainly on near-term revenue visibility. I mentioned our average length of assignment and technology is about 10 months. It's clear, obviously, there's uncertainty Joe mentioned in his comments as to happen in the back half of the year from an economic standpoint, and that could obviously influence what companies do.

But in terms of the business that we have, the necessity of those folks, a reasonable expectation part of the reason why I had mentioned, we're thinking into the second quarter that we've got a relatively stable technology workforce and this billing and our clients.

Perfect. And then just second question, just on price competition. I think you mentioned it a little bit in your prepared remarks. I'm wondering if there's been any change or do you anticipate any change based on maybe some of the assignments that you're looking at now?

Yes. I'll reiterate what I said before. I think for us, we've been in an environment for a number of years, and we're still seeing it, as I mentioned, as it relates to new assignments that we started in the first quarter. Bill rates continue to increase, right, on an assignment level. We've seen that for a period of time, again, just to us in the long term, it's hard to envision a place where there is a lot more demand than there is supply that bill rates are going to do anything but be stable or up. And I don't -- I think we've been pretty consistent about that for quite a long period of time. Don't see that change.

The next now to Marc Riddick at Sidoti.

So I know we've gone -- have gone over a lot over. I was sort of just curious as to one of the other ways to maybe parcel of this. So really curious if you're seeing much of the differentiation in client behavior or client patterns for those of your clients who are consumer-facing, particularly in your commentary around mission-critical activities. Are you seeing much of a differentiation there between client-facing companies versus those that are more sort of BB-ish. Is there any particular industry callouts that we should be thinking about?

Yes, I would say, when I made that statement, Marc, I mean, the mission-critical is really cutting across all industries because they're all being faced with the same dynamics. Obviously, when we talk about, and I think there was an earlier comment about pull forward, we did see certain industries where I would say coming out of the pandemic, where being behind the curve in terms of where they were with the modernization or moving from an e-commerce standpoint. There's no question from a retail standpoint. You had a lot of organizations that had a lot of catch-up to do there. So some industries, I would say there were more catch-up work to do. But in terms of what we're stare seeing the demand now on these mission critical, that's broad-based across its respective agnostic to industry.

Yes. The only other thing I'd add, Marc, and I think Kye noted, we have clients in virtually every industry. So for us, as we see changes, obviously, we are -- we, as a portfolio, are able to adapt to opportunities and demand opportunities in any particular industry. I know your question underlying was to exceed softness in the industries. But for us, it's really about the fact that we've got business with 70% of the Fortune 500 as we have opportunities in one client. Certainly, there are occasions where there might be something that we've seen some pruning in other clients. It's a wonderful mix of business to have. It gives us a lot of flexibility and resiliency, I think, is the word you use guy.

(Operator Instructions) We'll take a follow-up question now from Mark Marcon at Baird.

Wondering with regards to capacity, how much excess capacity do you currently have at this point when you take a look at your recruiters and your consultants?

Yes. Mark, I'd say from a capacity standpoint, we're very comfortable where we are from capacity. We've -- our retention has gone up, especially with our office occasional model. And so we feel very confident that we're very well prepared for the upturn in terms of capacity. And by the way, we used to state this on our calls, productivity continues to move up across all of our 10-year category. So it's not just capacity. We are -- even in our lower 10-year groups, we continue to see people performing at higher levels.

And I would attribute that to a lot of the investments that we've made over the past of 6, 7 years in terms of tools and technologies, investments in leadership training. And I would just say, overall, it's just a team execution. I mean, Kye and team have done a tremendous job. We're executing I've been around over 35 years. We're executing the business better today than we have during my entire tenure within Kforce, and all those things show up, and that just really gives us even that much more confidence from a capacity standpoint.

Great. And you did a nice job with regards to managing the margins. First of all, how much of an impact was there from the health care, the higher health care costs as it relates to the gross margins?

Yes, it was small, Mark. I mean as you can expect, each quarter, you have maybe more or less with the number of large clients. So maybe 10 basis points or so. And so nominal just to give you a flavor. So nothing significant and nothing out of the ordinary, I would say, either.

Okay. Great. And then when we're thinking about managing the SG&A, you did a really nice job there considering the environment. Obviously, we got some SG&A deleveraging but -- and that's to be expected. How should we think about it? If this ends up being a more significant recession, how should we think about the decremental margins on a go-forward basis? Obviously, there are areas that you can flex. But just from a shorter-term perspective, how should we think about that?

Yes, Mark. So first of all, I think in terms of our press release, SG&A expenses are expected to go down in the second quarter. So that variability of cost and the ability to flex those costs is becoming apparent here. Actually, interesting comment, Joe was talking about productivity. Productivity and retention also give us an opportunity to do more with the people we have, which means we have to hire less, right, where you have the highest levels of turnover. So that is also a degree of cost variability that we have.

So for us, we've got -- we've always said we've got a very highly leveraged compensation structure, compensation is by far the biggest SG&A item here. And so as we -- if we were -- I'm hopeful that you're not -- I know you're speculating, but let's hope that revenues and the economy moves in a great direction. But if it doesn't, certainly, the variability of our cost -- our compensation structure gives us opportunity from an SG&A standpoint in addition to, I'd mentioned real estate and other things, right? So we feel very good about where we are. And then, of course, we're managing everything and everything that we can manage as well. So we're sensitive to it.

Yes. Mark, again, and you've been around our story for quite some time, and I think our position remains constant with how we've navigated through multiple cycles. We are going to do everything within our power to hold on to our highly productive and tenured people irrespective of how challenging it gets because there is another side to everything. And as you well know, it takes a long time to ramp people up to get them productive. So the good news is, is where our balance sheet is, where our overall cost structure is. We have a lot of room and a lot of firepower.

And we want to play for that other side because we know if it were to get that tough, we are going to have a lot of competitors who can go by the wayside, and that just provides us that much more client and market share opportunity, and we want to prepare to make sure we have the capacity to take advantage of those things. No different than by the way, that we did in the pandemic. On the front end of the pandemic, you saw many of our competitors reducing headcount and so on and so forth. We held on to our head count.

And I think that paid us huge dividends when you look at that 50% growth over a 2-year period following that. So we've been doing this for a long time. We've navigated through many of these cycles, but our people are very paramount to us. I mean that is our asset in this firm. You don't rebuild relationships overnight. So I do want to at least put that out there. We're going to do everything we can to hold on to our people if things were to get very challenging.

Fully appreciate that. And obviously, it's worked really well over the long run. Also, can you talk a little bit -- Dave, you mentioned in the press release the office occasional is working well. There's still more real estate that could be consolidated. Can you talk a little bit about the savings that we could end up seeing over the next few years on that front?

Yes. I don't think it'll give it a dollar amount, but this has been actually something we've been asked over the last couple of years. As we sit here today, we probably still got, and we're making these decisions about 30% of our real estate portfolio is still left to I'll say, reimagine, if you want to use that term. So there's still some opportunity of incremental savings over and above what we've already realized.

And it appears we have no further questions today. Mr. Liberatore, I'd like to turn things back to you for any closing comments.

Great. Thank you for your interest in and support of Kforce. While the environment has become more challenging, I would like to say thank you to every Kforce for their efforts and their execution, really resulting in Kforce performance as one of the top technology staffing and solutions providers here in Q1. I would also like to say thank you to our consultants and clients after your trust in Kforce and partnering with you and allowing us the privilege to serve you. So we look forward to talking with you again after our second quarter of 2023.

Thank you. Ladies and gentlemen, that will conclude the Kforce First Quarter 2023 Earnings Call. I would like to thank you all so much for joining us and wish you all a great remainder of your day. Goodbye.