KFRC - NASDAQ

Good day, everyone, and welcome to the Kforce First Quarter 2024 Earnings Call. Today's call is being recorded. And I would now like to turn the call over to Joe Liberatore, President and CEO. Please go ahead, sir.

Good afternoon. Thank you for your time today. This call contains certain statements that are forward-looking and 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 SEC. We cannot undertake any duty to update any forward-looking statements. You can find additional information about our results in our earnings release and our SEC filings. In addition, we have published our prepared remarks within our Investor Relations portion of our website. Our first quarter performance was generally consistent with our expectations, and we were encouraged by March trends in our Technology business. Operating trends over the past 2 quarters and discussions with our clients indicate to us that the current operating environment is more stable and constructive than it was throughout most of 2023. There remains uncertainty as to whether or not the U.S. economy will fall into recession. The dialogue surrounding interest rate cuts has shifted from a discussion referencing the number of anticipated cuts and when we should expect cuts in 2024, if there will be any cuts at all this year. Geopolitical concerns, including the war in Ukraine, the recent expansion of the war in Israel with Iran's aggression, further complicate forward-looking visibility. Against this backdrop, our clients, broadly speaking, have continued to exercise a degree of caution initiating new technology investments. Importantly, this restraint does not appear to be increasing but rather appears to be fairly stable. As we look beyond the current uncertainties, we continue to be encouraged by the backlog of strategic imperative investments that we expect to be high priorities for our clients once the macro uncertainties begin to clear. Technology investments are simply not optional in today's competitive and disruptive business climate. Given the secular underpinning, there are simply no other market we want to be focused in other than technology talent solutions space. As we move throughout the upcoming second quarter and second half of 2024, we will closely monitor our performance indicators and trends and make any necessary adjustments to our business while continuing to invest in our long-term strategic priorities and retain our most productive associates. As to our first quarter results, revenues and earnings per share were both within our range of guidance. The improvement in our leading indicators that we spoke about on our last call translated into reasonably robust new assignment growth in March 2024, which encouragingly is expected to lead to sequential growth in our Technology business in the second quarter at levels close to historic seasonal prepandemic levels. Dave Kelly will expand upon our operating trends in his remarks. Our message to our people is unchanged. During these uncertain times, we must control what we can, stay close to our people and our clients, while maintaining a long-term view on our decision-making. We are blessed to have a tenured executive leadership team who has been through multiple economic cycles together and is prepared to quickly adjust to changing market conditions, and we are equally blessed to have a high-performing team that is tenured, dedicated and passionate about what they do. While all economic cycles behave a bit differently, what remains clear is that broad and strategic use of technology, including the most recent technology secular shift associated with AI will continue to evolve and play an increasingly instrumental role in powering businesses. Over the long term, we believe that AI and other technologies will continue to drive demand for rather than replace technology resources and that the pace of change will accelerate. We are ideally positioned to meet that demand. Our core competency is rooted in the ability to identify and provide critical resources real time and at scale to help world-class companies solve complex problems and help them competitively transform their businesses. Our operating model also allows us to be flexible in partnering with our clients to meet their needs across a broad spectrum of engagement forms, from direct hire, traditional staffing assignments to manage team engagements and manage projects. Our decision to grow our business organically with a consistent refined business model tailored to provide highly skilled technology talent solutions to world-class companies has been critical to our success over many years, and we remain confident that our firm is positioned well for improving market conditions. I'm tremendously proud of our team as they continue to execute with incredible passion to serve our clients, candidates and consultants cohesively as one Kforce. I remain confident and excited about the future of Kforce. Dave Kelly, our Chief Operating Officer, will now give greater insights into our performance and recent operating trends; Jeff Hackman, Kforce's Chief Financial Officer, will then provide additional detail on our financial results as well as our future financial expectations. Dave?

Thank you, Joe. Total revenues for the first quarter were $352 million, down 7.7% sequentially and 13.3% year-over-year. Our Technology business declined 6.9% sequentially and 11.4% year-over-year. As we mentioned on our last call, following a slower start to the year, and higher year-end assignment adds, we experienced an improvement in our leading indicators in late January and believe that those higher activity levels would contribute positively to new assignment starts in our Technology business later in the quarter. As expected, we experienced a notable acceleration in our consultants on assignment throughout March, which should lead to sequential growth in Q2 within the range we saw before the pandemic. Our clients continue to undertake mission-critical projects and also recognize the need to retain the highly skilled talent that we provide while they await a point of increased confidence to accelerate spending to address their increasing backlog of technology initiatives. Overall, average bill rates in our Technology business have remained stable over the past few quarters and continued to reflect our focus on providing highly skilled talent on both traditional staffing assignments and as part of managed teams over managed projects. Our clients remain focused on critical technology initiatives in the areas of digital, data governance, AI and ML, UI/UX, cloud, data analytics, business intelligence, project and program management and modernization efforts. This represents a continuation of recent trends and reflects some of the foundational work required by companies to gain the eventual benefit of AI-related investments. Flex margins of 25.3% in our Technology business declined 10 basis points sequentially and 60 basis points year-over-year. The sequential decline was less than expected as lower health care claims helped to offset the traditional annual tax resets. Our bill/pay spreads continued to be stable on a sequential basis, which is an encouraging data point given the cloudiness of the economic environment. We've continued to broaden our service offerings beyond traditional staffing to include managed teams and project solutions. Clients consider access to the right talent essential to their success and see our services as a cost-effective solution for their project requirements. Our integrated strategy capitalizes on the strong relationships we have with world-class companies by utilizing our existing sales recruiters and consultants to provide higher-value teams and project solutions that effectively and cost efficiently address our clients' challenges. Our client portfolio is diverse and is comprised primarily of large market-leading companies. Market leaders typically prioritize technology investments to maintain their competitive advantage. Our focus on addressing their needs continues to be critical in our ability to drive sustainable long-term, above-market performance. Given the seasonal resets we see at year-end, a number of our industry verticals declined sequentially in the first quarter, but we saw relative stability in our retail, transportation and manufacturing verticals and some headwinds in financial services, after a steady performance in the fourth quarter. Looking forward to Q2, we expect technology consultants on assignment to remain relatively consistent with the levels we ended with in the first quarter and for revenue to increase sequentially in the low single digits. Year-over-year revenue declines will decelerate to the mid-single digits. Our FA business, currently 8.5% of our total revenues declined approximately 16% sequentially and declined 27% year-over-year. The year-over-year decline reflects the impact of business we are no longer supporting due to our repositioning efforts and a more challenging macroeconomic environment. Our average bill rate has continued to exceed $50 per hour as we continue to drive this business towards a higher skill set of business that is more synergistic with our technology service offering. We expect Q2 FA revenues to be down year-over-year in the mid-20% range. Flex margins in our FA business decreased 70 basis points sequentially due to a lower margin project with a strategic client but has improved 130 basis points over the last 5 years as our mix of business has significantly improved. We expect to bill/pay spreads to remain fairly stable at these levels in Q2. We've taken thoughtful measures to strike a balance between associate productivity and our revenue expectations. As we've done in prior economic downturns, we are focused on retaining our most productive associates and making targeted investments in the business to ensure that we're well prepared to capitalize on the market demand when it accelerates. We continue to invest in our managed teams and project solutions capabilities and the integration of those offerings within the firm, which is progressing well. While the uncertainty in the macro environment has persisted longer than many expected, I remain excited about our strategic position and ability to continue delivering above market performance. The success that we have as a firm doesn't happen without the unwavering trust that our clients, candidates and consultants place in us. We've been able to continue delivering strong relative performance during this difficult period while continuing to aggressively invest in the strategic initiatives that are critical to our long-term success and expect to continue to do so. I appreciate the dedication, creativity and resilience displayed by our incredible team. I'll now turn the call over to Jeff Hackman, Kforce's Chief Financial Officer.

Thank you, Dave. First quarter revenues of $352 million declined 13.3% year-over-year and earnings per share of $0.58 were at the midpoint of our expectations. Overall, gross margins in the first quarter declined 20 basis points sequentially due to seasonal payroll tax resets, which was partially offset by lower health care costs. Margins declined 100 basis points year-over-year to 27.1% due to a combination of a lower mix of direct hire revenue and a decline in Flex margins. Overall, SG&A expenses as a percentage of revenue was 22.2%, which is an increase of 20 basis points year-over-year. Our variable base compensation structure, the adjustments we made in July 2023 to reduce our structural costs to the lower revenue levels and disciplined cost management have significantly mitigated the impact of lower revenue and gross profit levels on our profitability. With that said, we are continuing to prioritize investments in retaining our most productive associates and advancing our enterprise initiatives, both of which are expected to significantly contribute to our long-term financial objectives. Our operating margin of 4.5% was toward the high end of our expectations. Our effective tax rate in the first quarter was 27.1%, which was higher than we anticipated due to greater nondeductible expenses and adjustments to certain tax credits. Operating cash flows were approximately $13 million, and our return on invested capital was nearly 40%. We have prudently managed our business by driving solid organic growth over many years. which has resulted in consistently strong results in a pristine balance sheet with minimal debt. Our pattern of returning significant capital to our shareholders has been consistent over many years and continued in Q1, with a total of approximately $9 million returned through dividends and share repurchases. All in, we have returned slightly more than $900 million in capital to our shareholders since 2007, which has represented approximately 75% of the cash generated, while significantly growing our business and improving profitability levels. We remain committed to returning capital regardless of the economic climate and our threshold for any prospective acquisitions remains very high. Our strong balance sheet and the flexibility we have under our credit facility provides us with the opportunity to get more aggressive in repurchasing our stock if there is a dislocation between expected future financial performance and the valuation of our shares. The second quarter has 64 billing days, which is the same as the first quarter of 2024 and the same as the second quarter of 2023. We expect Q2 revenues to be in a range of $352 million to $360 million, and earnings per share to be between $0.68 and $0.76. Our guidance does not consider the potential impact of any other unusual or nonrecurring items that may occur. We remain excited about our strategic position and prospects for continuing to deliver above-market results over the long term while continuing to make the necessary investments to help drive long-term growth and enable us to achieve our longer-term profitability objective of attaining double-digit operating margins at slightly greater than $2 billion in annual revenues. On behalf of our entire management team, I'd like to extend a sincere thank you to our teams for all of their efforts. We would now like to turn the call over for questions.

[Operator Instructions]. We'll take our first question from Mark Marcon with Baird.

You mentioned that you did see some improvement in terms of your leading indicators in late January and believe those higher activity levels would contribute positively. Can you just talk a little bit more about that? Like what exactly -- which areas are you seeing the strength in? How broad-based is it? And in your client discussions, what do you think would end up resolving some of the uncertainty that they're facing? I know the geopolitical is not within their control, but are there domestic things that they're looking for?

Yes, Mark, I'll start. This is Dave Kelly. Yes, as you mentioned, and we actually mentioned this on the call in January, we've seen activity levels that the front-end indicators that we typically look at client visits, the amount of submittals, right? We saw a lot of increasing activity. And as a matter of fact, some of [ action ] in job order flow, a lot of those activity levels were at levels that we had seen prior to the pandemic. So that was promising. And as we had indicated, the expectation is the flow-through would lead to some increase in new starts activity and that actually did occur in March. As a matter of fact, in each week in the month of March, we did see an increase. So it is really typical of what we had historically seen. Now I'll point out, we saw that a couple of times, right? At the end of last year, we saw that in September, October. As we look into -- as I commented in the prepared remarks, into the second quarter, we're still seeing a little bit of unevenness there. So I think, clearly, as Joe said, there's certainly a fair amount of uncertainty still that we're seeing. So it's probably, from our perspective, too early to call those increases a trend per se. We want to be cautious about that. But certainly, it's clear that things have become quite a bit more stable than they have been. And there's been some -- obviously, some periods of actually greater amounts of success and activity. And I would say, I think you'd asked about where we're seeing that. It's pretty broadly based. We obviously do business with predominantly very large companies across effectively every industry. And I couldn't point to any one particular industry driver or client type of a driver. Large companies, as we said, are big spenders in technology and they continue to spend money on mission-critical projects. So it's really a client-by-client type of evaluation you want to do. I've mentioned a number of industries. But even in financial services, where I'd said we saw some headwinds, we actually had clients there that actually had pretty robust increases in spend. So again, it's an execution game for us. We've got the benefit of being in many clients, many market-leading clients and execution for us and those clients in our portfolio, the strength of it, across geographies has really led us to some success here over the last couple of quarters, frankly.

Great. And then can you talk a little bit about pay bill (sic) [ bill/pay ] spread? And specifically, what are you seeing with regards to pay rates? I noticed that over the last 2 quarters, we've had a -- if we're looking at Tech Flex, the hourly bill rate has come down very modestly relative to Q3 in 2023. And I'm wondering, is there some mix change? Or is there just with the caution maybe and some overcapacity in the industry, slight price pressure?

Yes. And Mark, this is Jeff Hackman. Good to talk with you. I think we talked about this last quarter. I think the relatively modest decline in the average bill rate, I wouldn't read too much into that. I think it's still roughly $90 an hour. Very modest, I think, sequential decline Q3 to Q4 of last year, Q4 to Q1 of this year was a very, very slight tick down. For the very large part of 2023, and that largely has continued into Q1 of this year, the average bill rate has been actually quite stable. And in this environment, I think that's a good dynamic and an encouraging sign for us. I think as it relates to spreads, I think the comment that I would give you is early on in 2023, we certainly saw some pricing pressures early on in the year. And for the large part of the second half of '23, our spreads in our Technology business actually were quite stable. When you look at the Q4 to Q1 trend in overall margins, I think in our Technology business, they're rolling down 10 basis points. And typically, in a Q4 to Q1, you see that a little bit more of a decline. And part of what Dave mentioned in his script, is we saw some favorable health care costs that came in a little bit lower than we expected there. But I think to answer your 2 questions, Mark, I would say spreads are continuing to be quite stable. And as it relates to our average bill rates, it's still roughly $90 an hour, so that's also quite stable as well.

Yes. Only the other thing, Mark, that I'd add to this, right? So you'd ask in terms of supply. Supply continues to be tight here, right, even in a slower time to have the marginal change in bill rates. It's really been almost inconsequential and that is true with pay rates as well. Suggests, again, even in slower periods of technology spend to find the right talent is going to require us to pay the market rates and our clients, obviously, understanding that continue to understand that, and that's why bill rates haven't moved, either. So much like it's been for many years, right? A supply of highly skilled talent in particular, continues to be very difficult to find.

Great. And then if I could squeeze one more in. Just with regards to current capacity. You did mention, hey, if we get into the $2 billion mark from a revenue perspective, we're going to have significant expansion with regards to the margins. How much excess capacity do you have in your field sales and recruiting force? How much -- how should we think about the incremental margin trajectory from here? Is it going to be a fairly straight line or smooth line in terms of the uptick? Or would we end up having some fairly significant increases in terms of personnel as we get towards -- back towards $2 billion?

Yes. Mark, this is Dave again. I think first, often -- you've heard this often from us in slower periods. Maintaining our critical resources is very important. So we've always made sure that we've carried enough capacity, one, because those are the people who are going to lead you out of the recession. And two, obviously, when things break, we don't want to be short-handed. So we certainly have ample capacity. We had mentioned, I think, in the past, obviously, in terms of focus we actually have more sales so -- sales-related associates than we did a year ago, right? So there's always a bit of a mix shift here to ensure that we've got appropriate total capacity. So clearly, additionally, we continue to invest in technology and things like that, process improvements that creates additional productivity opportunities for us. We feel very comfortable that when things return, I think, to a trajectory of growth in technology spend, we'll be able to take advantage of that. It doesn't mean we won't need to add resources, we expect to be able to do so. But certainly, productivity improvements are what's driven a lot of the profitability, if not all, of the profitability improvements that we've seen in the past. That is certainly the biggest driver to get to the operating margins that we had expected. In terms of how that plays out, obviously, nothing is purely linear. As things start to improve, we are going to see a gradual improvement in operating margins, but we've got some other big opportunities as well. So it's going to be a bit uneven, Mark. There are pieces that are linear. There are pieces that are not. So I would say we still -- our thought process and thesis has not changed. I think when we get to something a little over $2 billion, 10% is where we expect to continue to be from an operating margin standpoint.

Yes, Mark, the only other thing that I would add to everything that Dave just shared with you is, throughout 2023 and here into 2024, we've continued to build our sales capacity because needless to say, to ramp up salespeople relationship, getting entry points into clients is a much [ global ] process. So -- we've actually increased our head count from a sales standpoint within our technology area. From a recruiting standpoint, plenty of capacity to service existing needs as well as market turns and there's a ramp-up in job orders coming in to service those job orders. Also, our team has clearly demonstrated because we've invested a lot in technologies and automation on the delivery front, that we can turn that dial very quickly if and when necessary. But we have plenty of capacity to address anything for quite some period of time. But then as we needed to accelerate that, we'd be able to do that. Likewise, I would say, especially here over the course of the last 24 months, we've continued to add a lot of capacity within our KCS, our consulting solutions organization, bringing on a lot of industry expertise, subject matter expertise, and they're really making a difference in terms of elevating our game, taking our conversations and the work that we're pursuing within clients to a whole another level. So we've been making a lot of investments on those fronts, which I think all these things are just building greater capacity as well.

We'll take our next question from Kartik Mehta with Northcoast Research.

Joe, You mentioned something about AI and obviously having a positive impact on the company in the long run. But I'm wondering, in the short run, is it causing any pause for your clients as they figure out maybe how to implement it, maybe how to use it internally, what resource they need from an external perspective? And could that be causing any delays in orders or jobs?

Yes. But I -- kind of the way I would characterize what we're experiencing within our clients is they're all in, I would say, preparatory efforts in areas such as building out their infrastructure and data to take advantage of Gen AI as well as large language models, for example. We're supporting clients with integration work to ensure that their segmented systems are talking more seamlessly with each other. And in many instances, that also means moving things to the cloud. And then likewise, from a data standpoint, there's major, massive data efforts going on, whether that be they're addressing data structure, governance, data cleansing efforts. So we've been successful at winning engagements in these areas and also have been assisting our clients with what I'll call the exploratory efforts, understanding the technology and evolving their strategies and potential use cases. So no, I don't believe that it's pausing anything. We're seeing a lot of energy in those areas as organizations organize themselves so that they can take advantage of things. And by the way, I don't think this is something that's going to change anytime in the near-term future, meaning for -- for entities such as Kforce who is not a strategy firm like a McKinsey, this is where the sweet spot and where the true revenue is going to be generated. It's going to be in these infrastructure areas. It's going to be in the -- in cloud. It's going to be in the data areas for the foreseeable future. I mean I would say that, it's highly probability that the application of generative AI and the use of large language models will ultimately prove to be beyond powerful and widespread accelerator for our business for a long time to come. So we're really excited about how we're positioned, where our focus already was, it -- kind of everything played to our favor on those fronts. So hopefully, that gives you a little bit of a backdrop.

Yes, it does. And I just wanted to make sure I understood your commentary on margins. And I think if we continue to see a sequential increase in revenue, do you think that portends well for margins? Or as you're adding capacity, could there be just some volatility in margins for the rest of the year?

Yes. I think, Kartik, generally speaking, as revenues improve, margins are going to improve, right? So that has been consistently how we've been managing the business. The capacity that we talked about Obviously, some of that will get absorbed. We'll continue to invest, but we'll be prudent to make sure that we return appropriately the revenue to the bottom line. So I expect margins will expand as revenue expands.

We'll take our next question from Trevor Romeo with William Blair.

First one I had was just on project types, I guess. I know you have an integrated sales function. It's not necessarily 2 different businesses, but I was just wondering if you could comment on trends for the managed teams in project solutions versus kind of more staff augmentation work, what kind of demand you're seeing for each one? And whether clients preferences are kind of evolving or changing in this environment?

Yes, I'd say we're seeing demand on both fronts, and that's one of the reasons why we like approaching this from an integrated strategy standpoint. Because there's professional staffing needs tied to every project and then the project opportunities allow us to gain greater visibility, get involved more strategically with the clients. But we continue to see our opportunity pipeline as we move through Q1 continue to build and has continued to build here into the early part of Q2. I'd say our existing projects and our strongest pipelines have been in and around application development, probably around digital transformation initiatives, which often focus on the customer and their internal experiences as well as realizing that much of that work also touches the cloud. We also continue to see a lot of projects that are data oriented, which often also require interfacing to the cloud and requirements on that front. So we've continued to see those pipeline opportunities for traditional data work. However, we also -- as I mentioned a little bit earlier in my last response, we continue to engage more in and around data opportunities as the clients are preparing for AI and ML in the future. So I'd say with all that said, we're seeing development, cloud, data, digital, all continue to remain very healthy in terms of areas of need. So we feel we're positioned very well in terms of market.

Okay. Great. That makes sense, Joe. And then just a follow-up on, I guess, competition. It feels like we've been kind of in the stable but lower level of demand for a while now. Have you guys started to see any changes in the way competitors are positioning themselves to win business? And I guess, similarly, have you seen any changes in the way clients look to choose a provider? And I guess, generally, does it feel like you're gaining, maintaining or losing market share in this type of environment?

Yes. Trevor, I think a couple of things. I think one thing that is clear, the clients that we do business with, obviously, are looking for those things that we do quite well, right? We can provide services across the country. But certainly, the trends, and you hear it from us, you've been hearing it from us repeatedly and Joe just touched on it, right? The ability to deliver a spectrum of services from staff augmentation all the way through managed solutions is critical. Because clients are looking for companies such as Kforce who can deliver the talent in whatever way that they'd like it to be delivered. And they're obviously within these large clients, a number of different project structures that they will see. So that is clearly a growing trend that we've seen. And so for us, and you hear it across the industry repeatedly, the ability to deliver those services in various ways is a hugely important competitive advantage.

Yes. And what I would add to that is realizing a lot of our focus is in those larger organizations, large consumers of the services that we provide. These aren't organizations where any competitor can just walk in the door and get requirements. I mean they're very sophisticated from their vendor management. Most of them have been going through for years vendor consolidation. So it's very difficult to get an entry point and get your foot in the door at those organizations. So we don't see a lot changing from the competitive landscape there. I'd say inside those organizations when we're dealing with larger competitors that also have compliance, regulatory, delivery capabilities, services capabilities similar to Kforce, we haven't seen any competitors' predatory pricing or anything of that nature. It's been pretty much business as usual, competing as usual. So no major fundamental shifts there. I would say then when you get into more localized business, where maybe it's $1 billion or $2 billion local organization where they may utilize what I'll call more market-based organization, the mom-and-pop to smaller organizations. You -- we're seeing the same thing that we usually see at this point in the cycle where, yes, they are willing to give things away, get their services away for a nominal margin which puts price [ up, sure ]. But what we're also seeing is the pressure on those organizations in terms of they're typically one account away from bankruptcy because they don't have a lot of reserves for bad debt and those types of things. So we do start to see those organizations are being pressured because of those practices and then when something goes south, it puts them in a difficult situation. This is my fourth cycle through this. In every one of these cycles, we see a flushing take place. As we move through these cycles, it's not typically the larger providers who are more disciplined and financially astute. It's more the local, the regional players that really haven't organized effectively. And when something goes south on them, then they typically are headed down a very difficult path. So we're seeing those same things unfold.

We'll take our next question from Marc Riddick with Sidoti.

Hi, good evening. I wanted to touch a little bit on -- just a different way of dicing it, I guess. I wanted to sort of get your views on a couple of things. One, are we seeing much of a difference in behavior from your larger versus slightly smaller customer base as far as prioritization of things that they want to act on sooner rather than later?

Yes. Yes, Mark, this is Dave. I wouldn't say so in terms of client size, right? So all of them are looking for ways to make sure that they fund those initiatives that are critical for them from a technology perspective. Behaviorally, obviously, things here have been a little bit slower. That doesn't mean necessarily that they're not undertaking those projects. They may be looking to do them a little bit more efficiently, taking a little bit longer to do those projects because they're obviously very cost conscious. But the behavioral change of continuing to invest in those things that are strategically critical has not changed, and that is not size-specific. Obviously, as we've mentioned, a significant majority of our business is with very, very large customers. So maybe we're not in a great proxy, but we haven't seen it even within our portfolio a different mindset, really. No.

Okay. Great. And then I wanted to shift on to -- and a lot of the things I would have asked about have already been asked, so I want to save you the time on that. I was sort of curious as to your views as far as talent availability and maybe some of the things that might bring some talent into the fold now relative to maybe a year-end or the like. Have you seen much to sort of make folks move from the sidelines onto the playing field?

Yes. For us, I had made this comment before, right? So we're sitting here, and this has, quite frankly, been true for the last 20 years, right? The -- for highly skilled talent, there are always opportunities, and that's effectively where the focus of our recruiting efforts are. We don't have a lot of people who are on the sidelines who said -- have suddenly said, I want to work. They have always been difficult to find. And typically, again, the highly skilled people have a number of opportunities. So I don't think anything really has changed, generally speaking.

Yes, I would say probably the only dynamic where we have seen a little bit of a shift is when you look at things such as conversions. Our conversions are significantly down on a year-over-year basis. And I think that also ties into -- and you see the same data we see when you look at quit rate. So there is no question that even in these high-demand technology professionals that are on the consulting side of the equation, they are not as active in the marketplace as they were during that euphoria of 2021, first half of 2022, mainly because there was an opportunity to make moves and with wage inflation, we all experienced what was happening on that front. So people were making moves for money. People are not making those moves because that's not what the landscape provides today. So I would say that's probably the one dynamic that has shifted here over the course of the last 6 to 9 months would be on that front. But still, the space we play. There's always been high demand for talent. There's always been a supply-demand in balance there. So if this goes back to what I always have believed at Kforce, one of our #1 core competency is the ability to recruit and identify the best talent in the market at a given time. So that real-time aspect is also why I believe we've made a lot of progress related to our consulting solutions-type business because we're providing those clients with the best available talent on the market at a given point in time at market prices, versus giving them bench people that might not have the right skills for those engagements. We are seeing that make a difference.

[Operator Instructions]. We'll take our next question from Josh Chan with UBS.

I guess if you took a step back over the last 3, 6, 9 months, has the activity recovery or demand recovery played out a little bit more slowly than you would have guessed? And if so, why do you think that has been so far?

Yes. This is Dave, Josh. One, I would say it's played out more slowly than we would have hoped. I think that's fair, right? But I'd mentioned a few minutes ago, it has been a bit uneven, right? We've seen slight periods where we've seen some benefits. But generally speaking, the economic environment continues to be challenging. It continues to be uncertain, right? For us. And Joe alluded to at the beginning of this call, some of the drivers, right? Clients are being very cautious because they don't want to overcommit. And so slower than we had anticipated. I think slower than some economists have been saying, but there have been predictions over a recession. We don't know what's going to happen. When Joe touched on rate cuts. So it's clear, if there's one thing I think that's clear is, I don't think anybody knows what's going to happen, right? And so I think it's just imparting significant amount of caution that continues to be the case across effectively every industry.

Sure. That makes sense. I appreciate that. And then you mentioned that the sequential increase in activity is similar to normal seasonality going from Q1 to Q2. Is the margin development similar as well to pre-COVID? Or how do you think about the margin expansion going from Q1 to Q2 versus normal?

Yes. Josh, this is Jeff. Good to talk with you. Yes, I think the anticipation, Josh, and contemplated in our guide is a fairly seasonal improvement in our bottom line profitability and overall operating margin. When you look at the first quarter, obviously, seasonally lower because of the payroll tax dynamic. Clearly, we're getting the alleviation of that in our second quarter guide. The margins, as we've mentioned a couple of times have been very stable from a Flex margin standpoint. So absent the alleviation of the payroll taxes, expect that to be stable Q1 to Q2. Dave and Joe each touched on the capacity that we have within our current associate population. And I think that gets to a point, Josh, where we can absorb capacity if we were to see some additional revenue growth higher than perhaps what we contemplate. So that gets you into a what we expect to see, a profitability kind of normal seasonal uptick. And I think the answer to that is yes. We are still, as we've talked about in the past, investing in our enterprise priorities and continue to advance those as we look to the long term. As we talked about the slightly greater than $2 billion in annual revenue, in double-digit operating margin, our enterprise priorities play a significant role in that. So we're still making those investments for the long term. But yes, I think the short answer is yes.

We'll take our next question from Tobey Sommer with Truist.

With respect to the sequential growth you're anticipating in tech, are you accessing new customers to achieve that and taking some share? Or is this a pickup in sort of staying customer growth?

Yes. Tobey, this is Dave. So the answer is both, right? So -- we obviously have had some success. It's been pretty broad-based. I would say, across every industry, as I said, across many different clients. As you might expect, some larger clients when you don't necessarily have a lot of incremental spend. We obviously have a very strong sales engine and diversification is always an important part of what we are doing and what we continue to attempt to do. So is some of that growth from new client logos? It sure is. Yes. So it's a combination of those things that we're seeing, but I would say in a footprint that we've consistently been attacking. So large clients, we don't do business with every large client, and there are certainly plenty of opportunities to build business both with new clients and to gain additional client share. So again, a combination of both of those things.

I want to get your perspective on your customers internal recruiting capacity because we talk about cycles and so forth, but this has not been a recession. It's been a drift down for 18 months, 2 years in outsourcing, recruiting demand. We've had GDP growth, and we've had a pretty good job growth. I'm trying to get your perspective on what growth would look like in the staffing industry and in your own business in the first year of sort of an acceleration in growth where there is more demand. Can your customers satisfy kind of more of that themselves? Or do you think they're going to have to turn to you pretty quickly?

Yes. Tobey, it's Joe. We're going to see the same cycle that we always see. I mean this is another pattern that has existed probably going back into the '90s at the advent of the monsters and kind of the level field -- leveling the playing field a little bit on talent access. And ultimately, what happens is during this [ port ] in the [ cycle ] -- I mean, their recruiting capabilities have been decimated. What's going to happen when it turns is, yes, they're going to be [ swarming ] to providers such as the Kforcers and others of the world because they're not going to have recruiting capacity. And then what's going to happen is they're going to start to hire recruiting capacity, build recruiting capacity, and then we're in the thick of the cycle where there's demand across the board for everybody. So we don't really feel that. I mean this is one of the things I try and coach individuals on this. When they're making moves for money, purely money, that ultimately what happens is when we go into tougher times, the first function that's cut inside these large corporate customers is the recruiting function. And sure enough, that's what happened to many of our individuals this cycle as it's happened in other cycles. And then they find themselves in difficult spots in terms of career-wise and those types of things. So this cycle -- this is one of those ones that just keeps coming around and it plays out the same way every time.

And that concludes the question-and-answer session. I'd like to turn the call back over to Joe Liberatore for any additional or closing remarks.

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