Kforce Inc. Aktie

Ladies and gentlemen, thank you for joining us, and welcome to the Kforce Third Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Joe Liberatore, President and CEO. Please go ahead, sir.

Good afternoon, and thank you for your time today.

This call contains certain statements that are forward-looking are based upon current assumptions and expectations that 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 the Investor Relations portion of our website.

We are extremely pleased to deliver a quarter of accelerating revenue and earnings growth. Revenues, which exceeded the high end of our guidance reflect the continued build of momentum that began in the second half of 2025 as evidenced by another quarter of sequential growth and further accentuated with year-over-year growth rate in our technology business of nearly 8% that is roughly equivalent to our pre-pandemic compounded annual growth rate.

As Jeff Hackman will cover in more detail, this momentum has continued into the fourth quarter, where we're expected to deliver another quarter of strong sequential billing day growth.

During the challenging years of 2023 to 2025, we didn't hang our heads. We spent considerable time selectively and responsibly investing in our people, strengthening our service offerings and evolving our brand and go-to-market strategy, supported by our integrated strategy efforts and fine-tuning our world-class client portfolio.

We also weren't unerved when the dramatic evolution of technology that occurred with AI in the fall of 2022 because across Kforce 64-year history, we have navigated and helped our clients navigate several defining periods of technological change from mainframe and personal computing and the Internet to mobile technology and cloud computing. We witnessed that each transition reshaped the labor market, yet it also created new opportunities as workers, particularly technology professionals, develop new skills and adapted to the evolving demands.

Over time, these cycles ultimately expanded the number and breadth of technology-related roles. In fact, there is some recent evidence supporting our historical experience with technological changes playing out with AI.

Recent research and labor market data continues to reinforce the durability of technology talent demand even as AI automates a significant amount of coding activity. Indeed, data showed U.S. software development jobs postings have increased nearly 15% since February 2025, with that growth significantly concentrated in senior roles, which aligns well with where we have historically focused.

Longer term, the U.S. Bureau of Labor Statistics projects employment for software developers and related roles to grow approximately 10% through 2035, much faster than the average for all occupations.

Our approach to AI remains deliberate and balanced, both within Kforce and how we support our clients. Internally, we are examining our core processes and introducing AI-enabled capabilities where they can meaningfully improve the quality and speed of the associate and client experience, resulting in improved productivity and operating leverage.

Externally, we are continuing to build fluency across our sales team and leadership while expanding the specialized AI expertise within our consulting solutions organization. We believe that enterprise adoption of AI is still at the early stage and will likely develop over time, much like other major technology transitions.

The greatest opportunity will extend beyond the technology itself to the thoughtful and secure integration of AI into business processes and operating models. Capturing that value will require organizations to bring together strategy, talent, data, governance and change management to produce measurable outcomes.

We, therefore, expect growing demand for highly skilled professionals and teams capable of designing, implementing and scaling AI, data and broader digital transformation initiatives. We believe clients will progressively turn to outside expertise to redesign business to be AI native.

A recent example of a major U.S. financial institution bringing in 1,000 technology consultants to help align their internal systems with recently acquired AI tools is indicative of how outside expertise can be leveraged.

With our technology talent solutions and consulting capabilities, Kforce is well positioned to help clients modernize their operations, translate technology investments into business value and build competitive advantage. No matter the pace of innovation, organizations will continue to need experienced professionals who can connect emerging technologies with practical execution. We believe that need supports the long-term demand for technology talent and consulting solutions that is at the center of our strategy.

The demand for flexible technology talent is broadly based and extends beyond AI. The labor environment remains a bit mixed with IT unemployment rates remaining relatively low at approximately 2.9%, indicative of a tight market for technology talent.

At the same time, recent [ BLS ] data indicates modest job declines in the information and professional services sector. This is an environment where many companies remain hesitant to add full-time staff, while the project-based nature of technology work may further incentivize clients to leverage flexible talent solutions.

Organizations are also increasingly turning to flexible talent models to advance large backlogs of high-priority technology initiatives. Broader uncertainty, including geopolitical tensions, rising interest rates and related volatility in the global energy markets has further reinforced the need for agility. We believe these dynamics highlight the value of flexible workforce solutions as clients adapt to near-term uncertainty while assessing the longer-term implications of emerging technologies on their business and talent strategies.

As a result, we remain encouraged that our operating trends and revenue improvements since late 2025, are consistent with a more typical cyclical demand recovery.

Our business model is intentionally simple, organically driven and intensely focused. By limiting inorganic growth within our existing service areas, we protect our teams from unnecessary complexities and distractions. That focus allows our people to do what they do best, build deep relationships and partner with clients to solve their most critical business challenges. Our strategy has been thoughtfully refined over time not overhauled because it is proven durable. That focus, combined with a unified and resilient culture is a real differentiator for us and central to our consistent market outperformance.

I am incredibly proud of the determination of our people and deeply appreciative of the trust our world-class clients continue to place in Kforce. The way our teams collaborate, serve our clients, and move our strategic priorities forward is creating meaningful momentum across Kforce and clear evidence to me that our people are operating more fully as One Kforce.

With that, I will turn the call over to Dave Kelly, our Chief Operating Officer, for additional perspective on our performance and operating trends. Jeff Hackman, our Chief Financial Officer, will then review our financial results and outlook in greater detail. Dave?

Thank you, Joe. Total revenues exceeded guidance on the strength of our technology revenue growth of 7.8% year-over-year and 2.5% on a sequential billing day basis. While there's been a considerable debate about whether AI tools and technologies will constrain demand across our sector, over the last 4 quarters, we're seeing buying patterns improve and have delivered revenue growth that is at or above pre-pandemic norms.

Both consulting and traditional staff augmentation revenues are growing, and our Consulting Solutions business has been growing in excess of 10% annually for the last few years. Our client portfolio is exceptional. Our go-to-market and integrated strategy efforts are gaining traction, and our culture is unmatched. Clients remain measured in their technology spending through our recent acceleration in revenue growth and leading indicators suggest that more projects are being greenlighted and demand for our services is increasing.

Our results and operating trends indicate that clients are prioritizing critical initiatives in digital and the platforms that support AI strategies and other critical projects that may have been deferred. Our growth rights provide concrete evidence that we are gaining share with our clients and across the broader market.

Importantly, the improvement in our business has been broad-based with positive trends evident across a wide range of industries and skill sets within our client portfolio. We continue to see growth in AI-related data, digital and cloud projects while also experiencing a ramp in demand for platform engineering roles and projects. It seems increasingly clear that the demand for flexible talent with high-end skill sets and technology is strengthening despite overall technology job growth being tepid, which further validates our focus on delivering high-end solutions to clients.

Overall technology demand by industry remains broad, but with particular strength in financial services, wholesale trade and in professional and business services. As part of delivering innovative solutions to our clients, we continue to make targeted organic investments to deepen our consulting expertise, assist our clients in translating business problems within AI use cases and more rapidly developing potential technology solutions. These investments include an increase in our innovation capabilities and increasing the depth and size of our team of domestically based technology experts and ensuring they are engaging in tandem with our talented sales associates to assist with early-stage client exploration and use case advancement.

During the third quarter, our Consulting Solutions business achieved record levels of new contract award value and converted the highest percentage of pipeline opportunities in its history. Our fully integrated sales and delivery model combines onshore, nearshore and offshore talent from our [ Pune ] delivery center to give clients a unified experience across consulting, project-based work and traditional staffing needs spanning a broad range of technologies and skill sets.

Demand is strengthening across our service portfolio with clients increasingly open to discussing new opportunities. After a relatively slower start to the quarter in July, which is fairly typical during the summer, we saw front-end activity levels and conversion ratios meaningfully improved in August, and we've seen continued strength in September and October. These elevated activity levels and improving conversion ratios are translating into increasing project wins and accelerating revenue growth.

Assigned and attrition also performed better than expected in the third quarter, which speaks to the overall health and sustainability of the operating environment. We continue to outperform broader industry trends and momentum in the business has clearly strengthened as reflected in our Q4 guidance.

We've maintained a stable to slightly improving average bill rate in technology over the past 4 years, which is encouraging and reflective of our higher quality, higher margin revenue stream. Our average bill rate in Q3 was $91 per hour. This reflects the growing mix of consulting-oriented engagements which command higher bill rates and stronger margin profiles as well as disciplined management of wage inflation and core technology skill sets.

Together, these factors have effectively offset the bill rate pressure associated with a greater mix of consultants based outside the U.S. We expect to continue seeing a stable to slightly improving average bill rate as technology labor continues to upskill in the face of advancements in AI.

Demand remains strong across our core practice areas, including data and AI, digital platform engineering and cloud. The number of opportunities in our consulting solutions offering continues to expand and will be a key driver for our sequential growth in Q4. These disciplines are foundational to the development deployment of AI solutions and we believe organizations will increasingly require specialized talent to execute their strategies.

Looking forward to Q4, we expect overall revenues to improve sequentially in the low single digits on a billing day basis, and for year-over-year growth to be stable with third quarter levels even against the more difficult prior year comp. Over the last several years, we made responsible adjustments to aligned head count with revenue levels and productivity expectations. We selectively added head count in the third quarter given our exceptional operating trends. We expect the productivity improvements that we are driving, particularly the greater efficiencies expected from AI-enabled solutions to generate additional leverage as we grow.

At the same time, we've continued to invest in our Consulting Solutions business and other strategic initiatives that we believe will support long-term revenue and profitability growth.

We remain energized by the opportunities ahead and confident in our ability to sustain recent momentum while continuing to deliver strong results that exceed overall market averages. Our success is grounded in the deep trust and long-standing partnerships we've built with our clients, candidates and consultants. These relationships remain the foundation of our growth, innovation and long-term success.

I'll now turn the call over to Jeff Hackman, Kforce's Chief Financial Officer.

Thank you, Dave. Third quarter revenues of $357.8 million increased 7.5% year-over-year and exceeded our expectations. Earnings per share of $0.90 benefited in the third quarter by the recognition of a $0.12 gain under our corporate owned life insurance policies. Excluding this gain, earnings per share would have been near the high end of guidance for the third quarter improving approximately 24% over the year ago period.

All aspects of the business continued to improve in the third quarter, driving very strong results from top to bottom. Our overall gross profit margin was at the midpoint of our expectations, increasing 50 basis points year-over-year to 28.2%. The stronger gross margin profile reflects not only strong demand but also a continuation of highly disciplined pricing by our people and further improvements in the quality of our revenue streams from a business mix standpoint that we are strategically driving.

As revenue growth has accelerated over the last 12 months, we have also increased our gross profit margins, which is not a trend that has been universally delivered across our sector. We are really proud of how our firm has executed and that our clients are recognizing the value that Kforce provides across both our technology talent and solutions offerings.

Sequentially, gross profit margins decreased as expected by 30 basis points, driven by a lower mix of Direct Hire revenues and slightly higher health care costs.

Flex gross profit margins improved 60 basis points year-over-year and was in line with the midpoint of our expectations. As stronger-than-anticipated bill pay spreads offset slightly higher health care costs.

Health care costs have generally come in as planned year-to-date, but can be difficult to project by quarter. As we look beyond 2026, we expect our higher-margin solutions engagements and offshore delivery to continue supporting further margin expansion opportunities. As to the fourth quarter, we expect bill pay spreads to remain broadly stable sequentially and for us to experience typical seasonal impacts from higher paid time off around the holidays.

SG&A as a percentage of revenue was 21.6% and benefited by 60 basis points because of the aforementioned gain under our corporate owned life insurance policies. Adjusting for this gain, SG&A costs were at the low end of our guidance of 22.2% to 22.4%, demonstrating an ability to continue delivering operating leverage as revenues expand.

As Dave mentioned, we made selective investments in our sales and recruiting teams to support the accelerating growth and added further depth to our consulting teams. We are largely absorbing the near-term cost implications of these investments through the leverage that our revenue growth is providing.

As previously discussed, the Workday implementation is expected to result in higher noncash depreciation and amortization expense following the early 2027 go-live. We continue to expect the more significant benefits to emerge in late 2027 and build more fully throughout 2028, enhancing operational efficiency and supporting long-term margin expansion.

Our operating margin was 6.3%, which benefited by 60 basis points due to the gain and our effective tax rate in the third quarter was 28.6%, lower than anticipated because of the tax-free nature of this gain. After factoring in this game, our operating margin and effective tax rate met the high end of our expectations.

Operating cash flow was $9.5 million in the third quarter. below our expectations due to a temporary payment delay at a large client that was resolved in early October. The overall quality of our accounts receivable portfolio remains very strong. During the quarter, we returned approximately $6.7 million to shareholders through dividends. We did not repurchase shares, which reflects our near-term priority of maintaining current debt levels.

We have repurchased approximately 15 million shares at an average price below $30 per share thus far in 2026. And returned another $20.2 million in dividends. an aggregate amount that has exceeded operating cash flows.

Net debt was effectively unchanged quarter-to-quarter. Our balance sheet remains strong with leverage of approximately 1.3x trailing 12-month EBITDA and providing continued financial flexibility.

Looking ahead, we will remain disciplined in deploying excess cash after funding our capital needs and quarterly dividend, balancing debt reduction with opportunistic share repurchases. Our return on equity remains strong at approximately 30%, reflecting disciplined capital allocation and our ability to generate attractive returns while investing to support long-term growth.

Turning to our outlook. The fourth quarter includes 62 billing days, consistent with the fourth quarter of 2025, but two fewer billing days than the third quarter of 2026. We expect fourth quarter revenue to be in the range of $352 million to $360 million and earnings per share to be between $0.62 and $0.70.

Our guidance assumes an effective tax rate of approximately 28.7%. At the midpoint of guidance, revenue is expected to increase 2.7% sequentially and 7.2% year-over-year. Our outlook assumes a stable operating environment and does not reflect any unusual or nonrecurring items.

We remain confident in our competitive position and our ability to grow faster than the market, continued progress in business mix, margin expansion and operating leverage strengthens our earnings potential as demand improves. We remain confident in our ability to achieve an operating margin of at least 8% and as annual revenue returns to $1.7 billion, representing more than 100 basis points of improvement from the margin achieved when we last operated at that revenue level in 2022.

Operating margins that we have delivered thus far in 2026 are significantly greater than the operating margins reached previously at similar revenue levels, which reflects disciplined execution, a stronger business mix, effective pricing and continued investment in our sales, solutions and enterprise capabilities.

On behalf of the management team, I want to thank our associates for their continued dedication and commitment to our clients. Their contributions remain central to our performance and our confidence in the opportunities ahead. We would now like to turn the call over for questions.

[Operator Instructions] Your first question comes from the line of Mark Marcon with Baird. Please go ahead.

Good afternoon, great results. Wondering if you can talk a little bit about -- you're seeing demand pick up. There's a lot of companies that are coming off the sidelines and implementing on programs that were deferred. To what extent do you think your results are a function of just the broad increase in demand relative to picking up share? And specifically what you've been doing both offshore as well as with some of your specialized higher-margin solutions?

I appreciate the question, Mark. This is Dave. So I would say a few things, and we alluded to these, I think, in some of our remarks that we've been sitting here for the last 3 or 4 quarters now indicating that we've seen a pickup of indicators. We've seen improving client conversations.

Obviously, there's been a lot of discussion in the marketplace about AI and AI-related investments, I would say. Certainly, that is a part of it. Our consulting services team has had a really nice period of growth. We've seen significant improvement in pipelines there. I think our AI and related pipelines are up something like 20% year-over-year. So certainly, that is part of the story. And our expectation is that it's going to continue to be the case as we move forward here, frankly, isn't anything in the marketplace that we're seeing that suggests that it's going to slow down.

I would say in addition to that, we've been talking for quite some time about a lot of deferrals that companies have had in terms of the other technology initiatives that they've wanted to do, right? They've always been trying to prioritize mission-critical things and they've really gotten to a point in many respects that have said, we really got to do this. We can't wait for things to turn around. We've got at least some visibility that things are going to continue to improve for our business, and we've got to make these investments. Certainly, still some uncertainty in the marketplace, but they're spending there as well.

Their expectations, obviously, and it's reflective of some of the changes that we've made in our model. It's to make sure that they're effective in meeting those needs in a very cost-effective manner. So certainly, our offshore facility is helping facilitate that.

We've talked in the past, especially about the idea of blended projects in our consulting services area. So we're seeing it pretty broadly across different types of business, not just AI, but general technology spend. We're seeing it broadly across many industries. So I wouldn't suggest to you that there is any particular industry driver as well. I think, in fact, 8 of our 10 industry sectors have been stable or growing year-over-year. So I think Joe used the word broad-based or I did. I can't remember, maybe both of us did. It clearly is has been and we expect will continue to be the case as it relates to demand.

Yes, Mark, the last part to your question that Dave didn't touch upon was overall market share. Yes, I have to complement our teams. Our teams have really been executing. We really -- we did a lot of training over the last several years. We've put a lot of new programs in place over the last several years. And I couldn't -- we couldn't be more proud of our team, the leadership and just how people are executing.

So based upon the data that we're seeing relative to the space, if you were to look at performance this quarter and our guide, it would appear that, that is that that's above what our market is projected. So obviously, that would lead one to the conclusion that we are capturing market share. We also do know that we're capturing client share.

Mark, there is one other way I think we need to slice this business as well. we've talked about as a core staff augmentation is an important part of our business as is solutions work, right? Our objective has always been to meet client needs from a talent perspective in any way they want to buy.

And so that strength that we're seeing is across that spectrum as well from staff augmentation all the way through our solution space. So broaden that sense as well.

Great. That actually led to one of my other questions, which is can you give us a sense for your gross margins on a year-over-year basis, on Tech Flex has been improving, despite the higher medical care costs and various elements along those lines.

But what are you seeing with regards to the mix of your business that's now offshore and solutions relative to domestic staff on. How much is that increase? Can you give us a sense for how big that is? And can we see the gross margins continuing to increase as we look out a little bit further into next year and the following year if this mix shift continues.

Yes, Mark, this is Dave again. So it's still certainly a small part of our footprint. We opened up that facility in [ Pune ] gosh, a year, 1.5 years ago now. We've had some nice growth. Our focus has been obviously in supporting our consulting solutions business. And so we've been very diligent about doing that. We've touched on that. So it is still a small percentage of the business.

Frankly, I think it will grow, but we're seeing improving bill rates in our consulting services, which, as we've said in the past, we typically carry margins 400 to 600 basis points higher than a staff organization assignment. So you're getting that offset.

The other thing I would say is margin improvements also, I think, are a good reflection of scarcity account and demand for high skilled labor, right? We've got a very concentrated revenue footprint in the high skill area, and we've been very diligent about maintaining that because we think that, that is an area where clients are willing to pay for value and scarcity of talent.

And I think, Mark, this is Jeff. I think you're hitting on a key point to our story as well. I mean it's pretty neat when you see the revenue trajectory meaningfully inflecting us starting to throw off growth. It's comparable to our pre-pandemic technology growth rates. If we look across our business.

Our average bill rate actually expanded, I think, for the second consecutive quarter, so it's approaching $91 an hour. The margin profile has continued to be very attractive. I think it was up 60 basis points in our technology business year-over-year.

To Dave's point, he touched on the strategic, continuing to drive that higher mix, both within our Consulting Solutions group in addition to the business that we have nearshore and offshore. We've talked about that having dramatically higher gross margins, but at a tactical level as well. I would give it to our teams. We've talked about the last couple of quarters at a tactical level. We are exercising really, really strong pricing discipline.

Joe talked about some of the training that we've done. We've done training in and around that as well. So our people from soup to nuts are just executing at a high level. And my compliments go out to the team. And that's frankly something Mark that within our peer set, you haven't heard a lot about margin enhancements on a year-over-year basis and with us you have. So I think it's my compliments to the team again.

Yes. I mean if I'm hearing you correctly, I'm hearing you indicate that you think that we can continue to increase the margins because it sounds like that's the direction where there's a greater percentage on both ends of the higher margin that you're working on. And then you've got price discipline with regards to domestic back augmentation. So correct me if I'm wrong, but I think you're basically saying the margins should continue to go up?

Yes. I think strategically, Mark, we are with intent driving a higher mix of business, and I don't expect that intent and what we're driving to necessarily change.

If you look at the long-term trajectory and the more traditional staff augmentation arena, and certainly, over time, that has become a bit more compressed. But I think we're overcoming that through some of the tactical measures that we're doing. You saw that over the kind of year-over-year comparisons. So yes, I think it's a balance, Mark, as you look at the long-term trajectory in our business.

Okay. Great. And then one last one. Just on the free cash flow, Jeff, you mentioned that you had that client that just basically delayed the payment but that's coming through. So should the free cash flow improve in a noticeable way in the fourth quarter?

Yes. I think, Mark, I think you hit the nail on the head. Our operating cash flows normalized for that client that kind of straddled Q3 and Q4 were effectively at our expectations. Q4, we're expecting also to be a cash flow positive quarter as well.

Year-to-date through Q3, we turned cash flow positive at the operating cash flow line. And I think, Mark, we would trade probably all day, any day working through some of the working capital constraints that we've seen in our business. We're trading that for certainly the revenue payouts.

Naturally, as you look back, Q4 and Q1 are historically some of our lighter operating cash flows, Q1 from a profitability, from a payroll tax perspective, and then in Q4, we have a lot of our annualized performance-based compensation plans. Those payments fall in the fourth quarter as well. So it will be certainly compared to Q3 a little bit more subdued. But certainly expect positive operating cash in Q4.

Your next question comes from the line of Trevor Romeo with William Blair. Your line is open Trevor. Please go ahead.

Good evening to the team. I did want to follow up maybe on the demand environment a little bit differently and particularly the progression over the past few months. So it sounds like you saw an improvement kind of from the low point in July and saw strength continuing in September and October.

So question here is, would you say what you're seeing now is kind of similar to, I guess, it's been a few years since we've seen a normal here. But similar to maybe a normal build that you would see into year-end? Or is it maybe a bit stronger than that given the momentum that you've been seeing lately?

Yes. Trevor, I appreciate the question. So as you alluded to, July was a little lower. I think that's more of a summer dynamic.

Frankly, yes, a nice build in August, September, October, I think we can actually feel very good about that. The strength that we're seeing here is reflective of a very good environment. So as I kind of think about where we are as a business, we've alluded to in the past, some pre-pandemic growth. This very much feels like a very normal environment where you've got talent that's shortage, you've got client demand, certainly, of work that they want to do. So flexible talent is really important.

So I think we can look at this very typically, right? The thought process that all of the AI dynamics might have a long-term or at least short-term impact on the need for Flex certainly appears to be a bit overstated, right? We're not seeing that. We're seeing a much more normal environment where skills and skill set needs have changed. And we, as a flexible provider of talent, our core competency is recruiting in the space and making sure that we can identify that talent. We do it very well. and we're taking advantage of that and meeting our clients' needs where that need is.

That's helpful. And then for my follow-up here, I know you talked about kind of selectively adding some head count in Q3 given the revenue trends you're seeing I think you've also talked in the past about having pent-up capacity on the sales side and you're also getting some productivity benefits from technology. So I guess I'm curious for a little more detail there, kind of more on what you're adding. And then kind of what gives you the confidence to add resources now rather than trying to maybe harvest more of that excess capacity and operating leverage?

Yes, I think it's a combination because I do think, Trevor, we are harvesting that capacity as well. So for us, let me answer your questions that I can remember them. So I'll start with the back end. Where are we adding those resources. We're adding them geographically in the areas where we've had the strongest growth and in the particular markets where we outstrip capacity, we need to make sure we don't fall behind the curve there, number one.

Number two, we're adding capabilities within our consulting services business. I've alluded to the growing pipeline there. And I think as our thought process here is to make sure that we're putting ourselves in a position where we're meeting our clients' needs, we were able to take the opportunity to gain client share certainly is the case.

And yes, we've got capacity. But frankly, growing near 8% when we came into the beginning of this year. I don't know that our expectation necessarily was to do that. So we want to make sure because our outlook is quite positive, that we don't get into a position where in a particular market, we don't -- we miss an opportunity because we don't have capacity.

So this is not a huge surge in adding. This is selective investments in particular markets, where we're doing extremely well with our clients. And then in addition to that, making sure that we're building the capacity for the building pipelines and our consulting services business.

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

Jeff, maybe to start off on just the margin conversation discussion we're having. I think in the past, you've said in '27, you still have some Workday implementation left and maybe that's in the first half. As you look at kind of revenue growth as we go into '27, if these trends continue, would you anticipate SG&A to grow slower than revenue growth and then also have a positive impact on gross margins as you were answering the question, do you expect improvement in margins as we go into '27? Or does that the improvement moderate and the real improvement happened to '21 after all the implementation.

So Kartik, good to be with you -- good to hear from you. So to answer your question on our Workday implementation, some of the benefits, I did put in the script, and this has been consistent with our prior calls that a lot of the benefits that we expect from leveraging the Workday products are going to start towards the tail end of 2027, and then we'll ramp more fully to the intended benefits as we work into 2028.

From an overall posture perspective, look at our business, growing close to 8% year-over-year in the fourth quarter, growing at 7% at the midpoint of our guide. Dave just talked about some of the investments that we've made in that demand and then deepening further our consulting expertise.

I think, Kartik, as you look into 2027, I would expect as you -- as it relates to in proportion to the revenue growth. I certainly would expect SG&A to increase at a lower rate than the overall revenue growth. So we do think that is certainly the expectation. And frankly, what we've been seeing over time.

You can look back. I think at similar revenue levels is what we're delivering today, you look back to fourth quarter of and you kind of look at a revenue per performer. We've done a really nice job and have improved the revenue per performer over that time span by 30%.

So to Dave's earlier comments about capacity and harvesting some of the productivity gains, we're certainly doing that. So hopefully, that helps, Kartik.

Yes. Kartik, I would just add a couple of other things. So kind of put the whole picture together. So we've got the benefits that we're going to derive from the Workday implementation. Jeff has already talked about the margins as we think about a strategic mix and the consulting business growing, that's going to be additive to margins. Certainly, gross margins as well.

As we grow our share of our business, it's in India, that is also a higher profit business. mix for us. That's adding as well. And then we've got scale opportunities, right? Leadership scale, and SG&A scale on fixed costs that we're going to have. So you take all of those things together, and that gives us great confidence in our ability to continue to improve margins well beyond where they are today.

And just as a follow-up, if I think about the consulting solutions contract and how long it takes to convert that to revenue. And I think you said in the third quarter, you had record activity. And I'm trying to just determine when that turns to revenue and how much of an impact do you think that could have in 2027.

Well, I would make -- well, things are -- we're at record levels because the business as well continues to grow, right? I alluded to the fact that, that part of our business has been growing for a number of years at a double-digit rate. Our expectation is for that to continue. So as far as that lead lag, we've got things that are coming into the chute in the coming quarter, that had been a quarter or 2 out an investigation as well. So it's really just a momentum build on itself.

Your next question comes from the line of Josh Chan with UBS. Please go ahead.

Congrats on a good quarter. I was wondering if you could talk to sort of your commercial success, I suppose, with the consulting and even in the staff augmentation what do you think is kind of leading you to be able to achieve kind of this level of success versus like the market?

Gosh, I think that there's a number of things that come to mind. We've touched a lot on the execution of the team. So our team has done an excellent job executing on a plan focused plan it goes to our strategic model as well, right? We are an organic story that is not distracted by anything outside of our core effectively technology business, in our F&A business, which is also doing a nice job.

Our model is very focused on a pretty narrow group of skill sets for which there is consistent demand. And we've got a client portfolio that we are focused on growing client share obsessively. And so you put all of those things together, it's a model that we've been executing on for a number of years, unchanged. All of those things, I think, have allowed us over a long period of time to outperform our peers.

And I would also add, I believe the backdrop has shifted a little bit. I mean we've seen now the last couple of quarters, rising conversions. Also, we see more resignations taking place which I think is creating a replacement demand aspect.

We basically view that as a positive signal regarding market health. That's the churn that's really been missing in the marketplace for a number of years now. which is really a sign of an overall healthier employment market. I mean I think this past quarter, our conversions were -- I think they were up about 23% year-over-year. Last quarter, they were up a little over 30% year-over-year. And I think that really reflects a greater client willingness to hire talent directly.

In addition to this, our teams are experiencing a lot more counteroffers today than what we were experiencing even a year ago. Along with consultants receiving multiple offers.

So while that creates challenges, it's actually very positive challenges and the kind of challenges that our team is very well equipped to deal with. So I do believe we have an overall backdrop that is also improving for us in addition to the execution points that Dave had touched upon.

Okay. That's really helpful color. I appreciate that. And then maybe one on the guidance. I guess, I know December is always a tricky month to predict. So I guess what does the guidance assume in terms of sort of the momentum into December and into the holidays?

Yes. And Josh, this is Jeff. I appreciate chatting with you again this quarter. we've got visibility, Josh. I think the -- certainly, the Christmas holiday and the New Year's falls at a weekend. We've certainly got a lot of experience in navigating through the holidays. Those are, to your point, always a bit tricky and uncertain -- we have taken into account all of what we would know to take into account from a fourth quarter perspective.

When you look at our guide at the midpoint in our technology business, it's up overall, we said in the script, 2.7%. Our technology business is expected to be up at the midpoint about 3%. As you look back to the fourth quarter of last year, we delivered 3% per billing day sequential growth. And last year, what we saw was somewhat similar to what we started seeing in the third quarter of this year.

Mid-August through the end of the quarter, and it was particularly strong. October started off very well last year and this year. Last year, as you remember, Josh, the momentum that we built went through the Thanksgiving Day holiday and went through the first week in December. Time will tell whether we see a repeat of last year. But we've taken into account our certainly our recent trends and as best as we can tell what we expect from a fourth quarter standpoint.

The next question comes from the line of Tobey Sommer with Truth Securities.

I wanted to ask a question about the path towards an 8% EBIT margin as we get back up to prior revenue levels. Do you expect the margin expansion to be evenly or just portionally driven by gross margin versus G&A leverage?

Yes. Tobey, it's Jeff. I think you're going to have a little bit more of a linear equation when you look at the gross margin and the Flex margin contribution towards that. Dave Kelly touched upon our continued strategic drive of a healthier business mix more geared towards our consulting solutions and more geared towards our nearshore and offshore business. Each one of those has significantly higher overall Flex margins that we have been driving, and I would continue to expect us to drive that into the future. .

We've talked about SG&A leverage. We certainly expect the benefits from our Workday implementation. I would imagine that's going to be a little bit more of a step function into it as opposed to a linear equation. I mentioned in my prepared remarks that we would expect to start to work into those benefits towards the end of 2027 and then more fully into 2028.

And then, of course, Tobey, between now and the $1.7 billion to get the natural lift from a scale perspective. So those three components, and I would tell you, the productivity comment that I made from earlier in addition to our Workday, we are constantly trying to look to give our people the tools and the technology to position them for the most success in driving productivity. So those are some of the components, I would say, the only one that's more of a step function versus linear would be the benefits that we expect from our work to implementation. Hopefully, that helps, Tobey.

It does. In the F&A business, do you have an opportunity to leverage your offshore presence in an equivalent fashion to technology? Or is there -- are there elements of that, that are different?

Yes, Tobey, this is Dave. No, not nearly to the extent when you think about our technology business and those are much more larger for us, larger project-oriented blended models that's what has led itself to the use of our offshore. Our F&A business is less of that type of business. So it's probably smaller assignments at clients. maybe a little bit shorter duration assignments as well. So it is not expected, at least at this point to utilize a lot of the offshore. That we're building.

Yes. The key is we're not doing BPO type oriented work, which is where you'd really see that come into play from an FA standpoint. And as David mentioned, remember, going back to one of our key drivers of going to India is because we saw more of this need for blended teams, a combination of onshore, nearshore, offshore teams for a variety of reasons.

One of those is access to talent, which is obviously why we're in India because of the access to the talent pools, especially from an AI standpoint in comparison to where the U.S. talent pool is at this point in time. So those are really the drivers, not necessarily in support of the FA business because, again, this went back to the solutions-oriented the types of projects that we are working on.

Great. And then last question for me is like from a visibility perspective and assignment length perspective when you blend in your exposure offshore, how is that trending? And do you have momentum into sort of visibility of that project duration elongating?

Tobey, this is Jeff. Yes, it's been pretty stable. Of course, we've talked in the past that our consulting solutions offering has longer overall assignment lengths -- the business that we have offshore is predominantly supporting our consulting solutions offering as well. So there's a little bit of a mix benefit there.

But overall, Tobey, when you look at the visibility in the business has been very, very stable, if not slightly elongating but nothing meaningful that I will call out.

We have reached the end of the Q&A session. I will now turn the call back to Joe Liberatore for closing remarks.

Well, thank you for your interest and support of Kforce. I'd like to express my gratitude to every Preserve for your efforts. And to our consultants and clients for your trust and faith in partnering with Kforce and allowing us the privilege of serving you. We look forward to talking with you again after fourth quarter of 2026. Thank you.

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

Ladies and gentlemen, thank you for joining us, and welcome to the Kforce Second Quarter 2026 Earnings Conference Call. [Operator Instructions]

I will now hand the conference over to Joe Liberatore, President and CEO. Please go ahead, sir.

Good afternoon, and thank you for your time today. This call contains certain statements that are forward-looking 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 SEC filings. In addition, we have published our prepared remarks within the Investor Relations portion of our website.

We are extremely pleased to have delivered results in the second quarter that again exceeded our expectations from both a revenue and profitability perspective. Overall revenues positively impacted in the first quarter of 2026, meaningfully expanded in the second quarter, and our guidance for the third quarter contemplates continued sequential improvement. As a point of reflection, the year-over-year growth rate in Q2 for our Technology business was at its highest level since the end of 2022. And our sequential improvement was the best we've experienced in 4 years. I am incredibly proud of the determination of our people and deeply appreciative of the trust of our world-class clients continue to place in Kforce as we help them advance more meaningful high-value engagements.

Our go-to-market approach, shaped by our integrated strategy efforts is clearly gaining traction. Across the firm, our people are operating more fully as One Kforce, bringing the full breadth of our capabilities to bear across our service offerings. The revenue inflection that we experienced in our business in the first half of 2026 is consistent with the improving macro demand environment for talent as evidenced by indicators such as the ISM Services PMI, ASA Staffing Index and the SIA Bullhorn staffing indicator that have strengthened over the last several months. In addition, overall U.S. job growth has moderated in recent months, but recent gains have been increasingly concentrated in professional and business services, which are far more aligned to Kforce's end markets than the growth drivers over the past couple of years.

Our results reflect disciplined execution and a meaningful shift in client behavior. Organizations are increasingly turning to flexible talent models to advance large backlogs of high-priority technology initiatives particularly as AI accelerates transformation and CEOs remain measured in adding permanent headcount. Broader uncertainty, including the geopolitical tensions and related volatility in the global energy markets has further reinforced the need for agility. We believe these dynamics highlight the value of flexible workforce solutions as clients adapt to near-term uncertainty while assessing the longer-term implications of emerging technologies on their business and talent strategies. As a result, we remain encouraged that our operating trends and consecutive quarters of revenue improvements are consistent with a more typical cyclical demand recovery.

Kforce has a very rich 64-year operating history. And as such, we've witnessed and participated in a major technology shifts before, including personal computing, the emergence of the Internet, the mobile revolution and the move to cloud computing. Each of these periods affected the labor markets, but over time, workers and specifically technologists, adapted by upskilling and retraining as technology evolved, resulting in a net increase of technology-related roles. From an AI perspective, we continue to take a disciplined approach, both internally and externally. Internally, we are evaluating our core business processes and selectively deploying AI-enabled solutions where we see the greatest opportunity to enhance productivity, improve the associate and client experience and drive operating leverage. Externally, we continue to educate and train our sales associates and leaders while adding specialized AI expertise within our consulting solutions organization.

We believe AI as one of the most significant technology shifts over the last several decades. However, we believe enterprise adoption remains in the early stages and is likely to follow a progression similar to prior transformative technology cycles. While much of the current focus remains on the underlying technology, our experience suggests the greatest value creation will come from effectively integrating AI into business processes and operating models. Successful adoption will require organizations to align strategy, talent, data, governance and change management capabilities in order to translate AI potential into measurable business outcomes. As a result, we believe demand will continue to grow for highly skilled professionals and talented teams who can help organizations design, implement and scale AI, data and digital transformation initiatives.

Through our technology talent solutions and consulting capabilities, we believe Kforce is well positioned to help clients navigate this transformation, accelerate modernization efforts and realize the value of their technology investments creating a competitive advantage. Regardless of how quickly the underlying technology evolves, organizations will continue to require skilled professionals and teams of individuals who can bridge the gap between innovation and execution. We believe this dynamic supports the long-term demand environment for technology talent and consulting solutions that are central to our strategy.

Our business model is intentionally simple, organically driven and intensely focused. By limiting inorganic growth within our existing service areas, we protect our teams from unnecessary complexities and distractions. That focus allows our people to do what they do best, build deep relationships and partner with clients to solve their most critical business challenges. Our strategy has been thoughtfully refined over time, not overhaul because it is proven durable. That focus, combined with the unified and resilient culture is a real differentiator for us and central to our consistent market outperformance.

Before I hand it off to Dave, I am grateful every day for the opportunity to work alongside such talented and dedicated colleagues. Their passion, expertise and commitment, continue to strengthen our business, advance our enterprise initiatives and position us well for the future. Because of their efforts, I remain confident in our strategy, our momentum and the opportunities ahead. 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 of $349.3 million, represented overall revenue growth of 4.5% on a year-over-year basis and 4.1% on a sequential billing day basis, both of which represent levels not seen in nearly 4 years. There has been a lot of discussion about whether we and the broader sector can continue to deliver revenue growth, given the much speculated negative demand impact of AI tools and technologies. Encouragingly, we've been successful at delivering 3 consecutive quarters of revenue growth that has returned to pre-pandemic and thus, pre-AI advancement norms. This growth is being seen both in our consulting revenues and our traditional staff augmentation business.

The strength in Direct Hire revenues across both our Technology and FA businesses was also a positive contributor for us in the second quarter, further signaling the desire for companies to add critical long-term test. Our client portfolio is exceptional. Our strategic direction is clear and unchanged, and our culture is unmatched. We recognize that there is still uncertainty in the geopolitical and macroeconomic environment. While we've been successful in our go-to-market strategy, leveraging the progress made with our integrated strategy efforts, clients continue to take a measured approach to technology spend.

With that said, our results and operating trends suggest that they are actively prioritizing critical initiatives in areas such as data, digital and the platforms that underpin AI strategies among other areas that may have been previously postponed and that we are taking client and overall market share. Importantly, the improvement in our business has been broad-based with positive trends evidenced across a wide range of industries and skill sets within our client portfolio. We continue to see growth in AI-related data, digital and cloud projects while also experiencing a ramp in demand for platform and application development roles and projects. Overall technology demand remains broad with 8 of our top 10 industries showing sequential growth and similar performance on a year-over-year basis.

We continue to make targeted organic investments to fortify the depth of expertise in our consulting solutions business to meet rising client demand for cost-effective access to highly skilled talent. Our consulting led offerings are contributing positively to the performance of our technology business supported by an increasing volume of opportunities. Our fully integrated sales and delivery model, which also leverages a combination of onshore, nearshore and offshore talent from our Pune delivery center addresses a growing need in the market, offering clients a seamless experience across consulting, project-based work and more traditional staffing assignments, spanning multiple technologies and skill sets.

We are seeing clear signs of a healthy demand environment across the full spectrum of our service offerings as clients are increasingly receptive to discussions on potential opportunities, ,many of which are focused outside the CIO function, as evidenced by a meaningful year-over-year improvement in client visits. Indicators in our business that support this and suggest a continuation of sustained strong demand in addition to meaningful gross margin expansion include approximately 18% year-over-year improvement in both job orders and in new assignment starts in Q2. We though June and early July are typically slightly slower months for front-end activities and new starts due to increased client PTO, more normal activity levels have resumed over the last 2 weeks and these indicators suggest a healthy demand environment that is conducive to driving continued sequential revenue growth in Q3, which is contemplated in our guidance.

The net is that we are driving disproportionately better results than the macro industry reading would suggest and the forward momentum in the business is good. We've maintained a stable average bill rate of approximately $90 per hour over the last 4 years while continuing to build a higher quality, higher margin revenue stream. This reflects the growing mix of consulting-oriented engagements which command higher bill rates and stronger margin profiles as well as disciplined management of wage inflation in core technology skill sets. Together, these factors have effectively offset the bill rate pressure associated with a greater mix of consultants based outside the U.S. Frankly, we would expect to continue seeing stability in our average bill rate as we look forward with the potential for slight enhancements as technology labor continues to upskill in the face of advancements in AI.

Demand remains strong across core practice areas, including data and AI, digital platform engineering and cloud. The number of opportunities in our consulting solutions offering continues to expand and will be a primary driver for our sequential growth in Q3. These disciplines are foundational to the development and deployment of AI solutions, and we believe organizations will increasingly require specialized talent to execute their strategies. This creates meaningful and durable growth opportunities for our firm. Looking forward to Q3, we expect the pace of overall technology activities to continue to improve across along historical pre-pandemic levels and for revenue to improve sequentially in the low single digits, which will result in further improvements in our year-over-year performance.

Over the last several years, we've made responsible adjustments to align head count levels with revenue levels and productivity expectations. We believe we have sufficient capacity to absorb near-term improvements in demand without requiring significant incremental resources, particularly as we continue to drive greater efficiency through AI-enabled solutions. At the same time, we remain committed to investing in our consulting solutions business and other strategic initiatives that we believe will support long-term revenue and profitability growth. We remain energized by the opportunities ahead and confident in our ability to sustain recent momentum while continuing to deliver strong results that exceed overall market averages. Our success is grounded in the deep trust and the long-standing partnerships we've built with our clients, candidates and consultants. These relationships remain the foundation of our growth, innovation and long-term success.

I'll now turn the call over to Jeff Hackman, Kforce's Chief Financial Officer.

Thank you, Dave. Second quarter revenue of $349.3 million was up 4.5% on a year-over-year basis, and earnings per share of $0.73 was up approximately 24% year-over-year. Our second quarter results not only demonstrate our ability to drive revenue growth in the face of secular growth concerns, but were parlayed with stronger-than-expected gross margins and enhanced profitability levels.

Overall gross margin was 28.5%, up 140 basis points year-over-year, driven by expanding Flex margins and stronger-than-expected Direct Hire revenues. Sequentially, gross margin increased 120 basis points, reflecting improved Flex spreads, a stronger-than-expected Direct Hire mix and a typical seasonal recovery from Q1 payroll tax resets. The enhanced gross margin profile has been a true standout for us, especially as revenues have inflected positively. This success reflects the value we deliver to our clients and are focused on improving the quality of our business mix.

As discussed previously, solutions-oriented engagements, along with our offshore business typically carry higher margins and growth in these areas have been an important contributor to our overall margin expansion. Looking ahead to the third quarter, we expect bill pay spreads to remain stable sequentially, reflecting the continued benefits of our pricing discipline and business mix strategy. SG&A expense was 22.7% of revenue in the quarter, an increase of 50 basis points year-over-year. The increase was primarily driven by higher performance-based compensation, which is rebounding from historically low levels reflecting the strong financial results we achieved thus far in 2026.

While the initial positive inflection of revenues and strength in gross profit is resulting in some SG&A deleverage, we do not expect this to perpetuate at even higher revenue levels. In fact, as revenues grow, improving productivity levels will create meaningful improvements in operating leverage as the business scales. We are beginning to see tangible benefits through improved productivity metrics across the organization. As these initiatives mature, we expect the resulting efficiency gains to drive additional operating leverage over time. While we are likely to see some elevated noncash depreciation and amortization expense in early 2027 post go-live from our Workday implementation, consistent with our prior commentary, we continue to anticipate realizing more meaningful benefits towards the end of 2027 and more fully into 2028, which should further enhance operational effectiveness and support long-term margin expansion.

Our operating margin was 5.4%, and our effective tax rate in the second quarter was 30.6%. On a year-to-date basis, we have experienced negative operating cash flows of $6.7 million, which is consistent with historical trends in periods where revenues have meaningfully and positively inflected. We expect to resume generating positive operating cash flows in the second half of 2026 as we monetize the higher levels of accounts receivable. We continue to carry a very high-quality accounts receivable portfolio and days sales outstanding was stable with prior year levels. During the quarter, we continued to return capital to shareholders with $9.6 million distributed through dividends of $6.7 million and share repurchases of approximately $2.9 million. We were more aggressive with our repurchase activity in the first quarter of 2026, leveraging the strength of our balance sheet, given what was believed to be and has proven to be a disconnect between our operating performance and demand trends and the current valuation of our stock.

As a result, net debt increased to $106.8 million at quarter end from $90.2 million in the prior quarter. Despite this increase, our balance sheet remains strong with leverage of approximately 1.4x trailing 12-month EBITDA, which we continue to view as a conservative level. Looking ahead, we expect to continue balancing returning excess cash generated beyond our capital requirements and quarterly dividend commitments to shareholders through share repurchases and paying down debt. Our return on equity remains strong at approximately 30%, underscoring the effectiveness of our capital allocation strategy and our ability to generate attractive returns while continuing to invest in long-term growth initiatives.

Turning to our outlook. The third quarter includes 64 billing days, consistent with both the second quarter of 2026 and the third quarter of 2025. We expect third quarter revenue to be in the range of $349 million to $357 million and earnings per share to be between $0.71 and $0.79. Our guidance assumes an effective tax rate of approximately 30%. At midpoint of guidance, revenue is expected to increase approximately 1.1% sequentially and 6.1% year-over-year. Notably, earnings per share at the midpoint of guidance represents a 19% increase compared to the prior year. Our outlook assumes a stable operating environment and excludes the impact of any unusual or nonrecurring items.

We remain confident in our strategic position and our ability to deliver growth that outpaces the broader market. The progress we have made in improving the quality of our business, expanding margins and enhancing operating leverage reinforces our confidence in the earnings power of the company as market conditions continue to improve. We also remain confident in our ability to generate an operating margin of at least 8% when annual revenue returns to $1.7 billion. The 8% annual operating margin expectation represents more than 100 basis points of improvement compared to the margin profile we achieved the last time we operated at that revenue level in 2022. As a reference point, second quarter operating margin of 5.4% is notably higher than the 4.5% operating margin in Q2 of 2020 when revenues were at approximately the same level. We believe this demonstrates the benefits of our disciplined execution, improved business mix, pricing strategy and investments in our sales, solutions and enterprise capabilities.

On behalf of the entire management team, I would like to thank our associates for their dedication, hard work and continued commitment to serving our clients. Their efforts have been instrumental in delivering our strong results and positioning the company for continued success in the future. We'd now like to turn the call over for questions.

[Operator Instructions] Your first question comes from the line of Mark Marcon with Baird.

Congratulations on the strong progress, particularly on the margin front as well as the inflection in terms of revenue continuing and accelerating. In terms of the revenue growth, Joe or Dave, you mentioned that there's an 18% increase in terms of the number of orders that you had in Q2. How does that compare to like the year-over-year increase that you had in the orders in Q1? And how is that trending as we get into Q3? And how should we think about fill rates?

Yes, Mark, I appreciate the question and the comments. So I would say in the comments that I made, both related to just general activity levels and visits as well as starts activity which I had mentioned approximated about 18% year-over-year in the second quarter. That's roughly what it was in the first quarter as well. So we've had good consistent demand. And as we look at -- and I mentioned this in my prepared remarks as well, some of the -- at least some of the visit activity, we've seen some good results. I think I said 2 weeks, it's actually the last 3 weeks of really strong activity levels as well.

So we feel good about not only what we've seen from a consistency perspective, but additionally, what we are looking at in the third quarter. So some good momentum. And I would tell you, obviously, we've had some improvement in year-over-year growth rates in Q2. We expect the same -- some incremental additional year-over-year improvement in technology, revenue growth in Q3. I think that basically reflects a pretty consistent fill ratio. So about the same -- about the same, which I think continue to be very positive.

That's great. And then I thought the gross margins were really impressive. And while the hourly bill rate is in the same neighborhood, it did have a nice sequential uptick. So I'm wondering if we can dig down a little bit with regards to like kind of the revenue split that's enabling you to generate these higher gross margins. Obviously, your offshore has higher gross margins, your consulting has higher gross margins. But can you just talk a little bit about the sustainability in terms of increasing those gross margins? Or how we should think about the mix and how that's trending and where gross margins could go?

Yes. Mark, this is Jeff. Maybe I'll start and maybe Dave Kelly can take part 2 here. Anticipated the question and going to be with you again here, Mark. Certainly, the margin story for us in addition to the significant inflection that we've had, certainly, with our revenue trends has been a really positive part of the story. I think when you look at our Technology Flex margins, they improved about 120 basis points on a year-over-year basis in the second quarter, and I think they were up about 80 basis points on a year-over-year basis in the first quarter. So certainly some sequential improvement there and our bill pay spread, which is great to see. When you layer that on top of the direct higher revenues, sequentially were up pretty strongly, I think, up 20% sequentially that really gives you a pretty powerful margin story overall.

We've talked about this probably, Mark, gosh, probably for the last 4 or 5 calls that we've really seen some really nice margin enhancements. And I think, frankly, in the second quarter, not much has changed. The success that we're seeing not only is by the increase in demand in some of the harder to find talent. We've talked on prior calls that we really are focused in that highly skilled technology skill set area, and I think that continues to bode well as far as pricing, but also several strategic initiatives. We've talked about the better pricing discipline to help ensure that our rates better reflect the value that we're providing to our clients. And I think certainly, the business mix has also helped.

You mentioned 2 of those. Our consulting solutions business continues to carry pretty significantly higher margins. We continue to improve the overall mix of revenue in KCS engagements. And then also on nearshore and offshore business continues to expand sequentially and year-over-year. So that continues to benefit us. And I'd be remiss, Mark, if I didn't say thank you to our people. Really, really proud of what our team has accomplished over the last 12 to 15 months against an overall not so great macro environment. So I think from a spread perspective, I mentioned it in my prepared remarks that we're expecting stability in Q2 to Q3. Reflection point for me when you look at our Technology Flex margins in Q2 of 2022. Flex GP was 26.9%. And we sit here today at 26.8%. So I think a lot to be proud of, very thankful to all of our associates and leaders for their efforts.

Yes, maybe adding a couple of things to Jeff's comments. So first of all, I think -- and we've talked about this a lot, right? We've got a pretty highly concentrated set of skills, right, high-end skills that we readily place, highly concentrated around it. We mentioned $90 bill rate. I think this, frankly, is also a reflection of the demand for that scarce talent, right? It continues. It has been. It continues to be an area where there's a scarcity of talent. We meet those needs well, maybe better than any in our space.

Just to kind of remind you of a couple of things to add on to Jeff's point, the margins in our consulting business are typically 400 to 600 basis points higher than in our traditional staff augmentation business. You mentioned our offshore operations, as we've mentioned in the past, we've built that predominantly in support of our solutions business. So that is a contributor to that point, Mark, to that incremental margin. We feel good about the pipeline for that business. I had mentioned in my prepared remarks that the growth that we expect sequentially in our Technology business is predominantly going to be driven by growth in the solutions business, which again has got very strong margins.

Pipelines in that business continues to be very good. I didn't mention, but I will, meting pipelines for generally speaking, that profile business are up 30% year-over-year. We feel really good about that. It is distributed pretty broadly, whether it be the AI space or traditional application development work. So we feel very good about the trajectory of that business. And consequently, really very good about where the margin profile is and where it will continue to go.

That's great. I was just wondering if you were being a little conservative with regards to the Flex gross margin guide, given that the higher-margin areas are the ones that are growing the fastest, as I look at the third quarter. Because obviously, sequentially, you got that benefit from the normal seasonal tax rate, but it seems like if those areas are growing faster, then what would be the reason why Flex gross margins wouldn't be slightly higher in the third quarter relative to the second quarter?

Yes, there's a little bit, Mark. I think maybe at the midpoint, they're expected to be down 10 basis points. So I think on the margin, not that significant of a change. There's a little bit of a seasonality between Q2 and Q3. Typically, it's a little bit higher paid time off within certain of our clients. So we typically see that a little bit in Q3, if you remember back, Mark, in recent history. Q4, of course, has a much greater concentration of [ BT ], but Q3 does have a little bit. So that's contributing partly to that seasonality.

Okay. Great. And then lastly, and then I'll jump off. But the incremental flow-through in terms of GP to the operating line was also pretty impressive. How are you thinking about like what's that portend with regards to your ultimate targets with regards to -- you talked about getting to 8% margins at $1.7 billion. But it seems like your incremental margins are running a lot higher. Are you getting close to diminishing your excess capacity? Or where would you say your excess capacity is right now? How much more revenue could we end up absorbing if we have to meaningfully step up on SG&A?

Yes. So maybe, Jeff, if you got some quantitative comments, I think I'd say a couple of things, right? So we've had some really nice productivity improvements, and we, I think, do an excellent job. Our people are very strong. But we, as I mentioned, are confident that they've got some incremental capacity. And so -- and frankly, are passionate, and we continue to be about running this business and maximizing productivity of our people, and therefore, the income they generate as well. So we certainly think there's more room to go there. You mentioned our ultimate -- well, you mentioned at $1.7 billion. I wouldn't say that's our ultimate operating margin objective, certainly 8% is a way point from our perspective.

But when you add to that, some of the expectation of growth that we will see in the longer term offshore, Jeff mentioned in the remarks that he may -- in the comment on the ongoing implementation of our ERP system and the fact that we're going to be going live in that in early 2027, the incremental operating margin, I think Jeff can remind us, I think it is a meaningful positive impact on operating margin. So there's a number of levers that we are in the process of pulling. Things are, quite frankly, going according to plan on all of those fronts. So we think there's real opportunity in a number of different places. I don't know if you have anything to add...

Yes. Mark, the only thing I'd add to that, you probably noticed last quarter that as it relates to the $1.7 billion -- and the 8.8% at $1.7 billion. We previously referred to that as approximately 8%. Last quarter, we changed that to at least 8%. So certainly, the relative degree of confidence quarter-to-quarter given the productivity and the investments that we're continuing to make in technology to drive productivity has increased our confidence with our profitability objectives. Part of this, Mark, also and the reason that we included in my prepared remarks, a little bit of a reflection back to Q2 of 2020.

We had relatively similar revenue levels as we did in Q2 of 2026, and we had 4.5% operating margin back in Q2 of 2020 and just to 5.4%. So certainly generating increased operating leverage because when you look at the gross margin line across those 2 periods, they're actually very close. So I think we're on the path that we've described with a bit of increased confidence in our integrated strategy efforts, clearly resulting in the Flex margin improvement that we expected. And Dave mentioned our Workday implementation as well. We expected a full 100 basis points of operating margin benefit from that. Part of that, of course, is no longer investing at the base that we are today and then the other one is the benefits associated with it. So still very much on path.

And 1 last point, Mark, that I would share with you. When we look at 2021, 2022 and we look at peak performance for our sales associates, we look at these populations based upon their tenure with the firm. The people who have been here less than a year, people have been here 2 to 4 years, people that have been here 4 plus years because as I've articulated, for many years. It's a compounding effect in terms of what those people are capable from a performance standpoint. In all of those buckets, people are significantly off where they were at that point in time, which leads us to believe we have ample capacity, and we actually look forward to watching our people get back to those prior peak levels.

These have been a grueling 4 years for them as well. And nothing makes us happier than we can provide them the platforms, the tools, the environment to be successful and capture those opportunities, both on the solutions front, as well as on the talent front because of our integrated approach and so that they can capitalize and start to obtain their goals and objectives from a financial earnings potential. So very enthusiastic about that. I know our leaders are, and I think our people are seeing the benefits of all the hard work over these past 4 years.

Your next question comes from the line of Trevor Romeo with William Blair.

Great to see the demand and the pipeline improve. And I had a question, particularly on the AI and data related projects. I think you talked about making some investments in the consulting solutions business there, including adding some specialized AI expertise. So maybe I was -- shed a little bit light on maybe how many experts you're looking to add? What specific skills or expertise they have? And then how hard it is to just find talent with the right skills of those pipes are is right now?

Yes, Trevor, I would say we incrementally bring people onto that team based on the demands that we're seeing. So we're -- we've done a lot of work on bringing in individuals and we're hiring those individuals out of all name brands that you would hear out there from a consulting standpoint. They're mainly being brought in, in those areas of focus that we constantly talk about, that are the key pillars of our go-to-market whether they be app engineering, whether they be modernization, whether they be data, whether they be cloud, and obviously, here over the last several years from an AI standpoint. So we're sizing our teams based upon the demand that we're generating from our customer base.

There is a long lead time because of the nature of this talent. It's the most in-demand talent. We have a really good internal recruiting capability as well as we have a partner network that we look at. As well as obviously some of our people are working with individuals. So we have an internal referral program. So this is front center. Again, I go back to 1 of our core competencies is recruitment. And so we're all over this, and we're going to continue to size the group to the appropriate size based upon what our pipeline demand is.

Yes. The only other thing just as a reminder, right? So that combination of excellent talent work seamlessly with our sales and recruiting organization. Joe touched on recruiting as a competency, our integrated strategy. We continue to believe when you combine that with the relationships that we've got, a fantastic portfolio of companies has worked quite well, right? I mentioned and I think just important to reiterate the growth we're seeing here is being driven from the consulting solutions business and in the staff augmentation business. So the whole idea here for us is to meet our clients' needs, how they want it met right? The talent models can change. It doesn't change the teams on the field that are providing these services and identifying the opportunities for them. So I think that is also -- continues to be a significant differentiator for us.

That's great. And then I have a follow-up on the Direct Hire business, which I think Jeff had mentioned was a big driver for the margin -- the gross margin expansion. So I think you had a nice acceleration this quarter and it was better than you expected in Direct Hire. At the same time, it's kind of interesting, you mentioned in the prepared remarks that this is what we're doing, too. I think CEOs are still measured in adding permanent staff generally. So what's your confidence in Direct Hire continuing to improve from here? And then if you look over a longer period of time, I think that business was more than 3% of revenue and double-digit percent of your GP in the past at peak. So is there anything different about the business today that would prevent that from getting back to those levels, I guess, as this rebound continues to press here?

Yes, Trevor. Yes, I think first of all, it's an important part of our model. It is not a critical place for significant investment, right? We will meet those needs as we need to make investments. As we see demand, we'll make it. But Intentionally, this is a small percentage of our revenue base. And I don't expect it to be meaningfully different from what we see as a percentage of total revenue because we, quite frankly, think that the opportunities in the project space and in the staff augmentation space or the place that we should invest, and that's a much more predictable, sustainable revenue stream for us. So that is a strategy that we've undertaken, and we'll remain committed to.

As it relates to the expectation, though, in the demand environment for Direct Hire, first of all, I'll say our expectation sequentially is for Direct Hire to be down. That is a seasonal thing. We see that every year. Our projection and our guidance for Q3 contemplates that, both in the revenue and the margin line. As we think about the long term, I think we think -- again, we're talking about a scarce talent source that clients need both on a flexible basis and on a permanent basis. I think that they're clearly in the long term as a market for that talent and the needs in the Direct Hire space. So I think we feel good about it. For us, we will take the opportunities to meet our clients' needs. But again, I don't see it accelerating as a percentage of total revenue.

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

There's been a lot of talk, obviously, about AI, both in terms of helping drive revenue and helping maybe lower cost for you. I'm wondering, as you look at the AI opportunity, what do you think is a bigger opportunity? Is it a revenue opportunity for the company over the next 12 months? Or is it the opportunity to help drive down costs for you?

Yes. This is Joe. I would say it's both, which is why we have an internal AI strategy to align with our firm strategy. And then obviously, we have a go-to-market external AI focused. So we're pursuing it from both fronts. So there -- they're completely independent of each other. Obviously, we get to play off of some things that we learn from exterior clients when we're working with them if we can apply some of those things internally, which closes the gap, which is part of the nature of this type of technology. So it's not an either or, it's both.

And then, Joe, I know you mentioned kind of June was seasonally slow and the early part of July, but the last 2 weeks of July have picked up and normalized. And when you talk about normalization, are we talking back to the kind of job order growth you were seeing before? Or is it a little bit different? I know it's only 2 weeks, but just to kind of maybe a little bit more granularity on how things are shaping up.

Yes. Kartik, actually, this is Dave. It was my comment, and I corrected myself. I just want to make sure -- no, no worries, Kartik. And just -- but I'll correct myself. Actually, I had mentioned -- it's actually in the last 3 weeks. And I would characterize those activity levels is actually improving, right, from where they had been. We've had a really nice 3 weeks. Three weeks just not a long-term trend make. But if we can sustain that, as we've seen gradual improvement, it will continue the gradual improvement that we're seeing. So again, I think I would characterize it as continued positive momentum and revenue growth momentum in our technology business, in particular.

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

Congrats on a good quarter. I was wondering if you could talk about your Flex margin within Technology. And you mentioned a lot of different drivers that contributed to the improvement. But I was wondering if you can bucket between, I guess, mix, price, cost, like what is the most impactful currently in terms of driving this type of margin improvement?

Yes. Josh, thanks for the comments. Good to be with you. It's probably difficult to precisely break down each of those. But certainly, pricing overall has been a very strong point for us in the marketplace. Some of that is the market in which we are playing in, but also the efforts from all of our people. We put a lot of focus and energy around us last year, and it's very clear that that's paying off.

You can also see the business mix over time has also improved. You look over the last year and the things that we talk about like our consulting solutions mix as well as our nearshore and offshore. Those aren't parts of our business that we've only been investing in for the last 12 months. So that's much more of a longer-term margin enrichment opportunity that being business mix. So I would say pricing overall and prioritizing that within the firm and then, of course, business mix has been also a tailwind for quite some time.

Yes. The only thing I'd add to Jeff's comments is we kind of look across the space. I think, frankly, our margin improvements have been us in class, right? They just have. But I think I would kind of reflect, there's a lot of great companies in the space. One of the things that we've said many times, we've got a very simple business model that's focused, it's unchanged over the years. Our people are very good at what they do. And they're focused on just a couple of things and meeting the needs of our clients and doing it in a focused way, I think as meaningful -- it's a meaningful reason why margins have improved. It's a meaningful reason why revenues for us have, over a sustained period of time, been better than industry benchmarks. So I think it's execution as well.

Yes. And I'll touch upon because Dave touched upon the execution and that it goes even further back than that being an operator of this business for many years. This all goes back to leadership, training, education, and I couldn't be more proud of our teams on the efforts that they put forth on that front, our field leadership, on executing the plan, our corporate partners on building the plant in an integrated manner. I mean, that's where this all starts because they don't -- the margins just don't magically happen. You have to have all the -- you have to lay all the right pieces of the puzzle and pull the puzzle together, and then you got to be able to execute it. And our team has just done a phenomenal job.

Right. Yes. Congrats on the results that are being seen. That's impressive. And then I guess my follow-up on -- I think you've been increasingly referring to this as like a cyclical improvement. So I was just wondering on the cycle, was there like a catalyst looking backwards to why your customers are growing their demand? Or was it just like a point of where projects were deferred so long that it just must continue. I guess looking back, did you see anything change over the last 1 to 3 quarters?

Yes. I mean, I think you're starting to see some of the truth of this come out in the mainstream media at this point in time. We've been talking for a number of years. We were in a job recession. And the jobs that are being created, we're not the jobs that drive the economic engine. Also, we stated for many years. AI was being used as escape for downsizing and rightsizing. It was strategically -- it was a strategic benefit to say that you're downsizing because of AI, productivity and efficiency gains versus to be candid and truthful and saying, we did a little bit of over-hiring in the pandemic, and we need to resize our organization.

So all of that now has kind of worked its way through. And now we're seeing what we believe there is more indicative of a normal cycle recovery coming out of a recessionary period this time being a job recession versus being a broad recession for a variety of reasons. I'm not going to get into the economics of that. That's not my expertise. But from the workforce and the employment world, I mean, that's just the truth of what's happened here. And now also, you have the -- you have the air coming out of the balloon in terms of AI, job destruction. You've seen the CEOs of the 2 major players walk back their comments. AI is not going to be a job of apocalypse at this point in time. Now it's AI is going to drive efficiencies for the individuals.

So it's all these pieces are coming together, which really gives us a lot of excitement of where we are at this point in time based upon the landscape, based upon the competencies that we've built out and based upon how our teams are executing.

And the only other thing I would add to Joe's comments, Josh, are we mentioned it, right? Joe mentioned what might be happening in AI. Certainly, there is uncertainty geopolitically in the economy, there's some uncertainty there and what our companies do when they need to get things done? They look for talent flexible talent, right? So you're seeing some of those characteristics play through as well.

[Operator Instructions] Your next question comes from the line of Tobey Sommer with Truist.

I wanted to ask a question on the gross margins within the managed services in the context of ramping your Indian operations. Within those, are you -- is the Indian operations even -- are they accretive even to the broader category or consistent with the broader category differential?

Well, I think, Tobey, I think maybe to make sure I understand your question. Are you saying -- I mentioned that -- our consulting solutions business has got margins 400 to 600 basis points higher than our staff augmentation business? What I was trying to say is that is inclusive of what we're seeing with our offshore business. So it is not accretive to that. It is generally accretive to the firm as a whole. I think if I understood your question correctly?

Yes. Yes, you did. And then in India, is it primarily services? Or are you able to provide discrete resources from a more traditional staffing perspective? And if you do both, what's the nature of the split now and over the longer term if you have a vision of it?

Yes. I would say, Tobey, the vast majority of the work that we're doing in India is in support of our solutions business. Might there be opportunities to support our staff augmentation business. Yes. Are we looking at that? And are we doing some of that business right now? Yes. We're certainly earlier on in that. So I think the story is yet to be told there. We're hopeful. Certainly, we're making the right investments to test the hypothesis that we can do that. But again, right now, it is very significantly weighted towards supporting our solutions business.

I appreciate that. And 1 more on this topic, if I could. From a TAM perspective, did establishing that operation at scale increase your TAM, increase your GP? I'm just wondering if there were any projects that can be serviced via this mechanism that you as a company maybe weren't a position to execute on a couple of years ago.

That's definitely the case, Tobey, right? I mean -- and I think we've touched on this in past calls. It's clear clients are looking to identify talent. They're looking to identify it in a cost-effective way. They're looking to identify it in an efficient way that maybe they can meet the clock, 24-hour clock, any number of reasons, and there were places that we were provided opportunities from our client portfolio that historically you might have had to say no to.

So this is built to support that business because of those trends that our clients are asking for. And so certainly, we're expanding the addressable market that -- and we're showing some positive signs here. So yes, and I think frankly, it would surprise I think everybody around the table here if that didn't become even more significant to be -- to have that capability. It's just -- it's table stakes at this point.

I appreciate that. And then just 1 question on cash and capital allocation. I understand the seasonal sequential drain on cash from ops when you're growing revenue sequentially at this pace. For the year, based on the 3Q guide, what sort of cash generation do you anticipate for the company, a broad range?

Yes. Tobey, this is Jeff. Good to talk with you. Yes. So certainly, year-to-date, you acknowledged it negative operating cash of roughly $7 million that's largely to be expected given the meaningful collection that we've seen from a revenue standpoint. Of course, we're paying our consultants weekly. Our DSO is about 58 days. It's been very stable year-over-year. So you would expect a bit of working capital creep in these early innings. Certainly, in Q3 and Q4, expecting meaningful operating cash flows. When you look back to last year, we were probably generating somewhere around $20 million on average in the back half of the year. So that should give you a reasonable sense of what the possibility is there. Of course, Tobey, the leverage that we're currently carrying at 1.4x.

The good news is the denominator being trailing 12 months EBITDA has been improving. It's up 20% year-on-year. So very comfortable with the balance sheet flexibility, share buybacks for us when you look at our balance sheet, we've crossed the $1 billion in total return of capital. So yes, we feel very good about the balance sheet and the flexibility and the path that we're on from a cash perspective.

There are no further questions at this time. I will now turn the call back to Joe Liberatore for closing remarks.

Well, thank you for your interest in and support of Kforce. I'd like my gratitude to every Kforce for your efforts and our consultants and clients for your trust and faith in partnering with Kforce and allowing us the privilege of serving you. We look forward to talking to you again after the third quarter of 2026. Have a good evening.

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

Good day, everyone, and welcome to the Kforce Q1 2026 Earnings Call. As a reminder, this call is being recorded. At this time, I would like to hand the call over to Mr. Joe Liberatore. Please go ahead, sir.

Good afternoon, and thank you for your time today. This call contains certain statements that are forward-looking, are based upon current assumptions and expectations 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 the Investor Relations portion of our website.

We are extremely pleased to have successfully driven results in the first quarter that again exceeded our expectations from both a revenue and profitability perspective. The momentum that we carried into the beginning of the year has continued to strengthen, resulting in year-over-year revenue growth for the first time in several years. As Jeff Hackman will cover in more detail, our trajectory has continued to improve in the first month of the second quarter, which we expect will lead to accelerating year-over-year growth in Q2 in the mid-single digits. I cannot be prouder of the tenacity of our people or more appreciative of the trust that our world-class clients are increasingly placing in Kforce to drive more meaningful and valuable engagements with them.

Our go-to-market approach, which was borne out of our integrated strategy efforts, appears to be paying dividends. Our people continue to operate more fully as one Kforce, leveraging the firm's capabilities across all service offerings. While recent economic data continues to point to a generally softer labor market for professionally oriented roles, our performance reflects strong execution and a clear shift we're seeing across our customer base. However, several of the leading indicators we track, which have historically signaled strengthening demand for our services are improving. Companies are increasingly turning to flexible talent strategies to move forward on significant backlog of high-priority technology initiatives, especially in the age of artificial intelligence where CEOs remain cautious to add permanent headcount. At the same time, heightened geopolitical uncertainty, including the conflict involving Iran has contributed to significant volatility in the global energy markets, resulting in sharp price increases across oil, gasoline, natural gas and electricity.

In this environment, clients are focused on agility. We believe uncertainty is reinforcing the value of flexible workforce solutions as organizations seek to adapt while they gain greater clarity around geopolitical developments and the longer-term impact of emerging technologies on their business and talent strategies. Against this backdrop, we remain optimistic that our recent operational data and several consecutive quarters of improving revenue performance reflect a more typical historical cyclical pattern consistent with prior demand recoveries. As we have stated, we've witnessed and participated in transformative technology shifts before such as personal computing, the emergence of the Internet, the mobile revolution and the move to cloud computing. Each of these periods of technological change impacted labor markets.

Yet over time, workers, including technologists, have continued to upskill and retrain themselves to improve the relevancy of their skill sets as technology has evolved. Over the last 50-plus years, we've placed skill sets that include mainframe operators, COBOL programmers, database administrators, web developers, mobile application developers, DevOps engineers, cloud architects, UI/UX designers, data scientists, data engineers, AI platform engineers, AI product managers, prompt engineers, et cetera. The point is the task change or, in some cases, completely go away. Job titles change, skill composition shifts, and at the end of the day, new roles are created. New businesses are spurred, new industries are created, resulting in a net positive amount of technology-oriented job growth as society's unquenchable thirst for technology advancements and productivity gains.

We believe generative AI and its offshoots into Agentic AI and Cognitive AI are in the early stages of the evolution and may just be starting to align with historical patterns we've experienced. Recruiting the right in-demand talent, assembling effective teams and implementing target enterprise-level initiatives are crucial for organizations seeking to successfully integrate and leverage these new tools to maintain a competitive advantage. Our strong position enables us to grow our client portfolio and bring on new client opportunities, thereby sustaining our history of consistent above-market performance fueled by client share growth, ultimately strengthening the foundation that delivers enduring value to our shareholders.

Our business model is intentionally simple, organically driven and intensely focused. By limiting inorganic growth within our existing service areas, we protect our teams from unnecessary complexity and distractions. That focus allows our people to do what they do best, build deep relationships and partner with clients to solve their most critical business challenges. Our strategy has been thoughtfully refined over time, not overhauled because it has proven durable. That focus, combined with a unified and resilient culture is a real differentiator for us and is central to our consistent market outperformance. As our operating trends continue to improve, we're also making great progress on our key strategic initiatives, including the implementation of Workday, scaling our India development center, advancing our internal AI initiatives and continued refinement of the execution of our integrated strategy. Further to that point, we are pleased to have recently announced the establishment of our AI innovation studio within our headquarters and associated AI pods in India to support evolving client needs.

As I conclude my remarks, I want to acknowledge the outstanding people who make up the Kforce team. I'm incredibly proud of their fortitude, adaptability and dedication demonstrated across the firm, particularly given the challenging business environment over the past 3 years. I am grateful every day for the opportunity to work with colleagues who bring this level of skill and commitment. Thanks to their efforts, we are well positioned strategically, and I feel confident in our trajectory and the opportunities ahead. 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 of $330.4 million represented a return to overall revenue growth for the first time since the fourth quarter of 2022. Encouragingly, we were successful at delivering year-over-year Flex revenue growth in both our technology and FA businesses. The first quarter is typically characterized by sequential revenue declines on a billing day basis due to calendar year assignment ends. This is a very normal part of our business and the broader sector. There's been a lot of discussion about our ability and the sector's ability to deliver revenue growth given the much speculated demand impact of AI tools and technologies.

A data point that we think is particularly relevant is that our first quarter performance was meaningfully better than the average sequential decline over the past 15 years prior to AI becoming an hourly topic of conversation. Our results were driven by a combination of lower levels of project ends and a faster-than-normal rebound in new assignment activity. Further to this point, as Jeff Hackman will cover in his prepared remarks, the midpoint of our guidance contemplates year-over-year growth in Q2 of approximately 4%. While clients continue to take a measured approach to technology spending amid an uncertain macroeconomic environment, investments in critical initiatives, particularly in data, digital and platforms that underpin long-term AI strategies are actively being prioritized by our clients.

Our recent momentum and operating trends suggest clients are increasingly greenlighting long postponed initiatives through the use of flexible workforce solutions that are strategic to their needs and don't have an easy or obvious AI-related solution. Importantly, improvements in our business have been broad-based with positive trends evident across a wide range of industries within our client portfolio and utilizing a wide range of skill sets. While we certainly continue to see growth in AI-related data, digital and cloud projects, we're also seeing a ramp in demand for platform and application development roles and projects. The demand for technology is broad-based. We continue to make targeted organic investments in our Consulting Solutions business to meet rising client demand for cost-effective access to highly skilled talent.

These investments are strengthening our value proposition by expanding flexible delivery models and deepening differentiated expertise. As a result, our consulting-led offerings are positively contributing to the performance of our technology business, supported by a strong pipeline of high-quality opportunities. Our fully integrated delivery model, offering a seamless client experience across consulting, project-based work and staff augmentation spanning multiple technology and skill sets remains a clear point of differentiation in the market. We've seen clear signs of improving demand across the entire spectrum of our service models. This integrated approach has been a core driver of our technology performance, enabling meaningful gross profit expansion over the past year despite a challenging macroeconomic backdrop while maintaining stability in average bill rates.

We leverage long-standing client relationships as the foundation of our model and focus on simplifying the buying process and accelerating decision-making. An increasingly important component of our ability to deliver cost-effective solutions is our global talent strategy, including access to highly skilled professionals outside the United States. Our development center in Pune, combined with strong domestic sales and delivery capabilities and a high-quality vendor network enables a scalable multi-shore delivery model that comprehensively addresses client needs. Demand for this channel continues to accelerate, reinforcing its strategic importance and strengthening our confidence in the durability of this model. We now have a multi-shore delivery model being utilized within 60% of our 25 largest clients.

We've been able to maintain a stable average bill rate of approximately $90 per hour over the last 3 years, while building a higher-quality, higher-margin revenue stream. The increasing mix of consulting-oriented engagements, which command higher bill rates and significantly stronger margin profiles, along with disciplined management of wage inflation and core technology skill sets has effectively offset the downward pressure on bill rates from a greater mix of consultants based outside of the U.S. Demand across our core practice areas, including data and AI, digital platform engineering and cloud remains strong, and our pipeline of consulting opportunities continues to expand. These disciplines represent foundational capabilities for the development and deployment of AI solutions, and we believe organizations will increasingly require access to specialized talent to execute their strategies, creating meaningful and durable growth opportunities for our firm.

Over the last several years, we've made responsible adjustments to align headcount levels with revenue levels and productivity expectations. As noted in last quarter's call, we implemented further refinements to our organization in the first quarter. Despite these actions, we believe we have sufficient capacity to absorb the near-term improvements in demand levels without the need for significant incremental resources, particularly as we continue to enable greater efficiency through our use of AI solutions. We remain committed to investing in our Consulting Solutions business and other strategic initiatives that we believe will drive long-term revenue and profitability growth.

The actions taken in the quarter provide increased confidence in our ability to continue making these investments while maintaining our previously stated profitability objectives. We are energized by the opportunities ahead and confident in our ability to sustain recent momentum while continuing to deliver strong results. Our success reflects the deep trust and long-standing partnerships we've built with our clients, candidates and consultants. These are relationships that continue to serve as the foundation for our growth and innovation. I will now turn the call over to Jeff Hackman, Kforce's Chief Financial Officer.

Thank you, Dave. First quarter revenue of $330.4 million exceeded our expectations and earnings per share of $0.46 was above the high end of our guidance. Our results for the first quarter demonstrate our ability to grow revenues while also driving a higher quality of business as evidenced by better-than-expected gross margins in the quarter as well as generating enhanced operating leverage. Overall gross margins of 27.3% were up 60 basis points on a year-over-year basis due to expanding Flex margins, which more than offset the impact from lower direct hire mix. Sequentially, gross margins were up 10 basis points in a quarter when they were expected to be seasonally down as improved Flex spreads and favorable health care costs more than offset the seasonal payroll tax resets.

The success we have had expanding our margin profile can be attributed to our teams pricing more effectively with clients to more appropriately reflect the value of our services and the benefit of higher quality business that we have been strategically driving. We have discussed that solutions-oriented engagements have an appreciably higher margin profile. As that mix has continued to improve, that has driven margin improvement. In addition, Dave mentioned that the mix of consultants working outside of the U.S., both through our nearshore partners and through our India business continues to grow. We have seen higher margins from our business abroad, which although it's had a relatively small positive impact on current margins, it could continue to provide upward opportunity if the overall mix were to continue to grow.

As we look forward to Q2, we expect overall Flex margins to improve sequentially due to the alleviation of higher seasonal payroll taxes, but for spreads to be relatively stable with first quarter levels. Overall SG&A expense as a percentage of revenue of 23.2% increased 40 basis points year-over-year, which was primarily driven by greater performance-based compensation due to the higher levels of financial performance we have been successful delivering in 2026. As discussed on our last call, the refinements we have made to headcount levels have provided incremental operating leverage, and we are continuing to make targeted investments in our sales and solutions capabilities while also maintaining investments in advancing key enterprise initiatives. While this will continue to impact near-term SG&A levels, we are beginning to see the benefits of these investments in our productivity metrics and expect continued improvements to create future operating leverage.

As we have stated on prior calls, we anticipate beginning to realize benefits from our Workday implementation more significantly in the second half of 2027. Our operating margin was 3.6%, and our effective tax rate in the first quarter was 30.2%. During the quarter, we remained active in returning capital to our shareholders with $18.6 million in capital being returned through dividends of $6.8 million and share repurchases of approximately $11.8 million. We were incrementally opportunistic with respect to share repurchases in the first quarter and utilized our strong balance sheet during a typically low cash flow quarter, given what we believe is a disconnect between our operating trends and demand environment and the valuation of our stock. This resulted in an increase in net debt to $90.2 million from $64.3 million.

Against trailing 12-month EBITDA, our leverage of 1.2x continues to be relatively conservative. Looking ahead, we expect to continue returning excess cash generated beyond our capital requirements and quarterly dividend to shareholders through repurchases, while being prudently opportunistic in repurchasing our shares. Operating cash flows were negative $4.1 million due to higher cash outflows in the first quarter associated with the actions we announced on our last call in addition to the timing of cash collections, which we expect to normalize in the second quarter. We expect positive operating cash flows of approximately $20 million in Q2. Our return on equity remains at approximately 30%.

The second quarter has 64 billing days, which is one additional day compared to the first quarter of 2026, but the same as the second quarter of 2025. We expect Q2 revenues to be in the range of $344 million to $352 million and earnings per share to be between $0.67 and $0.75. The effective income tax rate for the second quarter is 31%. The midpoint of our guidance of $348 million in revenue is up approximately 4% on a year-over-year and sequential basis per billing day.

Notably, earnings per share at the midpoint of guidance reflects a 20% increase year-over-year. Our guidance assumes a stable operating environment and excludes the potential impact of any unusual or nonrecurring items. We feel strongly about our strategic position and our ability to deliver above-market results while continuing to invest in initiatives that drive long-term growth. We are increasingly confident in our ability to generate at least 8% operating margin when annual revenues return to $1.7 billion, which is more than 100 basis points higher than when that revenue level was achieved in 2022. On behalf of our entire management team, I want to extend our sincere appreciation to our teams for their outstanding efforts. We would now like to turn the call over for questions.

[Operator Instructions] The first question comes from Mark Marcon from Baird.

Congratulations on the strong quarter and the even better guide. I was wondering if you could just talk a little bit about what you're seeing in terms of your trends by major verticals? And I'm particularly interested in terms of the financial services vertical. What are you seeing there? And just given the strength of the guide and the better-than-normal sequential uptick, at least relative to recent years, can you talk about any sort of new contracts that you may have won or gains that you're seeing among existing clients?

Mark, this is Dave. Thanks. So I would say, generally speaking, Mark, across industries, we're seeing either stability or growth pretty broadly. In fact, year-over-year growth in 6 of our top 10 sectors that we segregate the business in. In particular, I'd note strength in the information space and manufacturing space. Retail has been also strong as well. And we've had some benefit, in particular, with some pretty digitally enhanced clients in the retail space. So when we think about our business footprint. Professional services has had some negative impacts when you kind of look year-over-year. Those are really pretty much DOGE-related, we think, though. Financial services, you asked about specifically. We've seen a little bit of seasonal decline there, some reasonable, however, stability.

So I would say nothing materially out of some -- any variation across any industry. Maybe just to follow on, maybe give you a little bit more color. You asked a little bit about some of the indicators and pipeline. When we think about industry activities, projects, maybe I'll segregate a little bit into some metrics and then maybe a little pipeline information. When we think about some of the things that we cover from a metric standpoint to give you some sense of what we're seeing in terms of demand, we've had a pretty good strength as we've looked at this over the last year. When you look at client visit information in the first quarter, that really is up nearly 10% year-over-year. We've had some good strength from a job order perspective as well. That's up nearly 20% year-over-year, really translating into some good new assignment starts really that also in the low double digits.

The point there is that's, again, pretty broadly distributed. In terms of project-related activity, we're seeing strength as we've been talking about, as you'd expect, in the areas where our consulting service is focused, digital data, platform engineering, cloud, all of those have been pretty good. I think notably, our data and AI pipeline is up nearly 50% year-over-year. So I would say, generally speaking, Mark, in terms of the strength in the revenue stream, we're seeing it, as Joe alluded to, across our service spectrum from staff augmentation all the way through consulting project work. We're certainly seeing strength in those AI and AI-related revenue streams, but also some of the more traditional areas of strength for the firm, we're continuing to see growth in as well, right, platform engineering, application engineering, application development, all pretty strong. So it's a pretty good story across the entire spectrum of the revenue stream.

Yes, Mark, so I just net it out. I mean it was broad-based. It was across our enterprise accounts, our market accounts. So there were -- it was across geographies. So we're just -- we're seeing it broad-based.

Great. And then can you talk a little bit to what extent you think you're gaining share? And to what extent are your -- it's still relatively new for you, but your Indian operations, to what extent are those helping you to capture share? And what percentage of the work is now being done in India? And since you're still relatively early in that journey, where do you think that could go? And what are the implications as it relates to gross margins for that?

Yes. So well, let me first talk about India. You asked a few questions about that, and then we can get to the share question. So just as a reminder, we started this initiative, gosh, less than 2 years ago. The focus of this really is to enhance the capabilities of our domestic footprint, right? As I've mentioned and Joe had mentioned in the past, we're seeing a lot of demand from our client base to build blended projects. Obviously, cost is a key driver here. So this is not specifically set up to go and capture business in India with India clients. So I think probably the best way to think about this is how our clients are thinking about our prospects and how we're providing services in the types of business that we've been performing, right, across the spectrum of services that we provide. I made a comment in my prepared remarks, 60% of our 25 largest clients are using those services in a blended model. So it's a combination of a blended model. There are some projects that are offshore entirely. This is true in the consulting space, and that is really where we've set up this initially.

We're just now starting to think about providing some staff from a talent solutions perspective, so more staff augmentation. That's early on. So we've seen some good growth there. It is still a very small percentage of the revenue stream. I think we're seeing a pretty significant increase in new orders, but still a very small percentage. In terms of future prospects, I think it's pretty clear. Our clients are always looking for ways to cost effectively find great talent. And I would say the talent that we find in India is as good as that as we would find in the United States. There's been a lot of firms who've had success there as well. So I wouldn't necessarily put a precise percentage number on it, but it wouldn't surprise me that a very, very high percentage of our clients use this as a blended model, and it could be a very meaningful percentage over the next couple of years.

Yes. And the one thing that I would add there, Dave touched upon it a little bit there, but I want to accentuate this point, that talent level, especially when you get into AI skills of what we're identifying and finding in India, real shortage in the U.S. We're definitely seeing much more talent availability, especially from an AI standpoint, especially as we built out our AI pods over there to get some leverage for our people.

So Mark, I think the second part of your question -- or the first part, I should say, was a question around share, market share, client share. I think again, we're quite proud of our performance this quarter. Just to reiterate, the expectation is revenue growth, we believe, is going to accelerate in the next quarter. We've had the benefit of generating some additional client share that is certainly a part of the revenue growth. We've also continued to attract a lot of new clients as well. So when you look more generally across the market, as I kind of look at the metrics of how the market might be performing, I think our growth rates certainly are in excess of that and are certainly expected to be in excess of that. So the math basically tells me we're capturing share both within existing clients as well as acquiring new clients.

Great. And then just as I look at the -- and this is the last one for me, and then I'll jump back in the queue. But when I take a look at the bill rates moving up as well as the gross margin, can you just talk a little bit about the Indian portion of the mix, to what extent is it actually margin accretive as it relates to gross margin? And how are you able to offset the lower bill rates over there to end up actually increasing the bill rate?

Mark, this is Jeff. I appreciate the question. Let me first say, I think you touched on a couple of things, bill rate and margin. Let me first say, I'm really proud of the broader Kforce team for the collective efforts and ensuring that we're pricing the value into our engagements and assignments that we're bringing to our clients. You look at our gross margin profile, and we're up 60 basis points year-over-year. You look at our Flex gross profit margins, those are up 90 basis points year-over-year. The preponderance of that, Mark, is driven by good solid bill and pay spread expansion. Out of that 90 basis points, that comprised 70 basis points of that.

Part of that is driven by, as I mentioned, the execution of our teams. The adjustments, we made some adjustments and refinements in how we're incentivizing and how we're compensating our people to put that a little bit more towards the forefront of the conversation. And then at the last component, I would say, Mark, is just what we're driving from an overall higher quality of business. To that last point, we've talked about the growing mix of Consulting Solutions business that margin delta continues to run in that 400 to 600 basis points of higher margin. So certainly, as that mix continues to improve, we're getting the benefit of that.

You asked about our nearshore/offshore business. The margins there have also been very healthy relative to overall Flex margins. So to Dave Kelly's point, as that business continues to scale, we expect that to lead to enrichment at the Flex margin line. So I think, Mark, in the near term, these things don't change overnight. You heard the comments from us. This is a culmination of a lot of activities over the last year plus. I think in the near term, we certainly expect spreads to be stable, but over the medium to longer term, certainly an opportunity to see some further enrichment here.

Just maybe a little added emphasis on Jeff's comments to make sure it's clear. The impact on flexible margins from the offshore facility are nominal, right? That spread improvement is a result of the demand for the services that we're providing here, the execution of our teams, the emphasis we're putting on execution just generally and the mix of business that we're seeing as it relates to the consulting work that we're doing. So that is an opportunity for us as we move forward.

The next question comes from Trevor Romeo from William Blair.

I had maybe a couple of AI-related questions. So one is just along the lines of flexible talent becoming especially valuable in the AI era. I think I appreciate Joe highlighting how things have kind of evolved from mainframe operators all the way to prompt engineers and the like now. So the question is just to get a sense of how things can quickly change and how your model can adapt. Like is there some kind of way to think about what percentage of the demand you're seeing now for the Flex business or the consulting projects? What percentage of that is new roles or project categories that really weren't even around, say, 5 years ago? And how have things evolved?

That's a great question. I guess I would start, and I don't want this to come across the wrong way. But virtually almost 100% of what we're doing today didn't exist 5 years ago because even the traditional roles that still exist today that existed 5 years ago, now they're being augmented with certain skills in AI. The bulk of the requirements that our people are coming across, some type of AI aspect is embedded in virtually every role that we're working on. In terms of what I'll say our newly created roles, I think we're still in the early stages of new role creation, I mean, outside of some of the general ones that you hear about with prompt engineering and certain other AI engineering specific.

So I think this will continue to evolve. It's one of the reasons why I've always appreciated this business that we're in because we don't create demand. We follow where demand is. And at the end of the day, that's what we've been -- I've been doing this for 38 years. And the people that we're placing today aren't the same people that I was placing 38 years ago, although I did hear from some of our people that there's been a resurgence of demand for COBOL people, kidding. But the point being, the roles are constantly evolving, and our responsibility is to identify that talent that's in demand. So that's why we get really excited because we're not locked into any specific footprint. We typically move with where the footprint is moving towards. This is a lot of what we're seeing from an AI standpoint, not what I would consider pure AI, but augmented AI in terms of the skills and the skills evolution. So I don't know if that just gives you a little bit of a feel in terms of what we're seeing.

I appreciate that, Joe. That was helpful. And then you also mentioned the new AI innovation studio. So maybe you could talk a little bit more specifically about what that entails and what kind of value you can deliver to clients with that.

Yes. One of the things in today's world with AI, the days of when you're in front of clients and you're trying to work through solutions for those clients of presenting PowerPoints or walking them through something visual like that. Organizations really want something that's tangible, that is a prototype, a working model. And so that's really what we're doing with our innovation studio, which is part of our broader innovation experience. And so that's so that we can work with clients on ideation, get real-world examples of what they're using, also expose them with some of the tools that our people have developed, which can also accelerate some of the development.

So it's -- we've already been doing this mostly on client sites, but what we're also seeing is there are select clients that would prefer to get out of their environment and to get into a studio environment based upon the nature of what they're looking to do. And that's also tied into what we're doing in India. We've established what we call AI pods in India, which is where we get really a lot of leverage on building out some of these tools and the platforms that we're working with the clients. And we'll scale that accordingly based upon how demand evolves.

Helpful again. If I could maybe sneak one more quick one in for, I guess, either for Jeff or Dave. I think you typically give segment level expectations on these calls for the next quarter. So just any color you can provide on what's built into the guide for each of the segments in Q2?

Yes. Trevor, it's Jeff. I appreciate the question. Yes, and certainly happy to cover this in more detail tonight. But I think we mentioned in Dave Kelly's script that overall, at the midpoint of our expectations that year-over-year and very close to that is a sequential performance of roughly 4%. So if you look at technology with that being 93% of what we do, that technology performance is a preponderance of the driver there. I think when you go down and look at our FA business, again, we reorganized that business in early 2025, started to see sequential growth in the second quarter of last year, started to see some really nice sequential growth into the mid- to high single digits. In quarters 3 and 4, certainly saw some seasonal downtick to FA.

But when you look at the year-over-year and our FA business at the midpoint of our guide, that's in the mid- to slight high single-digit range. Then you look at our direct hire business, the first quarter was the last year-over-year difficult comp for us. So really do expect at the midpoint, Trevor, some stability in our direct hire both sequentially and year-over-year. So you look across the market, very clear to us. Dave Kelly mentioned client share and market share, very clear at the midpoint, the 4% certainly is taking share. So hopefully, that helps, Trevor.

The next question is from Tobey Sommer from Truist.

When you talk about your AI groupings in India, are you developing sort of repeatable solutions that maybe you could price differently than a bill rate, pay rate classic staffing or time and materials consulting model?

Yes, I would say more so as we're working with clients, clients are looking for us to bring solutions to the table, which accelerate the development process, leveraging AI. So yes, the tools in themselves are repeatable. But in terms of products that we're looking to go to market with, we're not a product-based organization. But when it comes to methodologies, when it comes to tools, and all those things obviously get embedded into margins and pricing. So I would say that's more of the approach. Now I will say one of the things, obviously, we see is with industry focus, different organizations within a given industry, they're dealing with the same problem. So some of those things, which are not proprietary in nature, it does provide us an opportunity to bring those solutions that are more industry-specific to our other industry clients within the marketplace where we can leverage some of those past capabilities.

Right. So well, I didn't really intimate you're a product company, but if you're able to apply some of those learnings within different industry players and still respect confidentiality and all that, I'm sure you would price. Are you able to generate a higher return, higher margin on the second, third, fourth time you've sort of take a swing at a similar set of projects?

Yes. Hypothetically, that would be the case. We don't have the practical experience that I can give you tangible that we've created a given AI solution and then we've taken that broadly across an industry. So I think time will tell on that, but logic would lead you down that path.

Okay. And Jeff, from a capital allocation standpoint, first quarter is a low cash quarter, so it makes sense that you're going to continue to return sort of at a more of an average quarter trend line. But given the valuation the way the stock has traded tomorrow notwithstanding where it's likely to be up, do you think you'll continue to, on a more sustained basis, lean into repurchasing shares at a greater level than annual cash flow?

Yes. I think, Tobey, you've certainly seen that, first, thanks for the question. You certainly saw that in 2025. I think we returned in excess of 100% of operating cash flows in 2025, took on -- leverage the balance sheet, the strength of the balance sheet that we had going into '25. We continued even in a -- as you acknowledged, Tobey, the first quarter for us relative to the other, certainly is the lowest cash flow quarter. We maintain share repurchases. Obviously, we're looking at our operating trends every day, every week and assessing what that means for our future. Certainly, in the first quarter, it looked like there was a significant dislocation between the underlying trends in the business and how the market was perceiving that with the valuation of our stock.

So we're very comfortable outstripping the operating cash flows certainly in the first quarter. That led to debt of roughly $90 million, 1.2x levered. Tobey, you've been here long enough. I think since I joined in 2007, I think maximum leverage that I've seen in my tenure here is roughly 2x. So I think we're going to continue to pay attention to the trends, the valuation of our stock. But as we sit here today, we've got a very strong balance sheet. Historically, we have been conservatively levered at 1.2x as of March 31. So you're not going to see us get super aggressive and super wild, but we do have a strong balance sheet moving forward.

And last question for me. I think in the prepared remarks, you kind of said that this would be -- could look like a recovery from similar to historic recoveries. Is it your expectation that it is possible to have in year 1 or year 2 of this budding recovery, the kind of growth that we've had exiting prior recessions where there was relatively rapid growth for a year or 2 before settling into a more normalized rate?

Yes. I would say let's remove the great shutdown, which was a little bit unique coming out of that. But if we look at prior cycles, that's really what our trends are telling us and what we're seeing. So Tobey, this goes back to the cycles that I know I spoke about. I know Michael spoke about, where we typically see companies when we go into tougher times, the first thing they do is they let go of contract or temporary labor. The next thing they typically do is they rightsize their organizations. Then as there starts to become some firming and visibility, they start to bring flexible workforce back in. And until there's great certainty, then they start to rebuild their permanent workforces.

There is no question in looking at the data that the dynamics that were driven by coming out of the great shutdown, all of the overhiring, all of the hoarding of people, basically, our belief is we've now, over the course of 3 years, organizations by natural attrition versus rightsizing have basically gotten to a baseline of workers that they can't support the work that needs to be done. So we're at that same point that we historically have seen during normal recessionary cycles. We usually get there in a matter of 12 months. It's taken over 36 months to get there. So we would anticipate short of anything macro happening or major disruptions that that's where we are in the cycle and that the use of flexible workforce will continue to build from this point forward.

[Operator Instructions] Up next is Josh Chan from UBS.

I guess on that cyclical recovery point, I guess, in past cycles, you normally have like a broader economy recession before everything recovers. So I guess I'm wondering your thought about the ability to have a staffing recovery without a broader economic recession to kick start it all, I guess.

Yes. I guess I would answer that a little bit differently. While we didn't have a GDP-oriented recession for the better part of the last 3 years, for professionally oriented roles, there has been a job recession. So a recession is a recession when it comes to the employment environment, and that's what we've experienced over the course of last 3 years, meaning the businesses -- and this isn't just Kforce, this is just not just technology. It's broad-based across all of the players. You saw what took place in terms of demand dropping.

And again, that was because I'll go back to this. Employers were holding on to people. So basically, they were supplementing the work that normally would have been pushed off into temporary workforce models. They were getting it done internally by holding on to the people, letting natural attrition take place until now where they've gotten to a place where they can't get the amount of work that needs to be done, done.

Okay. Okay. That makes a lot of sense. And then on the bill spread -- pay bill spread increasing, I guess, do you feel like the market is becoming less competitive because it's improving? Or do you feel like Kforce is securing the better portions of what's available in like an otherwise stable market?

Yes. Josh, this is Jeff. I appreciate the question. I don't think the competitive environment itself is becoming any tighter or any looser. As you mentioned on the margin question in my commentary earlier, much of this is execution and mix driven within our business. The higher quality revenue stream that we're driving with respect to our consulting solutions, those engagements, Josh, we've talked about it many times, are 400 to 600 basis points of higher margin. That mix benefit is benefiting overall gross margins.

I know the nearshore, offshore is a relatively minor portion now as we move forward, expect a little bit of momentum there as well. But when you look holistically across our enterprise and market-based clients, we're executing well from a margin perspective. The mix clearly is benefiting us. So I do not believe that it's a competitive change in the marketplace.

Yes. To further that, I don't -- you haven't seen broadly margin degradation in the space. And one of the things that we've continued to say, talent is sometimes difficult to find, right? So companies understand, especially highly -- we're talking about highly skilled talent in the space that we play. And so paying a premium to make sure you get the right individual with the right skill set or the right team of people, you are less price sensitive than you might otherwise be if you didn't need to get the work done. So it's a combination of those things, but this isn't just a pure dynamic that you have an individual and you just price it to the lowest price because you need the talent.

And everyone, at this time, there are no further questions. I'd like to hand the conference back to Mr. Joe Liberatore for any additional or closing remarks.

Thank you for your interest and support of Kforce. I'd like to express my gratitude to every Kforcers for your efforts and to our consultants and clients for your trust and faith in partnering with Kforce and allowing us the privilege of serving you. We look forward to talking with you again after our second quarter of 2026.

Once again, ladies and gentlemen, that does conclude today's conference. Thank you all for your participation. You may now disconnect.

Good day, everyone, and welcome to the Kforce Q4 2025 Earnings Call. Just a reminder that today's call is being recorded. I would now like to hand the call over to Mr. Joe Liberatore. Please go ahead, sir.

Good afternoon, and thank you for your time today. This call contains certain statements that are forward-looking 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 the Investor Relations portion of our website. We are pleased to have delivered fourth quarter revenues that exceeded our expectations and were reflective of the continued build of momentum that we discussed in our last earnings call. The sequential Flex revenue growth that we delivered in our Technology business represents the highest sequential billing day growth since the second quarter of 2022. This momentum appears to be carrying over into the first quarter's January results suggest that 2026 is our best start since 2022.

These trends are suggestive of the strength in our client portfolio, the criticality of the work that we are doing and the resilience of our people. We also believe that our trends are evidence that clients may increasingly pursuing a flexible talent model as a means to complete critical projects in this uncertain macro landscape and the growing belief that returns that we'll be generating from continuing AI investments may take longer to realize and may be more specific in nature to unique business problems rather than an overarching solution to all technology challenges.

I'm very proud of our team's accomplishment in driving our business forward and making the necessary adjustments to maintain high levels of performance. To that end, our results for the fourth quarter reflect certain charges related to the refinement of our internal headcount and organizational structure that further align the current revenue levels and position us well to execute in 2026 and beyond.

We also took certain actions to streamline other areas of our operating costs, which Jeff Hackman will cover in more detail in his remarks, along with the expected benefits. We have made tremendous progress in 2025 with our strategic initiatives, including the advancement of the implementation of Workday as our future state enterprise cloud application for HCM and financials, the evolution of our offshore delivery capabilities in India and the further integration of all of the firm's capabilities across the full spectrum of our service offerings as one Kforce. Each of these initiatives are transformational in nature and will be a meaningful contributor to us meeting our long-term financial objectives.

2025 marked the third consecutive year of revenue declines for Kforce and the broader technology services sector. The latest economic data continues to suggest a persistently weak and largely frozen labor market marked by prolonged stagnation of job gains coming off the post pandemic peaks and company's protective reaction to the great resignation. That being said, our historical experience is that companies typically turn a flexible talent solutions as an initial step prior to making core hires while they assess the durability of the macroeconomic conditions.

We are optimistic that our recent operating trends are suggestive of a more typical cyclicality. The debates continue on the relative impact of AI on the technology services sector revenue trends, versus the impact of economic uncertainty and a soft labor market.

Regardless, this uncertainty may intensify the use of flexible talent as companies prioritize agility until they gain clearer insight into how these technologies and at what pace they will reshape their overall business and talent strategies. We have witnessed transformative shifts before, such as migration of the mainframe to distributed processing the emergence of the Internet, the mobile revolution and the move to cloud computing.

The emergence of the Internet likely most closely aligns with AI. Unlike other secular technology shifts, the Internet NAI directly impact operating models and broadly touch virtually all white-collar roles in some manner. The Internet secular shift followed a typical investment and integration cycle pattern where we had initial exuberance, massive infrastructure investment, premature abandonment of legacy systems, realization of integration and modernization needs a return to balanced strategic investment; and finally, workforce transformation and skill shortage.

We believe generative AI and its offshoots into a Agentic AI and cognitive AI is in the early innings of the evolution and may just be starting to mirror this historical pattern, which is in past cycles has been an opportunity for Kforce in the broader technology sector. securing the right talent, organizing the right teams and launching focused enterprise-level initiatives is essential for organizations to successfully adopt and maximize these new tools to remain competitive.

Our strong position should allow us to increase client share and expand into new clients, continuing our track record of gaining market share and reinforcing the solid foundation that drives lasting value for our shareholders. Our domestically focused organic growth strategy continues to serve us well, minimizing distractions and enabling our people to fully concentrate on partnering with clients to solve their most critical business challenges.

Before I conclude, I want to express my appreciation for the exceptional people who make up the Kforce team. I am proud of the performance, resilience and commitment demonstrated across the organization. It is a privilege to work alongside such a talented and dedicated group. Their passion and contributions place us in a strong strategic position, and I am confident in our direction and enthusiastic about the opportunities ahead.

Dave Kelly, our Chief Operating Officer, will now give greater insight 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 of $332 million surpassed our expectations and represented a 3% overall sequential improvement per billing day in the fourth quarter. Flex revenues in our Technology and F&A businesses grew sequentially 3% and 5.7%, respectively, on a billing day basis in the fourth quarter.

As we enter the second half of 2025 we began to see signs of improvement across much of our portfolio. The second half momentum punctuated by our Q4 sequential growth and the strong start to 2026 puts us in a position where our Q1 guidance contemplates year-over-year revenue growth in the high end and only a slight revenue decline on the low end. Although many clients continue to take a measured approach to technology investments as they await greater evidence suggesting a sustained period of economic stability, they continue to prioritize mission-critical initiatives that require high-end talent to execute as well as investments in areas such as data and digital that are critical for the realization of their AI strategies.

Our recent momentum and operating trends suggest to us that clients may be reaching a point where they can no longer wait to execute their long-term road map of critical technology needs and are looking to begin addressing the significant backlog of initiatives. The improvements in our business spanned many industries as evidenced by sequential growth in 8 of our top 10 industries.

We continue to fuel further organic investments in our consulting solutions business, in response to increasing client demand for cost-effective access to highly skilled talent. This evolution positions us to deliver greater value through flexible delivery structures and differentiated expertise. Our consulting-led offerings have continued to contribute positively to the overall results in our Technology business, which is further supported by a robust pipeline of qualified opportunities.

The integrated approach we've taken in delivering a seamless client experience through a variety of engagement models across various technologies and skill sets is rather uncommon across our industry and has been a key driver to our success. It also has enabled us to slightly enhance our margin profile against a challenging macro backdrop and maintain stability in our average bill rates, whereas many companies have siloed their staff augmentation and consulting businesses our integrated approach leverages our deep, long-standing client relationships as the bedrock to greatly enhance the seamlessness of the client experience and ease the buying decision.

The expansion of solutions-based engagement underscores our adaptability and commitment to meeting evolving client needs and evolving our brand in the marketplace. Our Consulting Solutions business has continued to organically grow over the last 3 years. An increasingly important aspect of providing cost-effective solutions is our ability to source highly skilled talent from outside the United States.

Our development center in Pune when combined with robust U.S. sales and delivery capabilities and a high-quality vendor network enables us to comprehensively address client needs through a multi-shore delivery model. We've begun to see an acceleration in demand for this offering over the last few months, which is an encouraging sign as we head into 2026.

The average bill rate in our technology business has remained steady at roughly $90 per hour over the past 3 years, even amid macroeconomic uncertainty. The growing mix of consulting-oriented engagements which typically command higher bill rates and deliver stronger margin profiles and wage inflation and technology skill sets is offsetting the pressure on our average bill rates from a greater mix of consultants in nearshore and offshore locations.

Demand across our core practices, data and AI, digital, application engineering and cloud continue to be robust and our pipeline of consulting led opportunities is expanding. These disciplines are essential foundational pillars for the development and deployment of AI tools, and we expect companies will increasingly require access to specialized talent to achieve their objectives, creating significant opportunities for our firm.

Our ability to provide flexible talent, whether through traditional staff augmentation and consulting-oriented engagements positions Kforce to capitalize on growing investments in AI, including data modernization and readiness initiatives while continuing to support core technology areas that remain active.

Our core strength lies in delivering quality talent at scale and adapting to evolving skilled demands by providing cost-effective access to the very best professionals on a nearly real-time basis who can solve complex technological challenges, we ensure our services remain indispensable even as broader industry trends fluctuate.

As technology is advanced over the decades, we've consistently evolved alongside it, reinforcing our role as a trusted partner in driving clients technological progress. Looking ahead to Q1, with momentum in new engagements building throughout Q4 and carrying into early Q1, we anticipate a seasonal sequential billing decrease in our technology business in the low single digits.

Flex revenues in our FA business declined 2.4% year-over-year but saw a 5.7% sequential growth in the fourth quarter. This marks the third consecutive quarter of sequential billing day growth after declines over the past several years as we've transformed that business and further focused our efforts organizationally.

Our average bill rate of approximately $53 per hour notably improved year-over-year and is reflective of the higher skilled areas we are pursuing. As to our first quarter expectations, despite an expected seasonal sequential billing day decline in the mid-single digits, we expect F&A to be up in the mid- to high single digits on a year-over-year basis for the first time since the third quarter of 2021.

I want to express my appreciation to our team for their persistence in driving positive momentum in our FA business. Over the last several years, we made responsible adjustments to align headcount levels with revenue levels and productivity expectations. Today, we announced further refinements. While taking these actions is always difficult, we've aligned our support infrastructure to current revenue levels and continue to prioritize the retention of our most productive associates while making targeted investments to ensure we are well positioned to capitalize on accelerating market demand.

Despite these reductions, we believe we have sufficient capacity to absorb increased demand without adding significant resources, particularly as we enable AI solutions to gain greater efficiency. We remain committed to investing in our consulting solutions business as well as our other strategic initiatives that we believe will drive long-term growth in both revenues and profitability.

The actions taken provide additional confidence in continuing these investments while allowing the firm to maintain its previously stated profitability objectives. We are energized by the opportunities ahead and are confident in our ability to continue delivering exceptional results and sustaining the recent momentum. Our success reflects the deep trust and partnership we share with our clients, candidates and consultants, relationships that continue to drive our growth and innovation.

I'll now turn the call over to Jeff Hackman, Kforce's Chief Financial Officer.

Thank you, Dave. In my commentary, I will discuss certain non-GAAP items. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid investors in further understanding the impact of certain costs on our financial results.

Our press release provides the reconciliation of differences between GAAP and non-GAAP financial measures. Revenues for fiscal 2025 of approximately $1.33 billion decreased roughly 5% year-over-year. GAAP earnings per share of $1.96 included fourth quarter 2025 charges of $0.13 related to refinements in our organizational structure and certain other costs that further streamline our operating costs net of the related tax effects.

Adjusted earnings per share for fiscal '25 of $2.09 declined approximately 22% year-over-year. Fourth quarter revenue of $332 million exceeded our expectations and GAAP earnings per share was $0.30. Adjusted earnings per share of $0.43 fell below the midpoint of our range of guidance due to higher health care costs and performance-based compensation given higher levels of financial performance.

Overall gross margins of 27.2% were down 50 basis points sequentially due to a decrease in Flex margins principally due to higher health care costs, normal seasonal declines around the holidays and a lower mix of direct hire revenues. On a year-over-year basis, gross margins grew 20 basis points as improvements in Flex margins more than offset a lower direct hire mix.

Our teams have done a nice job working effectively with our clients to recognize the value of our services from a pricing standpoint. Notably, Flex margins in our technology business increased 40 basis points year-over-year due to improved bill pay spreads and declined 40 basis points sequentially due to higher health care costs and normal seasonal declines around the holidays. The higher health care costs experienced in the fourth quarter were on the heels of the third quarter where health care costs were significantly lower than we anticipated.

For the full year, health care costs were essentially as expected though the inter-quarter timing of cost is difficult to predict. We continue to refine our program through our annual renewal process to mitigate significant cost escalation and don't expect any meaningful negative impact on margins in 2026.

As we look forward to Q1, we expect overall Flex margins to decline as a result of normal seasonal payroll tax resets, but for spreads to be relatively stable with fourth quarter levels. We expect the seasonal payroll tax resets to impact Flex margins by 60 basis points in our technology business and 120 basis points in our FA business. Overall, SG&A expense as a percentage of revenue on a GAAP basis was 24.2%. As adjusted for the previously mentioned charges, SG&A expense as a percentage of revenue of 23.2% increased 120 basis points year-over-year, primarily driven by deleverage from the lower revenue and gross profit levels.

We have made appropriate adjustments to headcount levels, refinements in our organizational structure and made decisions in the fourth quarter to further reduce certain other operating costs. With that said, going forward, we expect to continue to make targeted investments in our sales and solutions capabilities while maintaining investments in advancing key enterprise initiatives. While impacting near-term SG&A is expected to create operating leverage and are critical to our long-term strategy.

As we have stated on prior calls, we anticipate beginning to realize benefits from our Workday implementation more significantly in 2027 post go-live. Our operating margin on a GAAP basis was 2.6% and and as adjusted for the charges, operating margin was 3.6%. Our effective tax rate in the fourth quarter was 33.6% and slightly exceeded our expectations due to true-ups in certain federal income tax deductions. During the quarter, we remained active in returning capital to our shareholders with $14.1 million and capital being returned through dividends of $6.7 million and share repurchases of approximately $7.4 million. We continue to maintain a strong balance sheet with conservative leverage relative to trailing 12-month EBITDA.

Looking ahead, we expect to continue to return in the excess cash generated beyond our capital requirements and quarterly dividend program to be directed towards share repurchases while maintaining reasonably stable debt levels. Our dividend remains an important driver for returning capital to shareholders, the level of which leaves ample room for continued share repurchases.

Our Board of Directors recently approved an increase to our dividend, which marks the seventh consecutive year of increases. We continue to maintain significant capacity under our credit facility. Operating cash flows were $19.7 million and our return on equity remains at approximately 30%. The first quarter has 63 billing days, which is one additional day than the fourth quarter of 2025, but the same as the first quarter of 2025. We expect Q1 revenues to be in the range of $324 million to $332 million and earnings per share to be between $0.37 and $0.45.

The effective income tax rate for the first quarter is expected to be 29%, which is higher than usual due to lower expected income tax credits and higher nondeductible compensation. While there may be some volatility in certain quarters in 2026, we expect that the effective tax rate for 2026 also could approximate 29%. Our guidance assumes a stable operating environment and excludes the potential impact of any unusual or nonrecurring items.

As a result of the refinements in our headcount and organizational structure, along with other decisions to reduce our operating costs, we expect the annualized benefit from these actions to be approximately $7 million or roughly $0.30 per share.

Our guidance for the first quarter contemplates a partial benefit from these actions given the timing of the events that was more muted in our guidance because of greater performance-based compensation given our recent operating trends, the higher effective income tax rate and certain other nonrecurring investments we are making in the first quarter of 2026.

Given the actions taken, we expect to improve operating margins in 2026 even without improvement in revenue trends, which if trends accelerate provides additional operating leverage. We remain confident in our strategic position and our ability to deliver above-market results while continuing to invest in initiatives that drive long-term growth and support our profitability objective of achieving approximately 8% operating margin when annual revenues returned to $1.7 billion, which is more than 100 basis points higher than when that level was achieved in 2022.

On behalf of our entire management team, I want to extend our sincere appreciation to our teams for their outstanding efforts. We would now like to turn the call over for questions.

[Operator Instructions]

We'll take the first question from Mark Marcon from Baird.

Wondering, Joe, perhaps if you could elaborate a little bit in terms of some of your opening remarks. I mean, it's fairly very encouraging to see sequential improvement in terms of the revenue per billing day and how widespread it was. And then you mentioned in your remarks that perhaps there's a growing belief that returns will be generated from continuing AAI, but it may take longer. And it may be more specific.

Can you elaborate a little bit on that in terms of what you're hearing from clients? And also what you're hearing in terms of the pent-up demand that has basically all the projects that have basically been delayed as companies try to ascertain what the macro future is as well as AI and what that could end up meaning to you as the year unfolds.

Yes. Thank you, Mark. Yes, I guess where I would start is when we look at performance, going back to, I think it was in August of 2025. And I know you follow this American Staffing Association Index, which tracks changes in temporary and contract employment that turned positive after 3 years of being negative. Probably no coincidence. That's when we started to see our sequential improvements, and we continue to see that through the end of the year with momentum here into 2026 being really our best start since 2022.

I think to really touch upon some of the other comments I made. Every day, there's more articles, interviews, white papers referencing. We're clearly in the reality stage and we're hearing from clients really moving more to that rebalancing of the investment stages that I mentioned in my opening comments. Let's face reality. AI is real, it's here to stay. However, reality that we're hearing that setting in is the pace and complexity of executing corporate AI initiatives is as compared to what I'll call a more simplistic consumer AI, that's really what's been surfacing.

There are a couple of good things that have hit the press here in January. One, Gartner put out a really nice piece. I don't know if you saw it, it's called dispel the fear of AI displacing jobs. That write-up really touched upon humans plus AI outperform AI. And that AI being leveraged by the humans will really become the more dominant operating model. And they even specifically in that referenced the impact on software engineers and then I think it was on January 21, a really good article that Wall Street Journal put out, CEO say AI is making work more efficient. Employees tell a very different story.

I think this gets to the heart of the question that you asked. And the article really talks about the disconnect of what employees are experiencing in terms of trust, the amount of rework, accuracy and actually the amount of time they're picking up in comparison to where CEOs, and it's almost cascades from CEO to senior managers in terms of the disconnect with the employees of what their experience and what we're hearing from clients is a lot of that also has to do with the change management aspects.

So even when there is a successful AI technology deployed 70%, 75% of success is attributed to change management, and there's just -- there's a lot of socialization that has yet to happen. I mean we are in the early stages of what I'll call the behavioral changes, which are really the primary obstacle. So I guess the way that I would summarize that, I think -- the one cycle, and I know Michael talks to you a lot about this when we talk about the cyclicality of contract versus FTE of where we are in the cycle, is that going to be exaggerated because now the concern of I don't want to hire people because of AI and maybe displacing in, is that going to create more demand for flexible work models.

Time is going to tell on that. Likewise, I think only time is going to tell if AI is going to follow that same similar 5 cycle pattern that we experienced during the Internet we are seeing it, and we are hearing it from our clients, but we're still in the early stages of all that.

So maybe, Joe, maybe amplify one other point that you made early on and I think maybe to Mark's question about general demand AI. It was only part of it for us, right? So you mentioned what happened in the ASA stats turning positive in August. A lot of that and what we have seen in our business, and we alluded to it in our prepared remarks, relates to more of our traditional staff augmentation business. There are a lot of critical initiatives. They're not AI-focused, but also have been greenlighted recently.

So it is a combination of things. This is not an AI on AI of thing, right? This is just a general need for high skilled technology talent or things that are critical to our -- for businesses to continue to invest. So I think you can't disassociate that some of the revenue trends that we've seen as well.

Great. And can you talk a little bit about what you ended up seeing from clients just in terms of kind of the end of year dynamics. It sounds like some of your clients ended up keeping more of their consultants on staff instead of reducing them towards the end of the year and that you're starting out at a better point here in the first quarter, if I'm correct on that. And then what that ends up portending for the balance of the year as we kind of go through the normal seasonality?

Yes. Actually, the momentum going into the holidays was the strongest that we've seen probably going back to the back end of 2021, meaning clients desiring to take client visits, to evaluate submittals of applicants to interview applicants, ultimately resulting in closed deals we saw that bouncing right up to the holidays, whereas these past 3 years, we saw things pretty much with Thanksgiving things really lightened up. So a major difference on that front.

And then moving into the beginning of the year, correct. We're at this point in time, at a higher jump-off point. The best that we've seen going back to 2022 as well. In terms of jump off and actually better than we were in 2022. So yes, they held on to more of the consultants. One of the other things we observed is they converted less of our consultants as well.

So conversions were down, which means the desire to keep those people on from a flexible standpoint versus committing from an FTE standpoint, also was a significant shift that we saw this cycle. So where we are right now, I mean if these trends were to continue, then where it leaves us as we get back to our preholiday highs earlier in this quarter, which historically, you get there by the end of March. If the pace were to continue, we could get there a little bit early, which gives us great momentum going into Q2 and really sets up the remainder of the year.

That's great. And then just on the margin side, it looks like things are holding up. It sounds like from your comments in the prepared remarks, it's basically due to the increase in terms of the consulting that and that's kind of offsetting a little bit on the traditional staff ag. Is that right?

And then with the margins being up year-over-year despite the health care costs. How should we think about the Tech Flex gross margins over the balance of the year based on what you're currently.

Yes Mark, good question. I think you're you partly answered the mix dynamic there. And no doubt, as you look at our margins in our technology business, the help, if you look at it from that perspective on a year-over-year basis, of course, the higher skilled areas that we're playing in, of course, are continuing to see some level of wage inflation. That obviously then as we work to pass that on to clients would result in an average bill rate improvement.

And from a margin perspective, we've been working effectively from that standpoint to pass those on. the mix that we're driving in our Consulting Solutions group, which continues to grow from an overall mix standpoint. That continues to benefit us, both from an average bill rate and in addition to that, to the overall Flex margin line.

So I really think, Mark, we started seeing some slight spread improvement starting in the second quarter of this past year in 2025. I mentioned in my prepared remarks that our teams have done a really nice job there working to be much more disciplined with the conversations that we're having with clients that's been evident to us. We've done some training and put some incentives in place in that regard. So really proud of what our teams are doing from a pure pricing standpoint.

And certainly, from a mix perspective, to your question, Mark, that certainly is benefiting us both from a stability and bill rate and some slight improvements that we've had in spread. As to your question on going forward, we obviously have the payroll tax resets in the first quarter that's very traditional, as you well know. But aside from that, expect stability in spreads moving into the first quarter with a potential opportunity for us to see some continued mix benefit as we move through 2026. But overall, very pleased and encouraged with the trends there, Mark.

Great. Last one for me, and then I'll jump back in the queue. Just can you talk a little bit about what the software write-off was for in terms of that $2.2 million? And in terms of the guide, are you anticipating any sort of possibility of any other restructurings? Or do you think the table is pretty well set now?

No. I think, Mark, to answer the last one first. I think the table is pretty well set, certainly not anticipating any additional actions in the first quarter, certainly not from a write-off perspective. And then as we communicated on the call, we made some refinements in our organizational structure as well part of that $0.13 that we recognized in the fourth quarter was certainly related to severance. So it was about 1/3 of that.

The overall write-off of the asset was something that we had implemented many years ago and just frankly haven't gotten the value that we expected out of it and made the decision to discontinue using that in the fourth quarter. But nothing that's critical to the operation of the business, Mark moving forward.

Yes. So the only thing I would add to Jeff's comment as it relates to your question about expectations in the future, actually, the thought process and the timing of this action was a result of what we believe is a bit more stability and a bit better visibility -- and so refining things today with an expectation that things are stable and we are optimistic and improving was the driver here.

So maybe a bit contrarian, if you might think about what you see other companies do, but this is a result for us of a positive expectation of what the future holds at least in the near term.

The next question comes from Trevor Romeo from William Blair.

It

I guess maybe I wanted to do 1 follow-up on kind of the demand confidence environment. I think in -- I think in Joe's remarks, you talked about clients not being able to wait anymore to execute on some of their technology projects I think the pent-up backlog of IT projects has been there for a while.

So I guess when you think about the more visits, more interviews, willingness to have conversations you're seeing now, what is it about the environment right now that's kind of making clients unable to wait any longer at this point qualitatively.

Trevor, it's a great question. And I think again, it ties back to those 5 stages that I mentioned in my opening comments, reality is set in and organizations that had started experimenting and playing with AI realize how much work they have ahead of them.

So ultimately, what we're seeing is that modernization and and the digital aspects and the data aspects are really what's turned up. In fact, our data practice and our digital practice are on a percentage basis, our fastest-growing practices. So I think many organizations got the wake-up call as they started to go down these paths with experimenting with AI, just how much foundational work they need to do to really be prepared to maximize the opportunity and leverage and modernization in these phases. This isn't something that's going to happen overnight. I mean these are multiyear endeavors.

In fact, we've also heard more conversation at the client front of upgrades happening with ERP-oriented systems. And I think that's organizations now that had not migrated to the cloud, looking to get to the cloud. So again, that they are prepared for when they can start leveraging AI that they have the foundation set up to be able to do so.

So just to think about that translation into our business, right? So we talked about our consulting business, right? So those data and digital backlogs that we're seeing in terms of demand for talent continue to increase at double-digit rates, right, on a percentage basis. So that's part of the reason why Joe's earlier comments about the companies and the work that they need to do will manifest in a positive environment for our business and for the foreseeable future.

That's really helpful. I guess maybe to quickly follow up on that. Do you see the sequential momentum that you're seeing now as more of a I guess, more of an increase of aggregate spending by clients on IT projects? Or is it more of a shifting around of their priorities that you guys are starting to benefit from?

Yes. I think it's really more of a shifting around of priorities and diverting dollars in given areas into laying this foundation because they get benefit from the foundation even before they start to potentially leverage AI down the road. So it's definitely more that. And I would say, in combination with that, what we're also hearing from our clients is they're tapped out internally, meaning their workforces have basically migrated to a level where they're doing everything they can internally and they don't have capacity to be assuming some of these initiatives are coming on.

So we've been picking up some of that work as well. both from a staff augmentation standpoint and from a solution standpoint.

Okay. Very helpful. And then maybe just 1 more would be, I think you also talked about an acceleration in demand for the India development center in the last few months. So I would just love any more color on what's driving that? Maybe any examples of wins you've had recently or anything you can kind of share on that solution would be great.

Yes. So just as a reminder, so that business that we set up is meant to provide support for our domestic project work, right? So there is, as we stated in the past, continuing demand, obviously, for a more blended model because cost obviously is something that's really important. The ability to access highly skilled talent at a very attractive rates in India is something very important. So this is tying into everything that we're doing, right? So we mentioned the data and digital work, right? That is part of it, right? Any type of consulting-related engagements in particular, large companies are the type of engagements that they'll be looking for that type of support.

Additionally, obviously, given its cost effectiveness, some of the demand that we're seeing is also in our traditional staff augmentation business. So it really plays to both sides of our value propositions for our clients. So pretty broadly, pretty broadly.

Tobey Sommer from Truist Securities.

This is Tyler Barishaw on for Tobey. On the tech bill rates, those rates -- to rates have been remaining stable for about 3 years. Can you maybe discuss some strategies you're pursuing to raise those bill rates this year?

Well, good question. So stable is right for -- actually for 3-plus years now. So we obviously don't make markets per se. Right? So part of the reason why those bill rates are stable is the fact that there is still a scarcity of highly skilled talent in the marketplace. And so our clients recognize that. We passed through those pay rates and with a reasonable margin in them.

And so therefore, it is really, in many respects, saying market-driven opportunity as we think about our staff augmentation business. From a project perspective, obviously, we're delivering, I think, a very valuable project delivery method for many of our clients, and we price appropriately there. That still is a model that is very attractive relative to maybe some of the other higher-end consulting businesses that we see.

So it is actually gives us an opportunity to be attractively pricing for our clients and make a reasonable margin. So again, it's a competitive marketplace. So we're always looking for those opportunities, but it's about delivering the right talent and the right solutions that's going to provide the opportunity to provide price opportunities for us.

Yes. And I think the only thing just to tag on to Dave's comments, I had mentioned earlier that our consulting solutions mix has been continuing to grow on a year-over-year basis. That certainly is going to help from an average bill rate perspective, and of course, the higher skill areas that we play in that also, I think, would be a help when you think about average bill rates. Dave mentioned the acceleration that we've seen in our -- in the operation, the number of consultants on assignment that we have nearshore and offshore also on a year-over-year basis has grown significantly, that would tend to put pressure on your average bill rate.

So you have a little bit of a netting effect as you look at the overall average bill rate in our technology business being stable which we take to be an encouraging sign. As you look over the last 3 years, especially against a difficult macro environment against revenue declines that have been fairly persistent in the industry to have a stable average bill rate and in addition to that, seeing stability, if not some slight improvement as you look at our Flex margin profile as well.

Got it. And then just on operating margins. You mentioned you expect those can improve in 2026 even without revenue trends materially improving. Can you maybe just give us some guidelines for how much you think that's going to improve in 2026?

Yes. And I think part of that is going to depend upon what the assumption is from a top line perspective. But of course, we continue to drive the right mix of business as we look into 2026. If you look at Flex margins improved, as I mentioned, in the back half of this year. So that gives us a little bit of year-over-year help from that perspective. Of course, we're continuing to get ourselves more cost efficient. We had mentioned some of the actions that we took in the fourth quarter to refine our headcount, our organizational structure in a few other areas that's going to give ourselves a bit of leverage on a year-over-year basis as well.

And I think I mentioned in my comments there, even if revenues were to be flat for the full year that we would expect some operating margin improvement in '26 versus 2025.

So the only other thing I would say and Jeff started with saying the revenue trajectory is really important. So you alluded to the fact or maybe I did, that we've got significant capacity in our model, right? So as productivity improves, the cost to drive revenue go down. So just as has always been the case, when revenues start to improve in this business, you generate pretty significant operating leverage.

So yes, the actions that we've taken and the careful management of cost is going to help us. But we really built this model for the long term for sizable productivity improvements and a really strong fixed infrastructure that's going to drive significant leverage as revenues increase.

The next question comes from Kartik Mehta from Northcoast Research.

Jeff, maybe -- I know this is going to be a hard question to handle, but any perspective you can get great -- if the trends kind of continue the way it are, would you anticipate we've kind of turned the corner and we should see positive revenue growth kind of year-over-year going forward from the left 2026.

Yes. Kartik, we like difficult questions. So thank you for that. We had mentioned -- I think it was in Dave's commentary and maybe and Joe's as well. As you look at our first quarter guidance on the low end of the expectation that contemplates a slight decline on a year-over-year basis. And when you look at the high end of our expectation, suggests some year-over-year growth. So if you look at the midpoint, it's effectively flat. It's down very slightly in Q1. Of course, the acceleration that Joe had mentioned in the first quarter that we typically see heading into the second quarter.

We've seen sequential growth in the second quarter over the last couple of years. So it's certainly, Kartik, as we think about 2026, provided that the macro stays relatively intact with no adverse change. The momentum that we've built through the fourth quarter, the better start that we've had to January, which is factoring into our guidance for the first quarter. It certainly could get you to the point where you could see from year-over-year growth.

And I think, Joe, you mentioned that this is the best start since 2022. And I realize 2022 was a lifetime ago right now, it seems like -- but if you compare kind of cancel rates or order entry or size of the pipeline? What other metrics do you think are most relevant? How would you compare that to where we are today?

Yes. I think well, the way I always look at the front-end indicators are probably the best indicators of what's to come. I think our client visits in Q1 so far are the highest levels that I can recall, maybe in our firm history. So that tells you that clients are wanting to meet with our individuals to begin scoping work and understanding demand. So that's probably one of the more optimistic what I'll call it, front-end indicators that we see.

Likewise, usually, when we come into the beginning of the year, things are a little bit slower and there's a lull to build we saw things hit the ground running from day 1. I mean, in certain of our operating units, they jump right back to preholiday peak levels, which, again, we haven't seen that since the beginning of and 2022, it's interesting, right, because as we started to move to that mid part of 2022, that's when we saw our enterprise clients start to slow things down.

And then as we move through the back end and into '23, that's when things got much more challenging. So we are hearing very positive things from our people as I go around the horn and talk to all of our different regions and different individuals and operating units and some of our top-performing salespeople. Clients are wanting conversations. Order flow also jumped right back to where it was pre holiday, which usually, again, takes the better part of January to pick up. So very positive on those front-end indicators.

[Operator Instructions]

We'll go next to Josh Chan from UBS.

Just 2 quick ones for me, I think. I think, Jeff, you mentioned margin expansion in 2016. It sounds like it's a maybe both the gross margin and an SG&A driven expansion? Could you just confirm that? Because I think in Q1, it seems like you're still guiding to some SG&A headwind on a revenue -- percentage of revenue basis.

Yes. No. I think, Josh, I think it is a bit of a combination from top line gross margins and in addition to SG&A leverage that we would expect in 2026. A couple of dynamics that I did put in my prepared remarks, the tax rate assumption that we've made for the first quarter is 29%.

I also mentioned in my prepared remarks that, that's the rate that we expect for the full year. Normally, you see about 26%. That's what we had for all of -- the drivers to that, Josh, are we had a couple of tax credits, one of which was referred to as the work opportunity tax credit that we had expected might be extended that was not extended moving into 2026.

So that has a bit of an impact to the tax rate -- in addition to that, our research and development tax credit are informed by the level of spend on our Workday implementation, they incentivize you to spend more year-over-year. So that's expected to be down a bit and then we've got some nondeductible compensation that's also driving our tax rate up. So that is part of the dynamic that you could be seeing from a compression perspective.

In addition to that, Josh, I had mentioned that -- some of the actions that we took had a more muted effect. We are continuing to make investments in the business. In the first quarter, we're making some investments in the business that I don't expect that it do not affect to continue moving into the second quarter, so we should get the full benefit of the annual benefit associated with our realignment of headcount in addition to the abatement of some of the investments that we're making in the first quarter moving into Q2.

Great. That's great color. And then I guess based on your view of the cycle and where we are, what's a reasonable path for the Direct Hire business from here? I know that usually lags, but what's your view for that in '26?

Yes. So it's an interesting question because one of the things that we've been noticing is small to mid businesses, which is where we do a lot of our direct hire business, they've actually become more active. And I think it's because they've had so many years of running so lean from a staff standpoint that they're having to backfill or add to their staff to prepare -- so that's what we're seeing there.

When we talk about the conversions that I mentioned earlier, those conversions that we usually see, which are predominantly on our tech side of our business, that's usually in the what I'll call the Fortune 1000, which are actually down. So I would say, from a small to midsize, I'm pretty optimistic in terms of the direct hire from a large enterprise, they've been -- they've actually slowed their direct hire here over the course of, let's just say, the better part of the second half of last year as we head into this year.

And everyone, at this time, there are no further questions. I'd like to hand the conference back to Mr. Joe Liberatore for any additional or closing remarks.

Thank you for your interest and support in Kforce. I'd like to express my gratitude to every Kforce for your efforts and to our consultants and clients for your trust and faith and partnering with Kforce and allowing us the privilege of serving you. We look forward to talking with you again after first quarter 2026.

Again, everyone, that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.

Good day, everyone, and welcome to the Kforce Q3 2025 Earnings Call. Just a reminder that this call is being recorded.

I would now like to hand the conference over to Mr. Joe Liberatore. Please go ahead, sir.

Good afternoon, and thank you for your time today.

This call contains certain statements that are forward-looking, 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 the Investor Relations portion of our website.

Results for the third quarter exceeded our expectations across the board, with overall revenues of $332.6 million and earnings per share of $0.63, both surpassing the high end of guidance. We mentioned on our last call that we experienced unexpected early quarter assignment ends at a select few clients in our Technology business. Subsequently, we were successful at driving a consistent expansion in the number of consultants on assignment throughout the third quarter.

I also want to recognize the progress our team has made stabilizing and now meaningfully growing our FA business. I'm very proud of our team's accomplishment in driving this business forward against a persistently challenging macro backdrop. The momentum that we've seen has carried into the fourth quarter, which puts us in a position to expect to deliver sequential billing day growth in the fourth quarter in both our Technology business and our FA business.

The ongoing federal government shutdown, along with the continuing global trade negotiations and potential derivative negative effects on the U.S. consumer and broader U.S. economy continues to make the near-term outlook hard to predict as exhibited by the continuation of mixed economic data. Recent data continues to suggest a persistently weak and largely frozen labor market, marked by prolonged stagnation in job gains coming off the post-pandemic euphoric period.

However, our internal KPIs improved throughout the third quarter, and this translates to an increase in consultants on assignment, which has continued into early Q4. While it is too early to suggest that we will see sustained broad-based improvements in demand, our team's consistent execution of activities across our portfolio of market-leading companies that typically lead their industries in capital deployment within technology was a significant driver to strong Q3 results and early Q4 trends.

Recent trends, when combined with the increasing backlog of critical technology initiatives suggest to us that companies may not have sufficient capacity once the current macro uncertainties subside. In addition, our historical experience is that companies typically turn to flexible talent solutions as an initial step prior to making core hires while they assess the durability of the macroeconomic conditions.

The relative impact of AI on revenue trends versus the impact of weakening economic and softening labor markets continues to be hotly debated. Regardless, this uncertainty may intensify the use of flexible talent as companies prioritize agility until they gain clearer insight into how these technologies will reshape their overall business and talent strategies.

Generative AI remains a central topic in our discussions. We are confident that AI and other emerging innovations will become increasingly vital in driving business success, though these benefits are likely some years away and will require investments that we are well positioned to support. We have witnessed transformative shifts before, such as the migration from mainframe to distributed processing, the emergence of the Internet, the mobile revolution and the move to cloud computing. The emergence of the Internet likely most closely aligns with AI.

Unlike other secular technology shifts, the Internet and AI directly impact operating models and broadly touch virtually all white-collar roles in some manner. The Internet secular shift followed a typical investment and integration cycle pattern. Initial exuberant, massive infrastructure investment combined with fear-driven investment, premature abandonment of legacy systems, realization of integration and modernization needs, a return to balanced strategic investment and finally, workforce transformation and skill shortage.

In speaking with many executives, it is clear the realization stage is set in, and we might be in the early stage of transition to a return to balanced strategic investment where demand for our services began to accelerate during the Internet cycle. While initial phases of technology secular shift often bring concerns about workforce disruption, these transitions ultimately created new opportunities, expanded existing roles and redefined responsibilities, fueling further investment in technology.

We believe generative AI and its offshoots into agentic AI and cognitive AI is in the early innings of evolution and may just be starting to mirror this historic pattern, which has in the past cycles, been an opportunity for Kforce. Securing the right talent, organizing the right teams and launching focused initiatives is essential for organizations to successfully adopt and maximize these new tools.

We are well equipped to meet the growing need for foundational AI readiness and to deliver access to evolving skill sets as businesses advance their AI strategies. Our strong position should allow us to increase client share and expand into new clients, continuing our track record of gaining market share and reinforcing the solid foundation that drives lasting value for our shareholders.

We have established a strong foundation at Kforce and remain committed to investing in the evolution of our business through our strategic priorities, all of which are meaningfully progressing. Our domestically focused organic growth strategy continues to serve us well, minimizing distraction and enabling our people to fully concentrate on partnering with clients to solve their most critical business challenges.

Before I conclude, I'd like to take a moment to thank the remarkable people who make up our Kforce team. I am deeply proud of the performance, resilience and unwavering commitment shown across the organization. We're privileged to work alongside such a talented, united and passionate group of professionals. It's because of the people who make up Kforce, we're in such a strong strategic position, one I wouldn't trade with anyone in our space. We are confident in our path forward, and I couldn't be more excited about what lies ahead.

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 of $332.6 million exceeded the high end of our expectations. Revenues in our Technology business declined 1.1% sequentially and 5.6% on a year-over-year basis, and our Finance and Accounting business grew approximately 7% sequentially and declined slightly more than 8% year-over-year. Macroeconomic uncertainties have largely persisted throughout the quarter. However, our clients continue to prioritize mission-critical initiatives, although many are taking a measured approach as they await greater confidence in their technology road maps and AI investment strategy, along with greater visibility in the macroeconomic environment, we saw a sustained improvement in our KPIs and consultants on assignment throughout the third quarter.

As a point of reference, consultants and assignment grew roughly 4% from the early third quarter lows. The improvements in our business spanned many industries and were not driven by a few large projects. Rather, we saw positive impacts across many clients and talent acquisition models, inclusive of both our legacy staff augmentation business as well as consulting engagements. The increase in demand also spans skill sets from application development to digital, data, AI and the cloud. Impacts from earlier DOGE efforts and the more recent federal government shutdown have been and are expected to be nominal given our limited exposure to this space.

We continue to execute on our strategic enhancement of our consultant-oriented solutions capabilities, responding to increased client demand for cost-effective access to highly skilled talent. This evolution positions us to deliver greater value through flexible delivery structures and differentiated expertise. Our consulting-led offerings have continued to contribute positively to the overall results of our Technology business, supported by a robust pipeline of qualified opportunities. This approach has been a key driver to the performance of our Technology business and has enabled us to maintain stability in our margin profile and average bill rate.

The expansion of solutions-based engagements underscores our adaptability and commitment to meeting evolving client needs, strengthening long-term relationships and market relevance. Although traditional staffing revenue has declined year-over-year, the continued growth of consulting-led engagements validates our strategic direction and positions us for sustained growth and enhanced profitability.

An increasingly important aspect of providing cost-effective solutions is our ability to source highly skilled talent from outside the United States. Our development center in Pune, combined with robust U.S. sales and delivery capabilities and a high-quality vendor network enables us to comprehensively address client needs through onshore, nearshore, offshore and blended delivery models.

The average bill rate in our Technology segment has remained steady at approximately $90 per hour over the last 3 years, even amid macroeconomic uncertainty. This stability is driven by a growing mix of consulting-oriented engagements, which typically command higher bill rates and deliver stronger margin profiles. Demand across our core practice areas, data and AI, digital, application engineering and cloud continues to be robust, and our pipeline of consulting-led opportunities is expanding. These disciplines are essential for the development and deployment of AI tools, and we expect companies will increasingly require access to specialized talent to achieve their objectives, creating significant opportunities for our firm.

Our ability to provide flexible talent, whether through traditional staff augmentation or consultant-oriented engagements positions Kforce to capitalize on growing investments in AI, including readiness initiatives while continuing to support core technology areas that remain active. Many companies lack in-house AI expertise, so they rely on external providers such as Kforce for strategy conversations, talent sourcing and solutions engagements and execution.

Our core strength lies in delivering quality talent at scale and adapting to evolving skill demands. By providing access to top-tier professionals, we can solve complex technological challenges. We ensure our services remain indispensable even in broader industry as trends fluctuate. As technology has advanced over the decades, we've consistently evolved alongside it, reinforcing our role as a trusted partner in driving clients' technological progress. Our client portfolio is diverse and is predominantly comprised of large market-leading companies. Staying focused on their evolving priorities remains essential to driving sustainable long-term above-market performance.

Looking ahead to Q4, with momentum in new engagements building throughout Q3 and carrying into early Q4, we anticipate a sequential billing day increase in our Technology business during the quarter. Flex revenues in our FA business, currently about 7% of total revenues, declined 7.3% year-over-year, but saw a 6.9% sequential growth in the third quarter, the first time in several years that FA has shown consecutive quarters of sequential growth. Our average bill rate of approximately $53 per hour notably improved year-over-year and is reflective of the higher skilled areas we are pursuing. We expect Q4 revenues in F&A to be up sequentially on a billing day basis. I want to thank this team for its perseverance in driving positive momentum in this space.

We continue to align our associate staffing levels with productivity expectations, prioritizing the retention of our most productive associates while making targeted investments to ensure we are well positioned to capitalize on accelerating market demand. Over the past 3 years, we've selectively invested in our sales teams while rationalizing delivery resources, which have decreased by nearly 45% during that period and investing in productivity tools. Despite these reductions, we believe we have sufficient capacity to absorb several quarters of increased demand without adding significant resources, particularly as we enable AI solutions to gain greater efficiencies. Additionally, we remain committed to investing in our consulting solutions business.

We believe the stabilization we experienced in Q3 signals growing confidence in the market and reinforces the strength of our strategic positioning. We are energized by the opportunities ahead and remain committed to delivering exceptional results. With a proven track record of above-market performance in our Technology business for well over a decade, we are confident in our ability to sustain this momentum. Our success reflects the deep trust and partnerships we share with our clients, candidates and consultants, relationships that continue to drive our growth and innovation.

I'll now turn the call over to Jeff Hackman, Kforce's Chief Financial Officer.

Thank you, Dave.

Third quarter revenue of $332.6 million and earnings per share of $0.63 exceeded our expectations. Our teams have done a nice job working effectively with our clients to recognize the value of our services from a pricing perspective. Overall gross margins of 27.7%, up 60 basis points sequentially, meaningfully exceeded our expectations due to an increase in Flex margins of 50 basis points and a slightly better-than-expected mix of direct hire revenues. On a year-over-year basis, overall spread has been stable, though gross margins declined 20 basis points due to lower direct hire mix. Flex margins in our Technology business increased 50 basis points sequentially due to lower health care costs and slightly expanding spreads and were stable year-over-year. As we look forward to Q4, we expect Flex margins to remain stable outside of typical seasonal impacts due to higher consultant utilization of PTO around the holidays.

Overall, SG&A expenses as a percentage of revenue of 22.8% increased 60 basis points year-over-year, primarily driven by deleverage from lower revenue and gross profit levels. We continue to make targeted investments in our sales capabilities while maintaining disciplined cost management across the rest of the business. At the same time, we are advancing key enterprise initiatives that while contributing to near-term SG&A pressure are critical to our long-term strategy. These include the implementation of Workday, the ongoing maturation of our India development center and deeper integration of our solutions portfolio.

Our consulting business and offshore capabilities are positively contributing to stabilizing revenues and gross margins, and we expect all of these initiatives to drive higher levels of profitability as the demand environment improves and revenues grow. We anticipate beginning to realize benefits from our Workday implementation more significantly in 2027 as we stabilize post go-live.

Our operating margin was 4.5%, and our effective tax rate in the third quarter was 22.3%. During the quarter, we remained active in returning capital to our shareholders with $16.2 million in capital being returned through dividends of $6.8 million and share repurchases of approximately $9.4 million. We continue to maintain a strong balance sheet with conservative leverage relative to trailing 12-month EBITDA. Looking ahead, we expect to reasonably maintain net debt levels consistent with the third quarter with any excess cash generated beyond our capital requirements and quarterly dividend program to be directed towards share repurchases.

Our dividend remains an important driver for returning capital to shareholders, the level of which leaves ample room for continued share repurchases. We continue to maintain significant capacity under our credit facility, which provides ample flexibility to accelerate repurchases should we see fit. In addition, in October 2025, our Board of Directors approved an increase to its share authorization to an aggregate of $100 million, which we believe reaffirms to our investors our future intentions to continue driving our business forward organically and returning significant capital to our shareholders.

Our current credit facility is scheduled to mature in October 2026. As a result of favorable market conditions, we have taken steps to refinance our existing credit facility with a new credit facility that we expect to close over the next week or 2. We expect to retain essentially the same very attractive terms and conditions as are currently in place over the next 5-year term.

Operating cash flows were $23.3 million and our return on equity continues to exceed 30%. We continue to execute our organically driven strategy with strong results, and we believe our industry-leading performance reflects our focused approach in providing U.S. technology staffing and solutions complemented by our nearshore and offshore capabilities. Our balance sheet remains pristine with conservative debt levels, and we consistently return significant capital to shareholders. Share repurchases remain highly accretive to earnings. And since 2007, we have returned approximately $1 billion, representing about 75% of cash generated while growing our business and building a foundation for meaningful profitability gains as revenues expand. Our threshold for any potential acquisition remains very high.

The fourth quarter had 62 billing days, which is 2 fewer days than the third quarter of 2025, but the same as the fourth quarter of 2024. We expect Q4 revenues to be in the range of $326 million to $334 million and earnings per share to be between $0.43 and $0.51. This guide implies a midpoint of $330 million in revenue, which reflects a sequential improvement in both technology and FA revenues on a billing day basis and a further improvement in our year-over-year comparisons.

The expected income tax rate for the fourth quarter of approximately 32.5% contemplates a lower deduction on the vesting of restricted stock given the decline in our stock price. This presents an EPS headwind of approximately $0.04 in the fourth quarter relative to last year and a $0.07 impact from Q3 2025 tax rate levels. Our guidance assumes a stable operating environment and excludes the potential impact of any unusual or nonrecurring items.

We remain confident in our strategic position and our ability to deliver above-market results while continuing to invest in initiatives that drive long-term growth and support our profitability objective of achieving double-digit operating margins and approximately 8% when annual revenues return to $1.7 billion, more than 100 basis points higher than when that level was achieved in 2022. These objectives reflect anticipated benefits from our strategic investments, which are expected to reduce operating costs.

On behalf of our entire management team, I want to extend our sincere appreciation to our teams for their outstanding efforts.

We would now like to turn the call over for questions.

[Operator Instructions] We'll take the first question today from Trevor Romeo with William Blair.

First one I had was, I guess, the 4% increase in consultants on assignment you talked about from the low point of the quarter to the end. Nice to see that for one. I guess my question is, can you give us a sense maybe considering, I guess, we haven't had a normal year in a while, but what a typical July through September period would look like in a prior year? Just maybe trying to get a sense of would you view this as a return to normal seasonality or just kind of more than that? Or how are you kind of thinking about that pattern?

Yes. Trevor, this is Dave Kelly. So to your point, we did see some nice improvement in consultants on assignment, the 4% you mentioned, and I'll just reiterate the comment that, that has continued through the month of October as well. So we're seeing some nice sustained growth. As I kind of compare it, hard to compare it, right, because what is normal. But if I kind of think about pre-pandemic levels, it probably was slightly higher than that, although this is, for us, a reasonably healthy growth rate here. But certainly, we've seen higher growth rates in the past. But again, this is a positive statement, we think.

Okay. Great. And then Question on your gross margins. I think Flex gross margins came in above the guide coming into the quarter, it sounds like health care was less of a drag from the cost side. You did have, I think, a comment about slightly expanding spreads. So I just wanted to ask, one, I don't know if the mix shift to consulting is included in that comment. So how much did that help? And then if there was an increase in sort of the underlying spreads on a like-for-like basis, what do you think were the drivers of that?

Yes. Trevor, it's Jeff. Good to talk with you. I think certainly, we talked about health care costs for the last couple of quarters. And certainly, what you heard from the scripted comments in the third quarter, that was certainly much less so it was actually favorable in the quarter. So that ran better than we expected. When you look at the spreads in the business, I guess I'll start what I mentioned in my prepared remarks, and I think our teams have done a really nice job of working closely with our clients to ensure that we're effectively pricing the value that we're bringing to the equation.

I think, Trevor, you look at the components of this, and certainly, we've talked in the past, we look at our overall Technology business, both in terms of traditional staffing and the solutions work that we do. I think certainly, a mix of growth is definitely a driver there. We've talked about our consulting-oriented engagements contributing positively to our Technology performance. Those historically and is still today, those typically carry 400 to 600 basis points of higher margin. So with that mix of growth, that's certainly benefiting us there.

I also think when you look at the client drivers, there are some puts and takes, certainly from a mix perspective that's benefiting us from a spread perspective. Traditionally, for us, we've talked about the higher skilled areas that we play in. Our average bill rate being roughly $90 an hour has been very stable for several years. Certainly, in that higher skilled area, you would expect a little bit more durability from a pricing perspective. So I think the higher quality skill sets that we continue to focus in and technology is certainly boding well.

And then I'd say the other is internal. This is a continued emphasis for us, even more so in 2025. And I think our people have stepped up to the plate and recognizing the value that we're bringing to the equation.

Okay. Great, Jeff. And then if I could maybe sneak one more in just on H-1Bs and potential for the much higher fees just to kind of get you on the record here. I believe you do essentially no, maybe very little new H-1B sponsorships. You do have some experienced people on H-1Bs. So maybe just help us understand your overall exposure there. Is there any concern that eventually this could flow through to your talent pipeline? And then conversely, is there any potential benefit to your domestic talent?

Yes. Trevor, Dave Kelly again. So to your point, the proclamation that came out, I guess, what, about a month or so ago, 1.5 months ago, and the $100,000 fee. As we understand it, I think there's been some clarification in the proclamation just over the last couple of weeks that this fee specifically relates to new visas, right? So to your point, we do virtually 0 new H-1B visas. We don't bring anybody in. So our model is to sponsor visas and transition employees from people who are already in the United States. So to your point, our exposure in the immediate sense is essentially nothing effectively.

And I think important to note for the individuals here, they have an opportunity to renew their visas. That also is not covered by the proclamation and eventually maybe a half the citizenship. So for us, in the near term, as at least it relates to the access to talent, we don't expect there to be any real impact to our business. Now obviously, theoretically, if this is a permanent change, that will have an impact on where we source talent. But I'll remind you, right, our core competency here is in recruitment. So we have -- in many ways, have the ability to access talent through H-1B visas, other visas, domestic talent. So for us, we just see this as something that we're going to have to think about it as it evolves and make sure that we still got access to talent.

The other thing that I would mention to you, as we think about this, scrutiny in the visa process is probably even more important. And we're very proud of our compliance record and the approval rates that we have in transitioning visas amongst, if not the best in the industry. So for us, from a competitive standpoint, we feel good about where this is and the minimal impact it will have on our business. Frankly, we've got companies who have come to us when they've got difficult situations still the case. And if there is uncertainty, they look to us from a quality standpoint as, in some cases, the first place they'll go when they want to transition H-1B or other employees from other providers that they might have. So there is a competitive opportunity for us here in the near term as well.

Yes. And this is Joe. The last thing I would give you, if you play it out, if -- one, obviously, there's a number of lawsuits that have already been filed. So we're not sure where this will end up. But if it were to become law and play out, when do you start to feel that probably 4, 5, maybe 6 years from now, 6 years, obviously, which would impact all the people that are currently on visas. But it's important to note as well. There's 85,000 visas that are typically approved on an annualized basis. The applications are typically in any given year, 4 to 10x the amount that are granted. And we play in the high-end skill, the highest demand skill area. So more than likely, those are the individuals who are going to be gobbling up the majority of those visas. So really don't see any long-term impact for us as well.

The next question is Alex Sinatra from Robert Baird.

This is Alex on for Mark Marcon. I was just wondering, you mentioned higher interest in AI-related projects. I was kind of wondering if you can give some more detail on the types of engagements you have been more involved with and what kind of work that entails? And also, I guess, what outlook you're seeing so far on demand for those services and how those engagements may change over time?

Yes. I would say the majority of the work that we see our teams onboarding, it continues to be in and around foundational readiness work aspects associated with data. I just came back from the IT Gartner Symposium, and you didn't -- I don't think there was a conversation I was engaged with whether it was with a CIO, a senior tech person or a CEO where they're not dealing with data challenges. Tremendous amount of modernization of legacy systems as well to prepare for AI. And obviously, cloud touches everything, and then you have security and governance. So most of the organizations, they are really getting after the preparation phase associated with AI.

And what we're also seeing on the use case side of the equation, we've seen a number of clients that are ahead of the curve, predominantly technology-oriented companies that are executing some AI initiatives. I would say in general business, we've seen general business pull back a lot on their AI use cases and they have really narrowed their focus to more of an operational type AI use case where they have a very centralized data repository where they can control that data to look at those opportunities.

We're also hearing the ROI challenges out there. People, as they get deeper into these projects, are really being challenged to get the ROI from things that they're doing on the AI front. So the good news is all this preparation work still has to happen to take advantage of it, irrespective of how long it takes AI to ultimately play out. So I would say that's pretty much the backdrop. So it's been broad-based and pretty much the things that we're really aligned in and around, especially from our solution side of our business. Those are all areas that we have key practices in.

The only other thing I would add to what Joe said, and I think this is particularly relevant in the readiness work that's being done, the buying behavior of clients is not exclusive to long-term project acquisition as well, right? We're seeing demand in any number of our talent acquisition models, all the way, obviously, from solutions-based, deliverable-based project work, but all the way through to staff augmentation. So this is a positive contributor to the demand and staff augmentation as well. So important to kind of make sure you don't take a specific distinction in how the buying behavior is being done by clients.

Got it. That makes a lot of sense. And then on the consulting side, obviously, that's been a positive contribution to your results, both from a growth and margin perspective. I was wondering if you could give some more color on the type of engagements you're in and the magnitude of that contribution as well as where you expect that to go as things like AI become a bigger focus?

Yes. As I think I mentioned and Jeff mentioned, that continues to be a real bright spot for us, right? When we think about the revenue trajectory, certainly, the engagements that are being supported by our consulting team have been a real bright spot. And their practice areas, as we've said in the past, right, are in cloud. They're in digital, data, AI and application development engineering. So pretty broadly across all those things. I would tell you, as we think about the demand environment there, we've seen a real uptick. And I think you mentioned this last quarter, even more so this quarter, the pipeline of opportunities in the digital and data space continues to grow as well. So you're certainly seeing the investment in the readiness work that Joe was just alluding to coming our way as well. So just where you would think it's coming.

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

This is Tyler Barishaw on for Tobey. I want to go back to the AI point and how you're helping companies with road maps. Can you maybe touch on how much revenue engagements are contributing today? And maybe what is the margin profile of the engagements like?

Yes. So it certainly is a growing part of our business, right? It has been, as I said, a bright spot for us, but we've never really disclosed the percentage of the revenue stream that we're seeing here. It's certainly a significant portion, but it is not the majority of the business at this point in time. Margin profile, Jeff alluded to the fact that we've had very stable gross margins. Part of that is because this has been a growth part of our business for the last couple of years, and we typically see margins for a lot of these consulting-related projects could be as much as 400 to 600 basis points higher than the traditional staff augmentation model. So it is a benefit in terms of mix because of the growth trajectory.

Got it. Makes sense. And then you mentioned on consulting growth with being -- this has -- facing staffing revenue declines. Can you maybe talk about how close you are to a staffing revenue bottom and when we can return to growth? Or maybe what are some of the elements that could allow us to return to growth in staffing?

Yes. So I would -- maybe I'll reiterate the trajectory of the business that we've seen, right? So we've mentioned some of the declines that we saw right at the end of the second and the beginning of the third quarter. But prior to that, if you think about the last couple of quarters, we really have seen a stabilization of the consultants that we've had assigned. And that is across the spectrum of business we've seen, right, staff augmentation and our consulting services both as well. And as I mentioned in my prepared remarks, as we saw the consulting growth of 4%, growth from that low point that we saw at the beginning of the quarter and then even higher than that as we moved into October, again, broad-based that is inclusive of contribution from staff augmentation and consulting. So I don't want to say we're going to call a bottom, right, because we haven't seen many, many data points of growth, right? I don't want to go out and limb here, but it is certainly promising as we saw stability Q1 to Q2 absent those specific client dynamics and then some growth in our staff augmentation business in Q3 and what appears to be a positive Q4, we guided sequentially up again in our Technology business. So we're certainly seeing some signs here that things are certainly firming, and we'll see where it goes from here.

Yes. And what I would add on to what Dave just mentioned there, being there, we saw growth in both staff augmentation and the solutions side. I would really attribute that to the integrated model that we've deployed within our organization, where we're really leveraging relationships and being able to bring those services to the customer that the customer needs at a given point in time versus trying to push one service versus another. So I think unlike many others that we've heard about out there that are talking about declines on the staff augmentation side with growth more on the consulting side here in Q3, we saw growth in both of those and our forward-looking trends also point to growth in both of those areas into Q4.

And the other thing I would say is it's really promising about this, and again, I alluded to this, this is not industry specific. This is not geographically specific either. So we're seeing it pretty broadly, right? I mean obviously, we've got a high-level skill set that we focus on. But we're seeing it across industry. We're seeing it across geography. And so we've had a lot of positive contributions from a number of markets this quarter. So it seems to be, again, relatively broad-based.

The next question will come from Josh Chan from UBS.

This is Karan Singhania on for Josh. So I'm just curious if you're seeing any benefits from the reallocation of budgets [indiscernible] that you saw last quarter. I think in the last quarter, you highlighted some negative impacts from that. So I'm just wondering if that kind of liked flipped this quarter and you saw some of the projects that you're working on to see some additional funding over there.

Yes. If you recall last quarter to your point, there were a couple of specific clients where we have seen some reallocation of budgets, which is I think what you were referring to. I would say, as we've gone through the third quarter, we haven't heard that. As a matter of fact, obviously, as we've been talking about, there's a lot of pent-up demand, a pretty significant pipeline of activities. Joe alluded, I think, in his remarks to the fact that if there are critical things that need to get done, it is a natural tendency for companies when there's uncertainty, and I think there still is uncertainty in the marketplace that they will look for flexible talent first. So we could be, as I think you alluded to, be entering a typical period here that we've seen in previous beginnings of recoveries in the flex cycle.

Got it. Okay. That's helpful. And as my follow-up, I'm just wondering, I think it looks like the line is pretty big, but just hoping if you can provide some color on the [indiscernible] and markets or where it goes? Are there any specific industries that are showing like early signs of stabilization or any green shoots over there?

Yes. I'll just reiterate the comment I previously made. It is -- I mean, has every industry been up? No. But has there been many disparate industries that have grown for us sequentially? Absolutely. Now I've said in the past, we need to be careful here because the demand that we see, we don't do business with every client in every industry. So clients are driving behavior and there in every industry clients that we see increases from and probably some mild reductions in projects and there as well. So no, it is not industry specific. It is broadly -- if we were trying to pinpoint a driver, I wouldn't pinpoint a driver of any type of activity. I mean -- so no, it is definitely broad-based.

One of the drivers for potentially this being broad-based is, I don't want to date myself here, but if we go back to the dot-com era, and we look at how that cycle played out, the first phase was hype investment surge in new technologies driven by fear of missing out or being disrupted as well as investments in building out infrastructure. Then right shortly thereafter, we saw a halting of legacy investments with organizations pausing or reducing their spending out of fear of those systems imminently being obsolete. And then ultimately, what happened was a reality check hit, where organizations realized that the new technology is not a cure all with significant work needed to integrate and modernize their legacy systems. And then once that reality hit, basically, we saw a balanced investment come back in where they really returned to investing in legacy modernization while strategically positioning to leverage new technology.

Then the last stage was really an overall workforce and skill redistribution where technologies roles shifted. Some disappeared, many new roles created, many others had to integrate additional skills. It's clear when you start to read white papers, when you start to read some other mainstream things out there, reality check has hit. And again, coming out of the Gartner IT Symposium, that was a main theme that you heard in speaking, whether it be the presenters that reality has hit everybody on what it really takes to leverage AI and what organizations have to do. And if we are coming out of that reality into that rebalancing, it's the same thing that we saw during the dot-com.

Coming out of that is when we saw the need for our services start to pick up as people started to rebalance their investments across the board. So I'm not calling that, that's exactly where we are, but there are an awful lot of similarities. And I use the dot-com specifically because out of all the secular technology shifts that I've seen in my career, I've been doing this for 38 years. That one parallels AI most because those -- both of those impact work models, operating models and they touch all white-collared individuals within organizations. So there's a lot of parallels and a lot of similarities.

[Operator Instructions] We'll go next to Marc Riddick from Sidoti & Company.

A lot of my questions have already been touched on. I just maybe want to throw in maybe 1 or 2 others as far as what you're seeing with AI, digital and the like. I was wondering, could you maybe talk a little bit about -- do you have a sense as to current growth drivers, maybe the mix between cost savings driven versus growth driven?

Yes. I think -- and again, a lot of this was discussed at the Gartner conference as well. I think everybody started out on the productivity side and everybody is struggling with getting the ROI on the productivity side. I was with -- I had the opportunity, I was invited to spend time with 19 other CEOs to really hear firsthand what they're experiencing. And there was one key theme that I heard is everybody started out because of a lot of pressure from boards and to get after AI, out of disintermediation, fear of missing out, went after a lot of use cases. Most of them have really scaled back those use cases. Many of them went after productivity.

And where I was hearing where people are having success are really on what I'll call operationalizing business processes that are very focused and very narrowed where it's very measurable to get the return. And so that's really where we're seeing organization shift. And again, I'm not talking about the large tech organizations that obviously are getting after AI to embed into their products so that they can sell their products. I mean I'm talking general mainstream business. So we've really seen and what I heard is a real narrowing of the focus to get after an AI initiative.

The other thing that many are struggling with is the ROI in terms of everybody scoped the AI initiatives out just based upon the technological cost and then the added cost that people are now experiencing because of the amount of change management, training and all the post-implementation costs, that's really making the hurdles even that much more difficult from an ROI standpoint.

Everyone, at this time, there are no further questions. I'd like to hand the call back to Mr. Joe Liberatore for any additional or closing remarks.

Well, I'd like to thank you for your interest and your support in Kforce. I'd like to express my gratitude to every Kforcer for your efforts and to our consultants and clients for your trust and faith in partnering with Kforce and allowing us the privilege of serving you. We look forward to talking to you again after our fourth quarter of 2025. Thank you.

Once again, everyone, that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.