Kforce Inc. Aktie

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.

Good afternoon everyone, and welcome to the Kforce Q2 2025 Earnings Call. As a reminder, this call is being recorded. At this time, I would like to hand things over to Mr. 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 our Investor Relations portion of our website. Against the backdrop of a macroeconomic environment that has faced heightened uncertainty for a prolonged period of time, we are pleased to have delivered sequential flex revenue growth in both our technology and finance and accounting businesses in the second quarter. Overall results were largely consistent with the expectations and I'm proud of how our teams are continuing to execute and take market share.

While the enactment of the one big beautiful bill removes some uncertainty related to tax policy, the global trade negotiations and potential retaliatory measures are far from settled and the potential derivative negative effects on the U.S. consumer and broader U.S. economy remain highly uncertain as exhibited by continued mix economic data. Conversations with our clients, which are predominantly market-leading companies and our operating trends suggest that we are continuing to operate in a demand-constrained environment. With that said, our clients continue to carry a significant backlog of strategically imperative technology investment that they expect to execute once greater positive visibility exists.

Over the past 3 years, job gains have been concentrated in a handful of sectors, health care, leisure and hospitality, construction, education and government. These areas have driven the bulk of the labor market growth. Outside of these sectors where our client presence is modest, job creation has been minimal to nonexistent. Unemployment claims have remained low, which suggest that companies, broadly speaking, continue to be reluctant to lay off workers after allowing natural attrition to downsize their workforce over the last 3 years. These data points when combined with the increasing backlog of critical technology initiatives suggest to us that companies may not have sufficient capacity and an expanding economic environment that is free of the current significant macro uncertainties. In addition, our historical experience 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 emergence of AI may intensify this trend as companies prioritize agility until they gain clearer insight into how these technologies will reshape their overall talent strategies.

Generative AI continues to dominate the headlines as we become a fixture in conversations with our clients and our people. As we have previously articulated, over the long term, we believe that AI and other innovative technologies will continue to play an increasing role in powering businesses. This is informed by decades of experience operating in the technology sector, where we have seen new and disruptive technologies introduced such as the rise of the Internet, the mobility revolution and prolification of applications and the transition to cloud-based technologies to name a few. Each of these technology evolutions went through similar phases where companies look to understand the technology. assess the implications on their business, determine their strategy, begin to assemble their road maps and take advantage of the technology. There were also concerns in the early phase of these evolutions of disruption to certain areas of the labor market. What eventually unfolded through each was the creation of new roles, expansion of existing roles and redefinition of roles, which led to the acceleration of additional technology investment. We believe we are in the early phases of Gen AI. And while the demand we are seeing is not yet evident at scale, we are seeing meaningful opportunities with market-leading companies to assist them in aspects of their overall Gen AI journey. Dave Kelly will cover this in more detail.

Access to the right talent will be at the heart of company's success in preparing and utilizing these new tools. We are ideally positioned to meet what we expect to be increasing demand in AI foundational readiness work in combination with our ability to access evolving skill sets that will be required as companies move deeper into their AI road maps. We remain strongly positioned to further expand our footprint within existing clients while continuing to expand in new clients to take additional market share as we've been doing successfully for years. reinforcing the foundation we are building to deliver substantial long-term value for our shareholders.

As we look ahead to the third quarter and the remainder of 2025 has been the case over the last few years, we will continue to stay close to our clients and monitor our key performance indicators and make any necessary adjustments to our business while continuing to invest in our long-term strategic priorities with a keen focus on retention of our most productive associates. We remain encouraged by recent trends that continue to affirm the stability of our technology business.

We've established a strong foundation at Kforce and remain committed to investing in the transformation 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 distractions and enabling our people to fully concentrate on partnering with clients to solve their most critical business challenges.

Before turning the call over, I want to take a moment to recognize the incredible 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 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. The future is bright, and I couldn't be more excited about what lies ahead.

Dave Kelly, our Chief Operating Officer, will now give greater insights into the 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 $334.3 million declined 6.2% year-over-year and were largely consistent with our expectations. Flex revenues in our Technology and Finance & Accounting businesses both improved slightly sequentially in the second quarter, while direct hire revenues were more challenged in the quarter, given the sensitivity in this line of business to macro conditions and came in below our expectations. .

While macroeconomic uncertainties have largely persisted, our clients continue to prioritize mission-critical initiatives though given the backdrop continued to take a measured approach, while they await a period of greater confidence. As increasingly requested by our clients, we've continued to drive with strategic intent, a greater mix of our business through consulting-oriented solutions that align with the desire to access highly skilled talent in a cost-effective manner.

Demand for our consulting led offerings remains strong as evidenced by continued sequential and year-over-year growth and a growing pipeline of qualified opportunities. This offering continued to be a key driver to our overall technology top line outperformance versus our peers and stability in our margin profile and average bill rate. This growth highlights our adaptability and our success in meeting the changing needs of our clients. While our traditional staffing business has seen year-over-year revenue declines, the expansion of solutions-based engagement underscores our strategic shift and the increasing value clients place on our capability to provide talent through various delivery structures.

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 our robust U.S. sales and delivery capabilities and a high-quality vendor network enables us to comprehensively address the evolving needs of our clients whether onshore or blended onshore, nearshore or offshore teams.

The overall average bill rate in our technology business of $90 has remained stable over the past 3 years despite the uncertain economic environment due to a higher mix of consulting-oriented engagements which carry a higher average bill rate and margin profile. The demand within each of our practice areas, data and AI, digital, application engineering and cloud has continued to be strong, and the pipeline of consulting-oriented engagements has continued to improve. Each of these areas are critical to the preparation and implementation of AI tools and companies are expected to need access to critical talent to meet their objectives, which we believe provides significant opportunity for our firm.

Joe referenced the opportunities we're seeing in the overall AI space. We thought it would be helpful to articulate a few examples on how we're partnering with clients. In a recent engagement with a market-leading technology company, we're partnering with one of their key organizations to implement genic AI workflows. These AI-driven solutions enhance end user productivity and efficiency while also unlocking deeper insights through improved visibility into data patterns and trends. In another engagement with a top-tier networking technology company, we help drive measurable value by equipping their sales organization with agenetic AI-powered workflows. These solutions are designed to sharpen pipeline visibility and guide sales teams toward the most strategic next actions, ultimately accelerating deal velocity and improving alignment with customer priorities.

Our focus on providing flexible talent via traditional staff augmentation engagements or through our consulting-oriented engagements, especially in times of uncertainty, positions Kforce ideally to participate in the growing investments in AI, including the required readiness work in addition to more traditional areas of technology that are still progressing. Our ability to source and provide top-tier professionals who can address complex technological challenges has ensured that our services remain indispensable even as overall industry trends have slowed.

Our core competency lies in sourcing quality talent at scale for our clients adapting to evolving demand for various skill sets. As technology has evolved over the decades, we've efficiently adapted to the changing skill set demands of our clients, ensuring we remain a trusted partner in their technological advancements. Our client portfolio is diverse and is predominantly comprised of large market-leading companies. Our focus on addressing their needs continues to be critical to our ability to drive sustainable, long-term above-market performance.

Looking forward to Q3, the pace of overall new engagements in project gains remained stable with Q2 levels, though clients continue to reallocate spend within their businesses to areas they find most promising. As a result of such actions and a small number of clients at the end of Q2, we experienced some unanticipated project ends and therefore expect a modest sequential decline in our technology business in Q3.

Flex revenues in our FA business, currently about 6% of revenues, declined 16.8% year-over-year. But as previously noted, we saw a sequential growth in the second quarter, the first time in several years that this quarter has seen expansion. Our average bill rate of approximately $54 per hour notably improved sequentially and year-over-year and is reflective of the higher skilled areas we are pursuing. We expect Q3 revenues in FA to be up sequentially on a billing day basis in the mid-single digits.

I want to thank this team for their perseverance in driving positive momentum in this space. an area where you've seen the most significant impact from the economic uncertainty is in direct hire, which represents approximately 2% of overall revenues. We expect Direct Hire to be relatively flat sequentially in Q3. We continue to align our associates a staffing levels with productivity expectations prioritizing the retention of our most productive associates while making targeted investments to ensure we are well prepared to capitalize on market demand as it accelerates.

Over the past 3 years, we selectively invested in our sales teams while rationalizing our delivery resources, which have decreased by close to 45% over that time period. Despite these reductions, we believe we've ample capacity to absorb several quarters of increased demand without adding significant resources.

Additionally, we continue to invest in our consulting solutions business. We believe the slight sequential growth we experienced in Q2 reflects the continued stabilization of demand. We remain tremendously excited about our strategic position and our ability to continue delivering above-market performance in our technology business as we have for well over a decade. The success we achieved as an organization is a testament to the unwavering trust that our clients, candidates and consultants place in us.

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

Thank you, Dave. Second quarter revenue of $334 million and earnings per share of $0.59 were both largely consistent with our expectations. Overall gross margins increased 40 basis points sequentially to 27.1% due to an increase in Flex margins of 80 basis points, primarily resulting from the seasonal pickup in payroll taxes. This was partially offset by a lower-than-expected mix of direct hire revenues. On a year-over-year basis, overall spread and business mix have been stable though gross margins declined 70 basis points due to higher health care costs and lower direct hire mix.

Flex margins in our technology business increased 70 basis points sequentially due to the alleviation of Q1 payroll tax resets. Flex margins and Technology declined 30 basis points year-over-year due to higher health care costs, which were partially offset by slightly improved spreads. As we look forward to Q3, we expect Flex margins to remain stable.

Overall, SG&A expenses as a percentage of revenue of 22.2% were within the range of our expectations as we have continued to manage productivity and profitability level as well. SG&A expenses as a percentage of revenue increased 40 basis points year-over-year, primarily driven by deleverage from lower revenue levels and higher health care costs. which were partially offset by leverage gained from continued refinements in our headcount and lower performance-based compensation. We are continuing to make targeted investments in our sales capabilities, while tightly scrutinizing spend in all other areas of our business.

We also continue to advance our enterprise initiatives, which contributes to some of the negative leverage we are seeing in SG&A costs, including the implementation of Workday, the maturation of our India development center and further integration of our solutions offering, all of which are expected to significantly contribute to our longer-term financial objectives and prepare us well for when companies more aggressively invest in their technology initiatives. We expect to begin to realize the benefits of our Workday implementation towards the end of 2026 as we stabilize ourselves post go-live with 2027 as the year we would expect to begin to realize significant annualized benefits.

Our operating margin of 4.5% and our effective tax rate in the second quarter was 24.6%. The effective tax rate was slightly lower than we expected due to a favorable adjustment in certain 2025 tax credits in the second quarter. We also expect a lower effective tax rate in the third quarter related to the finalization of 2024 tax credits and our income tax returns. During the quarter, we remained active in returning capital to our shareholders with $17.4 million in capital being returned through dividends of $6.9 million and share repurchases of approximately $10.5 million. We continue to carry a very solid balance sheet and historically conservative leverage against trailing 12 months EBITDA levels.

As we move forward, we intend to maintain net debt levels relatively consistent with where we ended the second quarter of roughly $67.5 million. Any excess cash the business generates beyond fulfilling our capital requirements and quarterly dividend program will be utilized to repurchase our shares. Of course, we have significant remaining availability under our credit facility to get more aggressive in repurchasing shares if we believe there is a disconnect between our operating trends and expectations and our valuation.

Operating cash flows were $18.4 million, and our return on equity continues to exceed 30%. We continue to execute our organically driven business well, and we believe our industry-leading relative performance is a result of our intense focus and technology staffing and solutions in the U.S. augmented by our nearshore and offshore capabilities. We continue to carry a pristine balance sheet with conservative debt levels and return significant capital to our shareholders. This consistent repurchase activity continues to be strongly accretive to earnings.

We have returned approximately $1 billion in capital to our shareholders since 2007, which has represented approximately 75% of the cash generated, while significantly growing our business and laying a foundation for significant profitability gains as revenues grow. Our threshold for any prospective acquisition remains very high. The third quarter has 64 billing days, which is the same as the second quarter of 2025 and the third quarter of 2024. We expect Q3 revenues to be in the range of $324 million to $332 million and earnings per share to be between $0.53 and $0.61.

Our guidance is based upon the assumption of a continuation of a stable environment and does not consider the potential impact of any other unusual or nonrecurring items that may occur. We remain excited about our strategic position and prospects for continuing to deliver above-market results while continuing to make the necessary investments to help drive long-term growth and enable us to achieve our longer-term profitability objective of attaining double-digit operating margins.

As we mentioned previously, we expect operating margins to approximately 8% when we returned to $1.7 billion in annual revenues, which is more than 100 basis points higher than when that revenue level was achieved in 2022. This improvement is being driven by the expected benefits derived from investments in our strategic priorities, which will drive down operating costs. On behalf of our entire management team, I'd like to extend a sincere thank you to our teams for their efforts.

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

[Operator Instructions] We'll take the first question from Mark Marcon, Baird.

Joe, you mentioned where we are in terms of AI, and you mentioned a few projects that you guys have been working on. Can you just talk a little bit more about the levels of discussion that you're having there? And when you think the spicket will actually turn up to a greater extent in terms of the areas that you can really assist clients in? Obviously, there's lots of questions about that.

Yes, it's a great question, Mark. It's good to hear from you. I'd say, when we look at the external environment, the majority of the actual work our teams are focused on continue to be with clients in and around the foundational readiness aspects associated with governance, data, cloud and security. Most organizations continue to remain in what I would call this preparation phase associated with AI. On the use case side of things, we have worked, and I think Dave Kelly touched upon some of this in his opening comments with some technology clients. which are further ahead of the curve to leverage AI aspects really within their products. I would say -- I would really say that's the exception versus the norm right now. There's a couple of studies out there that kind of estimate that about 10% of organizations are really fully equipped to truly leverage AI. And I would say those are really -- most of those organizations are on the technology. Of course, there are some that are outside of technology. But in general, that's what I would categorize it up. So I think there's a significant opportunity, especially in and around data, which this is not going to be a short horizon for organizations to get their data organized, do everything they need to be able to leverage future AI opportunities. And then the whole digital aspect. This is where we see a lot of modernization activity going on. similar to what we're doing here at Kforce, right? I mean we're in the stages of implementing Workday from our legacy PeopleSoft environment, and that's going to prepare us so that we can fully take advantage and leverage AI down the road. And that's kind of what we're seeing within our particularly customer set. So hopefully, that gives you a little bit of flavor.

That's very helpful. And then there was a comment with regards to -- if we take a look at the sequential trend for Tech Flex going into Q3 where there was -- it sounded like there were a few project ends that came along unexpectedly. Can you talk a little bit about what you're seeing in terms of those early project ends. I've been hearing a number of comments from other companies along the same lines. And I'm just wondering, are these projects that are ending because the budgets just don't allow for them to continue? Are they bringing those projects in-house? Any sort of color that you could provide would be really helpful. Or do you expect those projects to resume?

Yes. Mark, this is Dave. You're alluding to the comment we made about this a couple of clients that we saw some unanticipated ends at the end of the year. So maybe again to give you a bit more color because we've made some commentary around what we see as some general stability in the marketplace to give you some perspective, right, of ends and/or what we're seeing and have been seeing over the course of the last couple of quarters, and I'll share a little bit of color on these ends as well on these projects. So we've really seen over the course of the last couple of quarters, Q1, Q2 and certainly into the third quarter. Some real stability in the new assignments that we've seen, the new project wins that we've had, some stability in starts, if you will. And actually, clients looking to maintain the resources we've seen attrition levels be a little bit lower than we had anticipated. Frankly, that had resulted in as we were into -- other than the last couple of weeks of the second quarter, we'd actually seen mild increases in the amount of consultants that we have seen on assignment. So pretty consistent with what we had seen in the first quarter and then similar to what we've seen in the first few weeks of the third quarter as well. And then right at the end of the quarter, really, the last couple of weeks of the quarter is when we saw these ends, just as a specific example, I would tell you, we were actually in the throes of discussing an extension and an increase in the number of consultants for the projects that we're undertaking. And right at the end of the quarter, the client basically decided that they found a better utilization of that investment in another technology project and they ended our unexpectedly really ended this project as opposed to increasing it. So this was not a reduction in spend on technology spend. It was just a reallocation of spend. Unfortunately, it was in a project that we weren't participating in. So I mean I look at all of those things, those -- those data set that I just shared with you and what has happened here. And frankly, as we think about what we've listened to over the last couple of weeks, the general tonality is stability. And I think it really resonates with us that we're seeing very, very stable investment environment and technology.

How would you characterize the pipeline right now?

That's a really good question. I would say the pipeline continues to be well strong. I think Jeff alluded to the fact that we still see a lot of pent-up demand on more of those legacy projects that clients are looking to invest in that they were looking for some greater insights as to an inflection. And I think we're benefiting potentially in the near term with some greater certainty in the marketplace. But additionally, and maybe more specifically to your question, we have seen a pretty significant increase in the pipeline in the areas that Joe mentioned a minute ago, data digital, clearly, there's additional spend there. So there's building pipeline, I think, generally in the hopes that we see some improvement in the economic landscape for those projects that are waiting on the sidelines. And then we're also seeing investments in areas that are essential. As we've always said, and data preparation and AI preparation is one of those areas where the pipeline actually is building. So I think, generally speaking, some promising some promising indicators for us.

Great. And then can you just talk to what extent do you see companies potentially holding off on some legacy projects that they have on their pipeline just because they're uncertain about what the impact of AI is going to be in terms of potentially making those legacy solutions obsolete or really out of date and therefore, just being a little bit uncertain just from where we are from a technology development perspective.

Yes. I don't think thematically that is what we're hearing, Mark, frankly, I think what we continue to hear. It's really the story remains the same. There's a lot of work that needs to be done, right? Everything that is being done in technology is not being done in AI. Yes, there is investment there. But there's a lot of work, I can say that is true for our own shop. We are always looking for people to do a lot of work here. We've got a transformation in our back office. We've got a lot of resources that we are looking for internally as well as through third parties to help us with that. A lot of companies are going through the same thing. And what the hesitancy is saying, great, I can see value being derived from these investments, but they're looking for because of the economic uncertainty, a more immediate return and therefore, are hesitant to pull the trigger. So I don't think that really that story has changed. And it's not a matter of them saying, we're not going to really spend this money at great scale because we're waiting for AI to change everything. As a matter of fact, as Joe alluded to, there's a lot of preparatory work. There's years we think of work that needs to happen in order for companies to realize those benefits. So you can't just wait years and I don't think companies are willing to do that as it relates to AI. It's more economically driven than anything else.

Yes, Mark, I would add on to that, that a lot of what we're seeing is what I'll call for a broader term modernization organization, the legacy systems that you're talking about, yes, they're redirecting dollars to modernize those systems so that they can be positioned for AI. But the spend is still there. Are people continuing to maintain legacy systems only because they have to. One of the hypothesis out there is AI could be the catalyst to 1 day retire the legacy Cobalt systems that I used to place programmers in about 37 years ago, I think most of them are retired at this point in time. But I do think that AI can assist and there was a really good article Wall Street Journal, I think it was probably about a month, 1.5 months ago talking about Morgan Stanley's situation of migration of their Cobalt and how they're leveraging AI. But it's not like you just throw this at AI and it rewrites the code and now you have a new system. What it's really helping them with is basically to get out all of the information so that now then they can start the development and migrate that to more modern systems. And then the next phase of that like we've seen with other situations with secular shifts, we're beginning now to hear about a lot of newer roles that are being introduced. In fact, there was an article just read recently that 1 out of every 4 jobs posted from a tech standpoint have something AI related. And we're seeing new jobs come out, not just the prompt engineers, but AI support specialists automation support managers, AI security engineers, AI project managers. And that will be that whole next wave as organizations get through the data and the modernization aspects, which is a long journey for most organizations to get there.

The next question today comes from Trevor Romeo, William Blair.

I had one to start on the FA business. I know it's a smaller part of the company. But you pointed out the sequential growth in Q2. I think you expect it to grow again in Q3, just given the trends have been, I guess, the reverse of that for a long time now. So any more color on what's driven the trends that flip positive there? And are we now at the point where you think the sort of repositioning you've been working on is fully done?

Yes. Trevor, this is Dave. I appreciate the question. First of all, I think it goes without saying we're exceptionally proud of this team and the work that they have done. As you pointed out, it's been a couple of years here of probably some painful times for them and have really done a great job Yes, we've been in the process, as you said, repositioning this business, the success here that we're seeing recently is a redoubling really a focus in building an executable model. We've got a highly tenured team, right, as you would imagine, over the course of time, given the size of the revenue stream, the best and brightest are still here. And obviously, you can rely upon them. They're executing well. you'd mentioned that we saw sequential growth in the second quarter, and we're signaling again that we expect even stronger sequential growth. So I think the repositioning of the business to higher skill sets, right, we're out of the administrative F&A work. And we're clearly with an average bill rate in the mid-50s in the accountant and above analyst type of territory, which we think marries quite well to what the needs of our clients, our more sophisticated clients are in our technology footprint. So we're very pleased with that synergy. I think that we're going to see on a on a go-forward basis. I think it's fair to say with a couple of quarters of sequential improvement that certainly things have stabilized here. expect stability and great execution from the team. Obviously, the market itself is going to be a factor in our continued success, but feel really good about where we are and the future of how F&A is.

That's great, Dave. Would you say, I guess, that that's more reflective of, I guess, Kforce's specific execution in the area? Or any sort of uptick in demand that you're seeing or maybe a little bit of both?

Yes. I think it's a couple of things, right? Like I said, we've got some exceptional people. We've got -- I think the average tenure of this group is more than 10 years, right? So -- so you got to have a lot of experienced people who are very good at what they do. The market itself, I think it's fair to say it's not great per se, but they're executing well. We've got a great client base, right? One of the things that Kforce has the great benefit of his great relationships over a long period of time with nameplate companies. And so I think it's a function of our footprint, the simplicity of our model and the capability of our people more than the market.

Okay. That's great. And then I just wanted to ask quickly on -- I guess, on gross margin, I think it came in a little below your guidance in the past couple of quarters. So the question is, is the health care cost issue I guess, is it still unfavorable to your expectations? Is it primarily a direct hire mix issue because that has a big impact on the margins? Because I know you've said that the bill pay spreads have been pretty stable. So just any more color on the pieces there would be helpful.

Yes. Trevor, it's Jeff. I appreciate the question. Yes, I think the net of the story when you look at second quarter results is direct hire mix certainly came down in the second quarter, and that put a bit of pressure on overall gross margins. Really the story when you look at our -- both our technology and our FA Flex businesses, both are behaving somewhat similar from a stability standpoint. If you look back to the last 1.5 years and our Technology Flex margins have been very stable. Health care costs on a year-over-year basis were still up. But against our expectation that was not a driver positive or negative in the quarter. So the stability that we have been seeing in our Flex margin profile, we continue to see moving into the second quarter. Actually, when you look at a year-over-year basis, spreads are actually slightly improving and our technology businesses that helped to offset some of the increased health care costs year-over-year. Sequentially, we received the same seasonal payroll tax benefit that we traditionally see again, health care cost is not a driving factor sequentially and spreads improved very mildly at our technology business sequentially. And frankly, going forward, we've been seeing stability. We would expect stability moving forward. We've talked part of the reason for that stability over a longer-term period of time is the progress of our consulting-oriented solutions. That continues to contribute positively to our financial performance and the gross margins in that line of business are still 400 to 600 basis points higher. So we certainly get the mix benefit up there. So a little bit longer, Trevor, than maybe what you're looking for, but hopefully, that helps.

Tobey Sommer from Truist Securities has the next question.

In terms of offshore, you mentioned that as a bright spot. Does the company have a wide enough array of sort of different price points because of the footprint that you have to be able to offer sort of as many menu choices as customers may want?

Yes. Tobey, this is Dave. Our footprint in in Pune has been built specifically to complement the skill sets that we are utilizing and placing here domestically. So as we've mentioned before, clients obviously are looking for ways to be more cost effective or driving requests through blended models, both to provide talent onshore, nearshore, offshore. So the intent of this endeavor here has been to support the revenue footprint that we have in the United States. So what I mean by that is we are not and we don't intend to build the delivery center in India to expand the type of roles that we are placing, right? We're not going to build helpdesk service centers to capture revenue. This objective here is meant to help drive revenue in the United States specifically. So it's relatively speaking, narrowly focused we are obviously narrowly focusing skill sets broadly focusing -- broadly focused as a bit of a [indiscernible] the footprint to meet the needs of all of our clients, however, because I would say the vast majority of clients are looking for this type of service.

Okay. From -- looking at your guidance, how would it compare, do you think, versus what would seasonally happen sequentially to your revenue gross margin and in bottom line in the third quarter. It's been a while since we've had a seasonal norm because the industry hasn't had a few years here declines and off the great resignation when things were crazy good. So what would it look like historically?

Yes. Tobey, this is Jeff. Totally fair question. I think I'll answer the third quarter. I think in the second quarter, when we were sequentially positive in both our Technology Flex and our FA Flex business what would typically be the case is somewhere probably closer to 3%. In the second quarter, we came in slightly positive. Typically, for us, the second quarter is obviously the highest sequential billing day increase coming off the seasonally low first quarter. As you go into the third quarter, the growth there is certainly a bit more muted I guess, Tobey, I'll give you a comparison maybe on pre-COVID, it was probably around 2% sequential might be an average free COVID because we had certainly 2020, which was anomalistic. And then we had the hyper growth in '21 and '22 and then relatively subdued growth since then. So what might be normal is maybe somewhere closer to 2% on an average for a third quarter sequential impact.

Okay. I appreciate that. And could you remind us on the cost saves associated with Workday in '27 and thereafter? And are there additional saves from the other internal investments that you'd care to quantify?

Yes. I think, Tobey, to answer your first question on our Workday implementation and we've given this comment. Over the years, certainly compared, Tobey to the level of investment that we currently have with our Workday implementation, we expect 100 basis points of net benefit throughout that Workday implementation. We've commented and Dave Kelly I think mentioned it in his prepared remarks that we would expect to go live in 2026 and towards the end of the 2026 to start to inure the benefits associated with that program, with a kind of a full annualized benefits post go-live in 2027. So about 100 basis points is the way to think about it from an operating margin standpoint, largely getting to that point in 2027. As to the other enterprise priorities, certainly, and Dave commented on our Pune presence. We've talked there that the opportunity for us, certainly at a lower bill rate overall, but we would expect the Flex margin profile on that business to be better as we pursue a blended onshore and offshore mix business. I would say, Tobey, that's -- yes, that's a contributor, but not a significant driver to our future profitability. And then certainly, the path for us on driving to a higher quality revenue stream through our integrated strategy efforts certainly is part of the overall equation and getting us to that. I'll give you the nearer term, though you have the $1.7 billion and 8%. So certainly some significant contributors there as we move forward that we didn't have when we reached that level in 2022.

[Operator Instructions] Josh Chan from UBS is next.

I guess, Dave, you mentioned one example of a project end. But I guess as you think about the vitality of all the project ends that kind of are impacting this trend, is there any common thread that you can pull from just a combination of all the ends? And then I just want to confirm that excluding those projects end, are you expecting the rest of the business to be in line with normal seasonality?

Well, I don't know that there's a lot of seasonality in Q2 to Q3. But I would say, generally speaking, thematically, this is a matter of projects and ending, right, kind of normal in some respects, although in a couple of these cases, we didn't necessarily anticipate them to end when they did as a result. The other thing, I think important to note dramatically, these resulted in reallocation of technology investments with these companies to other projects that we weren't participating in. So -- and then the other thing I would mention to you in terms of the portfolio as a whole, just to kind of reiterate what I was commenting about. Absent these couple I think for us, a bit of a surprise, ends at the end of the quarter, but we were actually trending positively in terms of what the revenue trajectory in technology was until literally the last couple of weeks, which is why we saw sequential growth from Q1 to Q2. And then our Q3 guide that's obviously coming off a lower baseline. So again, I think the sentiment here is one of stability. The sentiment here is one of companies engaging us at the same rate as we have. Again, you get surprises from time to time. This is just one of those.

Yes. What I would add to that is I think what we're seeing from clients in general is a heightened strategic competitive evaluation on a regular basis, which is really driving the shift of spend. So it really -- it manifests itself in 2 ways. Inside what I would say is the Fortune 500 where we work with 70-plus percent of the Fortune 500. They may have a division or a product that they conclude they are not going to be competitive within and that's the example of what happened to us on the back end of Q2. The decision was made that we're not going to be competitive with this initiative. We're going to basically disband this, and we're going to redirect those dollars an area where we believe we can be competitive with the products that we're bringing to market. I think you have that one phenomenon going on. And then the other phenomena is you do have unique clients in any given industry that are not par with their competitive landscape and they're adjusting accordingly. So those are really the 2 more, what I would say, macro drivers that we're seeing.

That's really helpful color. And then I guess -- yes, of course. I guess my other question is on the nearshore, offshore dynamic. Obviously, it has some impact on your hourly rate, but is there a margin impact too, is more of your business potentially shifts in that direction?

Yes. Yes, Josh, actually, again, it's a small part of the business. So it's not having a meaningful impact on either bill rate or margin right now. But I can tell you, with the work that we have done over there, it has been actually slightly accretive to margin, right? So it has a positive impact, at least from what we've seen so far. But again, I would tell you at this point, I wouldn't dial that in, either it's been relatively neutral even though we've had some good early success.

Yes. And Josh, the only thing I'd add to that, when you look at our average bill rate in technology, you look at Q1 was sequentially up from Q4. We had a very slight decline from Q1 to Q2. So I wouldn't read into that being the progress that we're making in our nearshore and offshore. That's just natural puts and takes, with the average bill rate. Think about that, Josh, as a stability over a very long period of time. I think if you go back, gosh, probably 3, 3.5 years, our average bill rate in our technology business has been hovering in that $90 an hour range, while we have been broken to offer a multi-shore delivery model to our clients leveraging nearshore and offshore. The balance of that is the more consulting-oriented engagements that we have been pursuing in earnest are representing a greater mix of the overall business as well, and those have not only a higher margin but also a higher bill rate so that's bringing a lot of stability to what you're seeing externally.

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

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

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