Earnings call transcript: Kforce’s Q2 2025 results meet expectations

Kforce Inc. (KFRC) reported its financial results for the second quarter of 2025, meeting analyst expectations with an earnings per share (EPS) of $0.59 and revenue of $334.3 million. The company’s stock price experienced a modest increase of 0.99% in after-hours trading, closing at $46.45. Despite a 6.2% year-over-year decline in revenue, Kforce’s performance aligns with its forecast, indicating stability amid uncertain market conditions.

Key Takeaways

• Kforce’s Q2 2025 EPS of $0.59 met analyst expectations.
• Revenue reached $334.3 million, slightly above forecasts.
• The company is focusing on AI readiness and strategic investments.
• Stock price rose by 0.99% in after-hours trading.
• Operating margins are expected to improve with strategic initiatives.

Company Performance

Kforce’s performance in Q2 2025 was characterized by stable earnings that met market expectations. The company faced a 6.2% decline in revenue compared to the same period last year, reflecting challenges in the broader market. However, Kforce’s strategic focus on AI and technology solutions positions it well for future growth. The company serves over 70% of Fortune 500 companies, maintaining strong relationships and a diversified client portfolio.

Financial Highlights

• Revenue: $334.3 million, down 6.2% year-over-year
• Earnings per share: $0.59, meeting forecasts
• Gross margins: 27.1%, up 40 basis points sequentially
• Operating margin: 4.5%
• Capital returned to shareholders: $17.4 million (Dividends:$6.9 million, Share repurchases: $10.5 million)

Earnings vs. Forecast

Kforce’s Q2 2025 results were in line with expectations, reporting an EPS of $0.59 against a forecast of the same. Revenue slightly exceeded predictions at $334.3 million compared to the forecasted $333.72 million, resulting in a revenue surprise of 0.17%.

Market Reaction

Following the earnings announcement, Kforce’s stock price increased by 0.99% in after-hours trading. The stock is currently trading at $46.45, which is within its 52-week range of $35.5 to $71.48. Recent performance has been strong, with InvestingPro data showing a 9.76% return over the past week. The modest rise reflects investor confidence in the company’s ability to navigate current market uncertainties and capitalize on AI opportunities. The company maintains a healthy balance sheet with a current ratio of 2.06, indicating strong liquidity.

Outlook & Guidance

Looking ahead, Kforce provided Q3 2025 revenue guidance of $324 to $332 million and EPS guidance of $0.53 to $0.61. The company anticipates operating margins to reach approximately 8% at an annual revenue of $1.7 billion. While InvestingPro analysis indicates net income may decrease this year, the company maintains strong fundamentals with a return on equity of 31% and operates with a moderate debt level. Strategic investments in AI and technology solutions remain a priority, with expectations of stability in technology investments. Get detailed insights and comprehensive analysis with InvestingPro’s exclusive Research Report for KFRC, part of our coverage of 1,400+ US stocks.

Executive Commentary

CEO Joe Liberatore emphasized the importance of AI readiness, stating, "Access to the right talent will be at the heart of company’s success in preparing and utilizing these new tools." He also highlighted the potential of AI, noting, "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."

Risks and Challenges

• Macroeconomic uncertainty could impact technology job creation.
• The pace of AI adoption varies, with only 10% of organizations fully equipped to leverage AI.
• Unexpected project ends due to internal reallocations may affect revenue.
• The competitive landscape in AI and tech solutions remains intense.
• Dependence on strategic investments for future growth.

Q&A

During the earnings call, analysts inquired about Kforce’s AI readiness and project dynamics. The company acknowledged that most clients are in the preparation phase for AI, with some projects ending unexpectedly due to internal reallocations. Additionally, Kforce’s offshore strategy aims to complement U.S. operations, with a neutral to slightly accretive impact on margins.

Full transcript - Kforce Inc (KFRC) Q2 2025:

Conference Operator: Good afternoon, everyone, and welcome to the Kforce Q2 twenty twenty five 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.

Joe Liberatore, President and CEO, Kforce: Good afternoon and thank you for your time today. This call contains certain statements that are forward looking or based upon current assumptions and expectations that are subject to risks and uncertainties. Actual results may vary materially from 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 investments that they expect to execute once greater positive visibility exists.

Over the past three years, job gains have been concentrated in a handful of sectors, healthcare, 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 non existent. Unemployment claims have remained low which suggests that companies broadly speaking continue to be reluctant to lay off workers after allowing natural attrition to downsize their workforce over the last three years. These data points when combined with the increasing backlog of critical technology initiatives suggest to us that companies may not have sufficient capacity in 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 clear 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 empowering 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 proliferation 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 roadmaps and take advantage of the technology. There were also concerns in the early phases 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 an 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 roadmaps. 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?

Dave Kelly, Chief Operating Officer, Kforce: Thank you, Joe. Total revenues of $334,300,000 declined 6.2% year over year and were largely consistent with our expectations. Flex revenues in our technology and Finance and 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, continue 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 engagements 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 three 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 provide significant opportunity for our firm. Joe referenced the opportunities we’re seeing in the overall AI space. We thought it’d 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 AgenTic 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 AgenTik 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 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 and project ends 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 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 which represents approximately 2% of overall revenues. We expect Direct Hire to be relatively flat sequentially in Q3. We continue to align our associates and 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 three 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 achieve 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.

Jeff Hackman, Chief Financial Officer, Kforce: Thank you, Dave. Second quarter revenue of $334,000,000 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 healthcare 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 in technology declined 30 basis points year over year due to higher healthcare costs, which were partially offset by slightly improved spreads. As we look forward to Q3, we expect Flex margins to remain stable. Overall SG and 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 levels well. SG and 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 and 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 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 $17,400,000 in capital being returned through dividends of $6,900,000 and share repurchases of approximately $10,500,000 We continue to carry a very solid balance sheet and historically conservative leverage against trailing twelve month EBITDA levels. As we move forward, we intend to maintain net debt levels relatively consistent with where we ended the second quarter of roughly $67,500,000 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 $18,400,000 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 in 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 $1,000,000,000 in capital to our shareholders since 02/2007, 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, which is the same as the 2025 and the third quarter of twenty twenty four. We expect Q3 revenues to be in the range of $324,000,000 to $332,000,000 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 non recurring 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 objectives of attaining double digit operating margins.

As we mentioned previously, we expect operating margins to approximate 8% when we return to $1,700,000,000 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.

Conference Operator: Thank you, sir. We’ll take the first question from Mark Marcon, Baird.

Mark Marcon, Analyst, Baird: Afternoon and thanks for taking my question. So you mentioned where we are in terms of AI and you mentioned a few you know, 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 and when you think the spigot, you know, 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.

Joe Liberatore, President and CEO, Kforce: Yeah. It’s a great question, Mark. It’s good to hear from 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. You know, most organizations continue to remain in what what I would call this preparation phase associated with AI. You know, on the on the use case side of things, you know, 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 how I would really say that’s the exception versus the norm right now. You know, there’s a couple 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, 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 particular customer set.

So hopefully, gives you a little bit of flavor.

Mark Marcon, Analyst, Baird: That’s very helpful. Thank you. And then there was a comment with regards to, know, if we take a look at the sequential trend for Tech Flex going into q three where there’s, it sounded like there were a few, you know, project ends that came along unexpectedly. Can you talk a little bit about what you’re seeing in 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, you know, are ending because the 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?

Dave Kelly, Chief Operating Officer, Kforce: Yeah. Mark, this is Dave. Yeah. You’re alluding to the comment we made about those couple clients that we saw some unanticipated ends at the end of the year. So maybe to kind of 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.

I’ll share a little bit of color on these ends as well of 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 in the second quarter, we’d actually seen mild increases in the amount of consultants that we had seen on assignments. 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 project 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 of 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 data the 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 of stability, I think it really resonates with us that we’re seeing very, very stable investment environment in technology.

Mark Marcon, Analyst, Baird: How would you characterize the pipeline right now?

Dave Kelly, Chief Operating Officer, Kforce: 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 our clients are looking to invest in that they were looking for some greater insights as to an inflection. 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, 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 indicators for us. Great.

Mark Marcon, Analyst, Baird: And then can you just talk to what extent do you see, companies, you know, potentially holding off on some legacy projects that they had on their pipeline just because they’re uncertain about what the impact of AI is gonna be in terms of, you know, potentially making those, those legacy solutions, obsolete or or really out of date and and and therefore just being a little bit uncertain just from where we are from a technology development perspective?

Dave Kelly, Chief Operating Officer, Kforce: Yeah. I don’t think thematically, that is what we’re hearing, Mark, frankly. I think what we continue to hear is 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 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 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, 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 gonna we’re not gonna really spend this money at great scale because we’re waiting for AI to 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 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.

Joe Liberatore, President and CEO, Kforce: Yeah, Mark. And I I would add on to that that, you know, a lot of what we’re seeing is what I’ll call, for a broader term, modernization. You know, 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, you know, the the the spend is still there. Are people continuing to maintain legacy systems only because they have to?

You know, one of the hypothesis out there is AI could be the catalyst, you know, to one day retire the the legacy COBOL systems that I used to place programmers in about thirty seven years ago. I think most of them are retired at this point in time. But I do I do think that, you know, AI can assist, and there was a a really good article, Wall Street Journal. I think it was probably about a month or month and a half ago, talking about Morgan Stanley’s situation of migration of their COBOL and how they’re leveraging AI. But it’s not like you just throw this 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, you know, and then the next phase of that, like we’ve seen with with other situations with secular shifts, you know, we’re we’re beginning now to hear about a lot of newer roles, that are being introduced. In fact, there was a article just read recently that, you know, one out of every four jobs, posted from a tech standpoint have something AI related. And, you know, we’re seeing new jobs come out, you know, not just the prompt engineers, but, you know, AI support specialists, automation support managers, AI security engineers, AI project managers. And that’ll be that whole next wave as organizations get through the the data, and the modernization aspects, which is, you know, a long journey, for most organizations to get there.

Mark Marcon, Analyst, Baird: That’s terrific. Thank you. Sure. Thanks Mark. Thanks Mark.

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

Trevor Romeo, Analyst, William Blair: Hi, good evening guys. Thanks for taking the questions. 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 to 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?

Dave Kelly, Chief Operating Officer, Kforce: Yeah. 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 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 of 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 and 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 well 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 go forward basis, I think it’s fair to say with a couple of quarters of sequential improvement that certainly things have stabilized here.

We 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 our F and A is.

Trevor Romeo, Analyst, William Blair: That’s great, Dave. Thanks. 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?

Dave Kelly, Chief Operating Officer, Kforce: Yeah. I think, you know, it’s a 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 more than ten years.

Right? So you got to have a lot of experience. People are very good at what they do. The market itself, I think it’s fair to say, is 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 is 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.

Trevor Romeo, Analyst, William Blair: Okay. That’s great. Thank you for that. 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.

Jeff Hackman, Chief Financial Officer, Kforce: Yeah. Trevor, it’s Jeff. Appreciate the question. Yeah, 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.

You look back to the last year and a half and our Technology Flex margins have been very stable. Healthcare 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, you look at a year over year basis, spreads are actually slightly improving in our technology business, so 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 costs was not a driving factor sequentially. And spreads improved very mildly in 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.

Trevor Romeo, Analyst, William Blair: That’s very helpful, Jeff. All right. Thank you all. Appreciate it.

Dave Kelly, Chief Operating Officer, Kforce: Thank

Conference Operator: Sommer from Truist Securities has the next question.

Mark Marcon, Analyst, Baird: Thank you.

Tobey Sommer, Analyst, Truist Securities: In terms of offshore, you mentioned that as 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?

Dave Kelly, Chief Operating Officer, Kforce: Yes. Tobey, this is Dave. Our footprint 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 a delivery center in India to expand the type of roles that we are placing, right? We’re not going to build help desk 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 focuses a bit of an oxymoron, 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.

Tobey Sommer, Analyst, Truist Securities: Okay. From looking at your guidance, how would it compare, do you think, versus what would seasonally happen sequentially to your revenue, margin in bottom line in the third quarter. It’s been a while since we’ve had a seasonal norm because the industry has had a few years here declines and off the great resignation when things were crazy good. So what would it look like historically?

Jeff Hackman, Chief Financial Officer, Kforce: 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 F8 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 pre COVID because we had certainly 2020 which was anomalistic.

And then we had the hyper growth in 2021 and 2022 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 in tech.

Tobey Sommer, Analyst, Truist Securities: Okay. I appreciate that. And could you remind us on the cost saves associated with Workday in 2017 and thereafter? And are there additional saves from the other internal investments that you’d care to quantify?

Jeff Hackman, Chief Financial Officer, Kforce: 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 a go live in 2026 and towards the end of the 2026 to start to ignore 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 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 of 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, but we have the 1700000000.08%. So certainly some significant contributors there as we move forward that we didn’t have when we reached that level in 2022.

Tobey Sommer, Analyst, Truist Securities: Thank you very much.

Conference Operator: Josh Chan from UBS is next.

Josh Chan, Analyst, UBS: Hi. Good afternoon. Thanks for taking my questions. I guess, Dave, you mentioned one example of a project end. But I guess as you think about the totality 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 project ends, are you expecting the rest of the business to be in line with normal seasonality?

Dave Kelly, Chief Operating Officer, Kforce: Well, 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 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 thematically, 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, 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, it’s obviously coming off a lower baseline. So again, 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.

Joe Liberatore, President and CEO, Kforce: Yeah. 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 the shift of spend. So it it really it manifests itself in two ways. Inside, what I would say, the the Fortune 500 where, we work with, you know, 70 plus percent of the Fortune 500. You know, they may have a division or a product that they conclude they are not gonna be competitive within, and that’s the example of what happened to us, on the back end of q two.

They 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 in area where we believe we can be competitive with the products that we’re bringing to market. I think we have that one phenomena going on. And then the other phenomena is you do have unique clients in any given industry, that are that are not par with their competitive landscape, and they’re adjusting accordingly. So, you know, those are really the two more, what I would say, macro drivers that we’re seeing.

Josh Chan, Analyst, UBS: That’s really helpful color. Thank you for, expanding on that. And then I guess my 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 a margin impact too as as more of your business potentially shifts in that direction?

Dave Kelly, Chief Operating Officer, Kforce: Yeah. I yeah, 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

Jeff Hackman, Chief Financial Officer, Kforce: had some good early success. Yeah. 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 three, three point five years, our average bill rate in our technology business has been hovering in that $90 an hour range. While we have been working to offer a multi shore delivery model to our clients leveraging near shore and off shore. 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 rates. So that’s bringing a lot of stability

Josh Chan, Analyst, UBS: That’s helpful. Thank you so much and thanks for the time.

Mark Marcon, Analyst, Baird: Thank you. Thanks, Joe. Appreciate it.

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

Joe Liberatore, President and CEO, Kforce: Well, thank you for your interest and support of Kforce. I’d like to express my gratitude to every Kforcer 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 twenty twenty five.

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

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