Kforce Inc Q4 FY2025 Earnings Call

Well, 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.

Afternoon, and thank you for your time today. This call contains certain statements that are forward-looking or based upon current assumptions and expectations and are subject to risk 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 site. We are pleased to have delivered fourth-quarter revenues that exceeded our expectations, which is 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 2022. This momentum appears to be carrying over into the first quarter as 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 we are doing, and the resilience of our people. We also believe that our trends are evidence that clients may increasingly pursue a flexible talent model to complete critical projects in this uncertain macro landscape and the growing belief that returns 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 am very proud of our team's accomplishments in driving our business forward and making the necessary adjustments to maintain high levels of performance. Our results for the fourth quarter reflect certain charges related to the refinement of our internal headcount and organizational structure that further align with 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 is 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 peak and companies' protective reaction to the great resignation. That being said, 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. 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 clear 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 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 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 agentic AI and cognitive AI are in the early innings of the evolution and may just be starting to mirror this historical pattern. This has historically been an opportunity for Kforce and 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 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 35.7% respectively, on a billing day basis in the fourth quarter. As we enter 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 on 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, which 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 roadmap 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 eight 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 have 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 of our success. It also 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 three 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 US sales and delivery capabilities and a high-quality vendor network, enables us to comprehensively address client needs through a multi-shore delivery model. We began 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 $90 per hour over the past three years even amid macroeconomic uncertainty. The growing mix of consulting-oriented engagements, which typically command higher bill rates and deliver stronger margin profiles, as well as wage inflation in technology skill sets is offsetting the pressure on our average bill rates. Demand across our core practices, data and AI, digital, application engineering, and cloud continues to be robust. 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 or 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 at scale and adapting to evolving skill demands. By providing cost-effective access to the very best professionals on a nearly real-time basis, we ensure our services remain indispensable even as broader industry trends fluctuate. Looking ahead to Q1, with momentum and new engagement building throughout Q4, we anticipate a seasonal sequential billing day 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 have 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 2021. I want to express my appreciation to our teams for their persistence in driving positive momentum in our FA business. Over the last several years, we have made responsible adjustments to align headcount levels with revenue levels and productivity expectations. Today, we announced further refinements. Taking these actions is always difficult; we have aligned our support infrastructure to current revenue levels and continue to prioritize the 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 revenue 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 will 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 2025 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 healthcare 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 healthcare 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 healthcare costs and normal seasonal declines around the holidays. The higher healthcare costs experienced in the fourth quarter were on the heels of the third, where healthcare costs were significantly lower than we anticipated. For the full year, healthcare costs were essentially as expected, though the interquarter timing of costs is difficult to predict. We continue to refine our program through our annual renewal process to mitigate significant cost escalation and do not 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, with the impact on near-term SG&A expected to create operating leverage and be 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 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 in 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 twelve-month EBITDA. Looking ahead, we expect to continue to return any 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, marking 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 sixty-three billing days, which is one additional day than 2025 but the same as 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 could also 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 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 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 return 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.

Thank you, sir. And, everyone, if you have a question today, please press 1 on your telephone keypad. We'll take the first question from Mark Marcon from Baird. I'm wondering if, Joe, perhaps you could elaborate a little bit in terms of some of your opening remarks. I mean, it's clearly 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 AI 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 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 you as the year unfolds?

Yes. Thank you, Mark. Where I would start is when we look at performance, going back to August 2025, and I know you follow this American Staffing Association Index, which tracks changes in temporary and contract employment. That turned positive after three years of being negative. Probably no coincidence that's when we started to see our sequential improvements. We continue to see that through the end of the year with momentum into 2026 being really our best start since 2022. To touch upon some of the other comments I made, every day, there are more articles, interviews, and white papers referencing we're clearly in the reality stage. Clients are really moving more to that rebalancing of investment stages that I mentioned in my opening comments. Let's face reality: AI is real; it's here to stay. However, the reality that we're hearing is that the pacing complexity of executing corporate AI initiatives compared to what I'll call more simplistic consumer AI is 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 called "Dispel the Fear of AI Displacing Jobs." That write-up really touched upon humans plus AI output being leveraged by humans and that this is becoming the more dominant operating model. They even specifically reference the impact on software engineers. Additionally, on January 21, a really good article in the Wall Street Journal discussed how CEOs say AI is making work more efficient while employees tell a very different story. I think this gets to the heart of the question you ask, and the article talks about the disconnect between what employees are experiencing in terms of trust, the amount of rework, accuracy, and the amount of time they're spending compared to what CEOs are saying, which cascades from CEO to senior managers in terms of the disconnect with employees. What we're hearing from clients is a lot of that disconnect also has to do with the change management aspect. Even when there is a successful AI technology deployed, approximately 70-75% of success is attributed to change management. There's a lot of socialization that has yet to happen, and we are in the early stages of what I'll call behavioral changes, which are really the primary obstacles. To summarize, the one cycle, and I know Michael talks to you a lot about this, when we talk about the cyclicality of contract personnel versus full-time employees, we need to consider whether this will be exaggerated because now there's a concern of not wanting to hire people due to AI potentially displacing them. It's hard to tell at this point. Likewise, it's uncertain if AI will follow the same similar five-cycle pattern we experienced during the Internet. We are seeing it and hearing it from our clients, but we are still in the early stages of all that.

So Joe, let me amplify one other point you made concerning Mark's question about general demand. AI is only part of it for us. You mentioned the ASA stats turning positive in August. A lot of what we have seen in our business, alluded to in our prepared remarks, relates to more of our traditional staff augmentation business. There are a lot of critical initiatives that are not AI-focused but have been greenlighted recently. So it is a combination of things. This is not an AI on, AI off thing. This is just a general need for high-skilled technology talent or initiatives that are critical for businesses to continue investing in. Can you give a bit of context about what you observed from clients regarding end-of-year dynamics? It seems some of your clients kept 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, is that correct?

Yes, exactly. The momentum going into the holidays was the strongest we've seen probably going back to the back end of 2021. Clients desired to take visits, evaluate applicants, and interview applicants, ultimately resulting in closed deals. We saw that trend continue right up to the holidays, while in past three years, the momentum lightened up significantly after Thanksgiving. This is a major difference. Moving into the beginning of the year, we are at a higher jump-off point than we've ever seen, the best level since 2022 and better than we were in 2022. Clients held onto more of the consultants, and one notable observation is that conversions have decreased. This means the desire to maintain flexible talent is prevalent compared to committing to full-time hires. If these trends persist, we could return to pre-holiday highs earlier in this quarter, which typically takes us until March.

That's great. And on the margin side, it looks like things are holding up. It sounds from your remarks that the increase in consulting is offsetting a bit of the traditional staffing. Is that correct? Given that the margins remain elevated year-over-year despite healthcare costs, how should we expect the Tech Flex gross margins to perform over the balance of the year?

You partially answered it, Mark. The mix dynamics are key. As you look at our margins for our technology business, the health of higher skilled areas leads to wage inflation, which we are working to pass on to clients. Our consulting solutions group continues to grow from a mix standpoint, benefiting both average bill rate and the overall flex margin line. We've started to see slight spread improvement since the second quarter of the previous year. Our teams have been working effectively on pricing conversations with clients. Overall, we’re pleased with the trends, and we expect to see some stability in spreads moving into the first quarter.

Great. Lastly, on the software write-off for $2.2 million: can you clarify what that was for, and do you anticipate any additional restructurings moving forward?

To answer the last part, I think the table is pretty well set. I'm not anticipating any additional actions in the first quarter, nor any further write-off actions. As communicated on the call, we made refinements in our organizational structure as part of the $0.13 that we recognized in the fourth quarter, and a portion of that was related to severance. The overall write-off of the asset was something implemented many years ago, but the expected value was not realized, thus leading to its discontinuation in Q4. This decision is not critical to operations or future performance.

The next question comes from Trevor Romeo from William Blair.

Afternoon. I would like to follow up on the demand confidence environment. Joe's remarks about clients being unable to wait any longer to execute their technology projects captured my attention. Could you elaborate on what is driving this urgency?

It's a great question. It ties back to the five stages mentioned in my opening remarks. Reality has set in for organizations that started experimenting with AI and they've realized how much foundational work they need to do. What’s turned up the most has been modernization and the digital aspects. Our data practice and our digital practice are on a percentage basis our fastest-growing practices. Organizations are waking up to realize that this foundational work is needed to maximize their opportunities with AI. It's important to note that these modernization efforts are multiyear endeavors. Additionally, there are more conversations around upgrading ERP-oriented systems, as organizations aim to migrate to the cloud to be ready for leveraging AI.

So to translate that into our business, what we observe is that the demand for talent in data and digital backlogs continues to increase at double-digit rates, underscoring why Joe's comments highlight the growing need for companies to execute these critical foundational initiatives.

That's really helpful. One last follow-up: Can you expand on the acceleration you're seeing in the India development center, and what could be driving that?

As a reminder, this business was set up to support our domestic project work. There is continuing demand for a blended model due to cost considerations. The ability to access highly skilled talent at attractive rates in India is essential. It is tied to our data and digital work and encompasses all consulting engagements, particularly at large companies. This demand also stretches into our traditional staff augmentation business. So it supports both sides of our value proposition for clients.

And everyone, at this time, there are no further questions. I would 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 Kforcer for their efforts and to our consultants and clients for their trust and faith in partnering with Kforce and allowing us the privilege of serving you. We look forward to talking with you again after the first quarter of 2026.

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