Earnings Call Transcript - KFRC Q1 2025

Operator, Operator

Thank you for standing by. My name is Greg, and I will be your conference operator today. At this time, I would like to welcome everyone to Kforce Q1 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. Thank you. I would now like to turn the call over to Joe Liberatore, President and CEO. Joe, please go ahead.

Joe Liberatore, President and CEO

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. Like many others, we entered 2025 with a general sense of optimism for the U.S. economic growth with the expected derivative benefit being a boost in our clients' confidence in accelerating investments in technology initiatives that have been deferred for the last several years. The signs of a slowing mid-Q1, followed by the announcement of significant tariffs for which the outcome and impact remains unclear, reintroduced many uncertainties into the U.S. economic outlook. The general tonality, as we sit here today, is that the earlier optimism has waned to a degree and the macro uncertainties have increased, which may delay an acceleration of investment for many companies. With that said, the macro uncertainties have not resulted in a deterioration in our business. In fact, over the last six weeks, our consultants and assignments have improved, and our front-end KPIs have been elevated compared to first quarter levels. We are cautiously optimistic about the level of demand we are seeing against this more uncertain backdrop. As to our first quarter performance, it was generally consistent with our expectations. Regardless of the ultimate environment, we believe there remains an increasingly strong backlog of strategically imperative technology investments. We continue to be well positioned to take additional market share, as we have been doing successfully for years, and continue laying the foundation to generate significant long-term returns for our shareholders. We are fortunate to have made the strategic decision more than five years ago to focus on the commercial space and divest our federal government business such that we no longer have any direct business with the federal government and limited indirect exposure through the support of our larger system integrator clients. As we look ahead to the second 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 the retention of our most productive associates. Our motto continues to be control what we can control. Our teams have continued to persevere and make the necessary adjustments within the business while we also have continued to make significant investments in critical initiatives that will provide a great foundation moving forward, positioning us to return higher levels of profitability as revenues inflect. We continue to make significant progress with the implementation of Workday as our future state enterprise cloud application for HCM and Financials. The go-live of this technology platform is expected in early 2026, and we expect to begin to generate immediate efficiency gains that will continue to improve as we rationalize the new platform. We also continue to evolve our nearshore and offshore delivery capabilities with our India development center and further integrate all the firm's capabilities across the full spectrum of our service offerings as One Kforce. Each of these strategic initiatives are transformational in nature and will be meaningful contributors to us meeting our financial objectives. AI continues to dominate the headlines. 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. We are ideally positioned to meet that demand and continue to see an increased focus on AI foundational readiness work in areas such as data, cloud and modernization, along with AI projects in our consulting-oriented engagements. Internally, we expect to benefit from the future leverage of AI, and in that regard, are extremely fortunate to have made the strategic decision to concentrate our platform technologies with Microsoft and Workday. We have accelerated our investments in these technologies by acquiring enterprise licensing of Office 365 Copilot and Sales Copilot from Microsoft. We are taking active steps within the firm to provide these important productivity-enhancing technologies to all of our associates and leaders. We have built a solid foundation at Kforce and will continue to make the necessary investments to transform our business. Our domestically focused organic growth strategy continues to benefit our organization by eliminating any unnecessary distractions for our people so that their full energy is directed to partnering with our clients to help them solve their most important business challenges. Before transitioning the call, I wanted to reiterate how proud I am of the performance and resiliency of the collective Kforce team. We are blessed to have a high-performing organization that is united, tenured, dedicated and passionate. I cannot be more excited about the future of Kforce. Dave Kelly, our Chief Operating Officer, will now give greater insights into our performance and recent operating trends. Jeff Hackman, Kforce's Chief Financial Officer, will then provide additional details on our financial results as well as our future financial expectations.

Dave Kelly, Chief Operating Officer

Thank you, Joe. Total revenues of $330 million declined 4.7% year-over-year on a billing day basis. Revenues in our technology business declined 5.2% sequentially and declined 3.5% year-over-year per billing day. We didn't see a typical recovery in the first quarter. Normally, consultants and assignments decreased in January as year-end projects are wrapped up, and then gradually increase during the last two months of the quarter. This year, we actually saw slight declines mid-quarter due to higher-than-expected assignment attrition, which mirrored the temporary economic expectations. Headcount levels did begin to increase in late March, and that improvement continued into mid-April. Though uncertainty remains, mission-critical initiatives continue to be prioritized by our clients. However, given the macroeconomic uncertainty, clients appear to be awaiting a period of increased confidence before more aggressively adding resources to address the significant backlog of other important technology initiatives. Our technology service offering has significantly evolved over the years, expanding beyond traditional staffing assignments to encompass more consulting-oriented engagements. Clients continue to prioritize cost-efficient access to highly skilled talent and view our services as an effective solution to meet their technology project requirements, leveraging our superior delivery capabilities. The demand for our consulting-oriented offerings has continued to significantly contribute to our results. This growth underscores our ability to adapt and meet the evolving needs of our clients. While our traditional staffing business has experienced year-over-year revenue declines, growth in solutions-oriented assignments highlights our strategic shift in the increasing value clients place on our consulting capabilities. Our integrated strategy leverages all aspects of the firm's capabilities to meet the needs of the world-class companies we serve. 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, India, positions Kforce well to compete for client opportunities that were previously unavailable to us. This development center, combined with our robust U.S. sales and delivery capabilities, and a high-quality vendor network, allows us to comprehensively address the evolving needs of our clients, whether onshore, nearshore or offshore. Overall average bill rates in our technology business of $90 grew slightly sequentially and on a year-over-year basis, continuing a trend of stability that has persisted for nearly three years. The consistent demand for highly skilled talent in both traditional staffing assignments and consulting-oriented engagements has played a crucial role in maintaining stable bill and pay rates. This demand is driven by clients' need for expertise in specialized areas such as AI and machine learning, application engineering, cloud, digital, data and cybersecurity. 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 the evolving demand for various skill sets. We anticipate this trend to continue as clients increasingly rely on us to provide data and digital resources to support their data rationalization and cleanup activities, which are critical to their AI investments. We have relationships with the largest providers in this space, including Microsoft, and continue to strengthen our partnership models with these companies. As technology has evolved over the decade, 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. The retail and transportation industries outperformed sequentially in Q1, while we experienced downward pressure in the relatively modest footprint with large consulting companies supporting the federal government, as well as in financial services. Our footprint is focused on supporting very large clients, all of whom have different needs. As a result, it's typical to see both increases and decreases in revenue for clients within the same industry vertical, which has been the case in financial services. Given our size and scale, it's difficult to extrapolate our performance with overall industry trends. Looking forward to Q2, we expect modest sequential growth in our technology business. Flex revenues in our FA business, currently 6.1% of our revenues, declined 22% year-over-year on a billing day basis. Our average bill rate of approximately $52 per hour improved slightly sequentially and year-over-year, and is reflective of the highly skilled areas we are pursuing. We expect Q2 revenues in F&A to be down sequentially on a billing day basis in the mid-single digits. An area where we have seen a more significant impact from the economic uncertainty is in our Direct Hire business, which represents approximately 2% of overall revenues. After a reasonably strong first quarter, activity slowed in early April, and we now expect Direct Hire to decline sequentially in Q2, in what is typically its strongest quarter. We continue to make adjustments to associate staffing levels based on productivity expectations, focusing on retaining our most productive associates and making targeted investments to ensure we are well prepared to capitalize on market demand when 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 40% over that time. Despite these reductions, we believe we have ample capacity to absorb several quarters of increased demand without adding significant resources. Additionally, we continue to invest in our consulting solutions business. Our performance in the first quarter continued to outpace that of our competitors. 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.

Jeff Hackman, Chief Financial Officer

Thank you, Dave. First quarter revenue of $330 million was at the low end of guidance and earnings per share of $0.45 was slightly above the low end of guidance. Overall gross margins decreased 30 basis points sequentially to 26.7% due to a seasonal decline in Flex margins of 50 basis points, resulting from usual payroll tax resets, which was partially offset by a higher mix of Direct Hire revenues. On a year-over-year basis, overall spread and business mix have been stable, though gross margins declined 40 basis points due to higher health care costs. Flex margins in our technology business decreased 40 basis points sequentially due to seasonal payroll tax resets. Flex margins in Technology declined 40 basis points year-over-year as higher health care costs were partially offset by a slight improvement in bill pay spreads. This spread increase of 10 basis points is attributable to the continued demand for highly skilled talent, and a higher mix of consulting-oriented work. As we look forward to Q2, we expect Flex margins to increase sequentially due to the alleviation of seasonal payroll tax resets, while remaining stable otherwise. Overall SG&A expenses as a percentage of revenue of 22.8% were within the range of our expectations as we have continued to manage productivity and profitability levels well. While we experienced higher health care costs in the first quarter, those costs were offset by leverage gained from continued refinements in our head count and lower performance-based compensation, given slightly lower financial performance. 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, 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 2025 to be the final year of significant net investment in these initiatives and for them each to begin providing meaningful and growing returns as we move into '26 and beyond. Our operating margin was 3.5%, and our effective tax rate in the first quarter was 26.4%. During the quarter, we accelerated our share repurchase activity returning in aggregate of $28.3 million in capital to our shareholders through dividends of roughly $7 million, and share repurchases of approximately $21 million. Given the level of repurchase activity, outstanding debt at the end of the first quarter was $65.5 million. We continue to carry a very solid balance sheet and historically conservative leverage against trailing 12 months EBITDA levels. We have continued to be active in repurchasing our shares in April and have significant remaining availability under our credit facility. Operating cash flows were $0.2 million, which were lower than usual, primarily due to timing of payments from our clients and an allowable deferral by the IRS of our 2024 federal income tax payment into the first quarter. 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 billion in capital to our shareholders since 2007, which has represented approximately 75% of the cash generated, while significantly growing our business and improving profitability levels. Our balance sheet and cash flows allow us to remain committed to investing in our business while aggressively returning capital regardless of the economic climate. Our threshold for any prospective acquisition remains very high. The second quarter has 64 billing days, which is one more day than the first quarter, and the same as the second quarter of 2024. We expect Q2 revenues to be in the range of $332 million to $340 million, and earnings per share to be between $0.57 and $0.65. Our guidance is based upon the assumption of the 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 objective of attaining double-digit operating margins. As we mentioned previously, we expect operating margins to approximate 8% when we return 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. Though we have seen recent slight improvement in bill pay spreads, our profitability expectations are not factoring in any additional meaningful benefit from further improvement in gross margin. On behalf of our entire management team, I'd like to extend a sincere thank you to our teams for their efforts. We'd now like to turn the call over for questions.

Operator, Operator

It looks like our first question today comes from the line of Mark Marcon with Baird. Mark, please go ahead.

Mark Marcon, Analyst

Joe and David, you mentioned the monthly trends that you were seeing, particularly on the Tech Flex side and really appreciate that. I was wondering if you could just give us just a little bit more color with regards to what you're hearing from clients? Obviously, it's an uncertain environment. But I'm wondering, are you hearing like a very firm commitment to sticking with existing projects and just basically delaying those that haven't started? Or are you starting to see any contemplation at all of potentially ending some already underway projects?

Dave Kelly, Chief Operating Officer

Yes, I appreciate the question, Mark. This is Dave. To reiterate what we said, we noticed some growth in the consultants on assignment in March and then through mid-April. Joe also mentioned some of our leading indicators. Our KPIs remain strong, and I want to highlight that we're observing some improvement in bill rates. Overall, the activity remains stable, and the feedback we’re receiving from our clients supports this. Unlike slower, recessionary periods, we haven’t seen clients canceling projects. The situation is very steady, as we've mentioned in our prepared remarks. We are indeed winning new business, which is evident. While we are experiencing some natural project completions, we aren’t seeing a significant uptick in new initiatives, as we've noted over the past several quarters. The pipeline looks promising, and there's definitely a desire to spend, but there's also a level of caution among clients given the uncertain environment, which makes them hesitant to fully commit to spending. This is similar to what we observed last quarter.

Mark Marcon, Analyst

Okay. It seems clear, but I want to confirm this. The guidance suggests relatively stable sequential trends moving forward for the rest of the quarter, but does it account for the possibility that the environment could worsen and some clients might need to cut back more sharply? Is that correct?

Jeff Hackman, Chief Financial Officer

Yes. And Mark, this is Jeff. Good to talk to you again this quarter here. I think Dave made a couple of points. I know we touched on this in his remarks, but mid-quarter in the February time frame, attrition levels ran a little bit higher than we had anticipated. The new assignments that we saw during the quarter were actually fairly consistent with what we expected. And I think it was in both Joe and Dave's scripts over the last four to six weeks, as we closed out the first quarter and started April, actually grew our consultants on assignment during that period. So that gives us a point, Mark, for guidance where, yes, from the remaining to-go period for the quarter, we expect stability from here on out. The growth that we saw in late March and April put us in a position where at the midpoint of our guide. Our technology business is up sequentially a little bit less than 1%. So yes, you are correct, Mark, that the assumption at the midpoint of the guide is stability for the remaining go period of the second quarter here.

Mark Marcon, Analyst

And obviously, nobody knows exactly what's going to happen because nobody knows exactly where tariffs are going to end and we don't know where other countries are going to respond. But if things do get worse, what are some of the levers that you could pull on? Or how would you react if we started seeing some pullbacks in terms of existing projects?

Jeff Hackman, Chief Financial Officer

Yes, Mark. Over the past couple of years, particularly in '23 and '24, we have seen a decline in revenues in our technology business due to macroeconomic challenges. As an organization, we have been making necessary adjustments. It was noted in Dave Kelly's comments that our overall delivery headcount has decreased by nearly 40% over the last several years. We have also been investing in our business in terms of sales roles. Moving forward, we will carefully analyze our operating trends, including client visits and job orders, and continue to make essential adjustments to ensure we maintain a responsible level of profitability.

Dave Kelly, Chief Operating Officer

Yes, I would like to add a couple of things. Jeff is discussing the sales and delivery teams. We have always managed our business using a quantitative approach and set expectations for our staff, which is reflected in the percentages Jeff shared. From a cost standpoint, we remain careful to avoid unnecessary spending, and I believe we've been quite prudent in that area. I want to emphasize, given our current situation and strong cash generation, that we consider this business not just for the immediate future but also for long-term benefits. We talked about the Workday implementation, which is crucial for us to continue investing in to ensure its success because, as Jeff mentioned in previous calls, we expect approximately a 1% improvement in operating margin once it goes live. We also plan to keep investing in our other strategic priorities, such as enhancing our offshore capabilities. Our focus is on being prudent in the short term while ensuring we remain aligned with the significant long-term benefits that we aim to achieve.

Joe Liberatore, President and CEO

Mark, this is Joe. I'll add one piece because I think both Jeff and Dave kind of gave a good backdrop of how we look at this, managing the business internally. But I want to shift a little bit to the external to the client front. The majority of the work that we're focused on in our model today is what I would call strategically critical projects that organizations don't turn off. They can't turn off. I mean, obviously, they could turn them off, but I'll tell you, things would have to get pretty bad. We'll be in a whole different world, and I think how Kforce is performing would be the least of anybody's worries. So, my main point with that, we have not seen projects being cut short. We've seen projects bringing come to completion. We're not seeing a lot of trimming in and around the strategic projects. So, I think that that's an important piece. My main reason for sharing that is we would see probably less initiation of new projects, which gives us time to prepare and react to those situations. So, I don't think we get blindsided by anything. I just want to give that part of the story as well.

Mark Marcon, Analyst

I appreciate that, Joe. And one last one from me, and then I'll jump back in the queue. Just in terms of the gross margins, Dave, they're holding in relatively steady. What are you seeing in terms of price competition just with regards to the traditional IT Flex staffing, not the consulting, but just IT Flex staffing?

Jeff Hackman, Chief Financial Officer

Yes. Mark, this is Jeff. I'll take part one and then Dave can add some color here. I think, Mark, as you look at our Flex margin spreads, specifically in technology. After the earlier declines that we saw in 2023, our spreads have been actually quite stable since that period of time. I think Dave mentioned in an earlier answer to a question on the average bill rate also being stable as well at roughly $90. I think you looked across that, Mark. I think we've been stable from an average bill rate standpoint now for the better part of three years. The margins have been very steady for the last couple of years as well. Of course, in the fourth quarter, and again, in the first quarter, we saw a little bit higher health insurance costs. I think that distorts the Flex margin lines a little bit. But I think it is encouraging for us that we continue to see the operational spread stability. Of course, we talked about the continued progress that we're making in our more solutions-oriented work. That work continues to have a margin profile that's 400 basis points or higher. So of course, as we continue to benefit from a higher mix of business in that space, that's also benefiting the overall margin profile for us.

Dave Kelly, Chief Operating Officer

Yes. To expand on Joe's earlier point regarding projects reaching their natural conclusion, we haven't noticed any significant deviations from a typical environment. When discussing traditional staffing engagements, we still encounter many large companies looking to consolidate their list of vendors and seeking some concessions. However, we are not experiencing any widespread demands for price cuts due to client pressure to save money. This reflects Joe's comments, as these companies are engaged in critical work that must continue. We remain in an environment where it's essential to find high-quality technology talent, which needs to be compensated adequately, and clients acknowledge this. We've observed stable bill rates and stable pay rates, indicating a very typical environment without any impulsive decisions from companies.

Operator, Operator

And our next question comes from the line of Kartik Mehta with Northcoast Research. Kartik, please go ahead.

Kartik Mehta, Analyst

I wanted to ask about capacity. You've made some cuts and had to restructure the organization given the current environment. I'm curious about your current capacity and if the situation improves, how much additional business you could handle without increasing personnel.

Dave Kelly, Chief Operating Officer

Yes, Kartik, this is Dave. Good question. To clarify what we've done, delivery resources have decreased, but it's important to note that our sales team is actually slightly larger than when we were generating $1.7 billion in revenue. These team members are in critical, relationship-driven roles with our clients, and their experience is more vital than ever. The team we have is more tenured now, which makes it more challenging to onboard new personnel. We've previously mentioned that the same doesn't apply to the delivery side. There's room for improvement there, and we've reduced the number of resources while enhancing their tools. This team typically ramps up quickly. Ultimately, sales capacity is the main factor in our capacity. With the current number of experienced salespeople doing more to secure sales compared to a stronger market, we estimate about 40% capacity. We are not in a position where we can't meet our clients' needs from a sales standpoint, and we feel very confident about our current status.

Joe Liberatore, President and CEO

Yes. I would like to add to Dave's comments that, as I mentioned earlier, we are making some investments in Office 365 Copilot and Sales Copilot since we are a dynamic organization and can integrate these tools. We are not assuming any productivity increase from the investments we are making in these tools that we will provide to our people.

Kartik Mehta, Analyst

And then just a follow-up. Just on the visibility, obviously, visibility today is a lot lower than it was. But if you try to compare it to when things were a little bit more normal, and you look at kind of visibility from a revenue standpoint, or project standpoint, how would you characterize? Or is there a way to look like, do you feel comfortable with about 60% of the revenue, or whatever KPIs you're looking at in terms of visibility?

Joe Liberatore, President and CEO

Yes, having experienced various cycles, we continuously track important KPIs that serve as our leading indicators, providing insight into future trends. During times of uncertainty, whether in a recession or a strong market, it’s crucial to balance these factors and keep an eye on the KPIs. We also pay attention to ratios since they are the metrics that fluctuate in both challenging and thriving times. Typically, ratios improve in favorable conditions, whereas they tend to widen during tougher periods. Over the years, we have developed our internal dashboards, largely utilizing Microsoft products, which give our teams access to real-time information. This approach helps us manage the business effectively.

Jeff Hackman, Chief Financial Officer

And I think, Kartik, just to add a couple of points. I think the average assignment length in our technology business has not moved significantly. I know we haven't talked about that maybe recently, but that's still about 10 months. And to Joe's point, very metric-driven. And certainly, through these times where you've got a little bit more of the macro to pay attention to, we rely heavily on our field leaders and field associates to keep in tune with the clients and kind of drive us on what they are seeing in those conversations. And I think Joe and Dave, both mentioned it, we're not seeing clients take proactive measures to restrict or delay or cancel. So, in that regard, I think the visibility still is reasonably clear to us in that regard.

Operator, Operator

And our next question comes from the line of Tobey Sommer with Truist. Tobey, please go ahead.

Tobey Sommer, Analyst

Regarding your internal initiatives such as Workday and your capacity in India, how would you assess the timeline for those projects? Are they on schedule, aligned, or falling behind? How are you overseeing the completion of these efforts?

Dave Kelly, Chief Operating Officer

Yes. You mentioned those two, those are probably the most visible here, Tobey. This is Dave. Certainly, with respect to the Workday implementation, we refer to it internally as Gemini. That has, as we've mentioned, been a multiyear project to go-live that we're talking about in the first quarter of 2026 is an on-time delivery of that. And so, we've been kind of foreshadowing the expectation of what we would see with that and looking to 2026. So, feel very good about where we are. The team has been intensively working has done an exceptional job, and I've got all the confidence in the world in the team. So, I feel very good about that program. As it relates to our facility in Pune, India. Actually, more than on time, that's operational, right? We went live with that facility at the beginning of this year. So, we're about four months in. Very pleased. As we had mentioned before, that is built strategically to support our domestic footprint. We've already won a couple of projects there, and things are going quite well. We've built it with a reasonable degree of variable costs, but it can scale. And although we don't have a specific target of how quickly it will grow, because it will obviously be dependent upon how it supports the U.S. business. Again, that was a very well-executed project by a lot of people on the team here. Again, I couldn't be more proud of them as well. So, things are going quite well on all these key initiatives, of course.

Tobey Sommer, Analyst

You mentioned health care a little bit higher in the quarter impacting gross margin. Is that utilization generally running higher? Is there something discrete in the first quarter that occurred? And what are you seeing so far in 2Q?

Jeff Hackman, Chief Financial Officer

Yes, Tobey, this is Jeff. It's good to hear from you. Regarding health care costs, as you might recall, they were somewhat elevated in the fourth quarter and the first quarter of this year. This increase is more related to claim severity rather than a rise in volume, which you can observe across various health care providers. There’s a general uptick in health care costs along with the severity factor. However, we do not consider this an extensive issue affecting the health insurance offerings themselves.

Tobey Sommer, Analyst

Okay. That makes sense. And then you mentioned the indirect exposure that Kforce has to DC large system integrators. Could you discuss that a little bit more like, I don't know, size the exposure, which I think is relatively small and what you're seeing there? And also, maybe talk about financial services as a vertical?

Dave Kelly, Chief Operating Officer

I wish I could provide you with more insights into those industries. Our exposure is relatively minor, but I can start by discussing our involvement with the government. As Joe mentioned, we divested our prime government contracting business, KGS, about five years ago, which makes us pleased in this current environment. It's behind us now. Additionally, we have a very diversified commercial portfolio. In the government sector, our services to integrators represent a small percentage of the overall portfolio, and the portion of our business that might be affected by government spending cuts is even smaller. For us, the impact is minimal. Regarding the financial services sector, which we've noted is our largest vertical, there was a slight decline from Q4 to Q1 after two quarters of sequential growth. We work with very large institutions, and some of them experienced revenue growth for us, while others saw declines. Overall, the total revenue was down a bit, but I wouldn’t consider us a benchmark for industry trends in financial services based on our performance. The situation can vary significantly from quarter to quarter, depending on individual projects and clients.

Operator, Operator

And our next question comes from the line of Trevor Romeo with William Blair. Trevor, please go ahead.

Trevor Romeo, Analyst

One I had was, you've talked about the success of the consulting focused offerings, I think, even in this softer type of demand environment broadly. I guess, are there any common themes among the type of project work that clients are kind of still demanding to a large degree for your consultant type offerings? Or maybe asked differently, are there any specific types of projects do you think Kforce in particular, has kind of carved out a unique offering that's really resonated well?

Dave Kelly, Chief Operating Officer

Yes. So, Trevor, yes, I mean, we've organized this offering in a couple of different areas. But frankly, and we get quarterly updates from our team here. We've had pretty broad success even in the application engineering space. We're continuing to see growth, obviously, that is at the heart of a lot of our development work that we're doing. We're seeing advancements in the digital space. Obviously, there's a ton of data and data rationalization work that's being done, obviously, in advance of a lot of company's AI efforts. And I think we're certainly seeing growing pipelines in those last two areas. But frankly, across all of the KCS engagements in the cloud, the cloud is also a big area of focus. So those places where the engagement with the end customer, the use of the cloud is really important as well. As I've mentioned, all very strong. So, we're proud of that business as well, right. As we've mentioned, we've had good growth. That has been really the driver of our out-performance, I think, generally speaking, over the last few quarters, certainly.

Trevor Romeo, Analyst

Got it. That's helpful. And then I guess I wanted to ask sort of an AI-related question. I know the long term view you have, and I generally agree that new use cases from AI will ultimately spur more demand. But just in terms of the near term, I guess, maybe there's some negative impact on certain roles. Maybe there's some new roles being created. I guess, are the new opportunities you're seeing now offsetting any of that near-term disruption? Or do you think one side of that is kind of moving faster than the other at this point?

Joe Liberatore, President and CEO

Yes, from what we're observing, our customer base primarily consists of enterprise, Fortune 1000 organizations, and we're noticing a general readiness for AI across the board. These clients are investing significantly in data management, migrating systems to the cloud, and digitizing their operations to prepare for building out their AI use cases. It's essential for them to establish a solid foundation and infrastructure first. We're witnessing a lot of effort in this area. As for new roles, we are seeing a transformation of existing positions, with data scientists evolving into roles more aligned with AI engineering or architecture rather than purely new positions being created. This shift is presenting more opportunities for us to engage in high-demand skill sets. However, the work related to AI that we are observing is primarily focused on readiness rather than significant implementation of use cases, particularly within these Fortune 1000 companies where data governance and other critical elements must be established before executing large-scale implementations.

Operator, Operator

And our next question comes from the line of Josh Chan with UBS. Josh, please go ahead.

Josh Chan, Analyst

Maybe to quickly clarify on your comments about the environment. You mentioned leading indicators improving through April. I guess, I think it typically improves around this time of the year. So, I guess are you interpreting this improvement as fairly normal from a seasonal perspective, just from a magnitude angle?

Dave Kelly, Chief Operating Officer

Yes, Josh. Just to clarify what I mentioned, typically in the first quarter, we see growth during the latter two months. However, we did not experience growth in the second month of the first quarter. We did see some growth in March, which is usual, and continuing into mid-April specifically. That growth trend has flattened a bit. In a stronger growth environment, we would expect growth to continue through the quarter. One reason for this is the uncertainty we're facing, which suggests that we might see flat consultants on assignment for the remainder of the quarter. Considering where we are in this cycle compared to a strong growth environment, we haven't indicated that we are expecting continuous growth.

Josh Chan, Analyst

That's really helpful Dave. And then on the health care cost, I guess, are you guys thinking of those as relatively random or unexpected events? Or I guess at what point do you try to price through those health care costs into your bids to have that not be as big of an impact?

Jeff Hackman, Chief Financial Officer

Yes, Josh, this is Jeff. From a health care perspective, I want to point out that we’ve seen higher costs for the second consecutive quarter, following three or four quarters where expenses were either steady or slightly below our expectations. As you can imagine, health care costs can be quite challenging to predict. Each year, we analyze health care cost trends and adjust our pricing accordingly. Occasionally, we encounter some unexpected severe claims that are difficult to forecast. However, we incorporate an annual cost trend into our pricing. I hope that clarifies things, Josh.

Operator, Operator

And our next question comes from the line of Marc Riddick with Sidoti. Marc, please go ahead.

Marc Riddick, Analyst

I want to thank you for all the color that you've already provided. You've already answered pretty much most of my questions. One of the things I was sort of curious about is maybe you could share some thoughts as to what you're seeing on candidate availability and whether that has changed much over the last few months, or if there are any particular areas where you're beginning to see things loosen up a bit? And maybe how you see things sort of playing out there?

Dave Kelly, Chief Operating Officer

Yes, Mark, the straightforward answer is that candidate availability has not changed significantly over the past several months, and I would say certainly not over the last nine to twelve months. This stability is also reflected in pay rates. Additionally, we excel at identifying the right candidates for the roles. Finding consultants is largely a matter of our skilled people and efficient processes, so it's not a major concern for us. Overall, there has been no substantial change in candidate availability.

Marc Riddick, Analyst

Okay. Great. And then last one for me, and you touched on this certainly during your prepared remarks as far as the share repurchase activity during the quarter. And I guess, it seemed to end into a little bit into April, which kind of lends toward the share count guide for 2Q. Maybe you could sort of share some thoughts there? I mean, obviously, it makes a lot of sense to take advantage of where the shares are, but maybe you could talk a little bit about that as well.

Jeff Hackman, Chief Financial Officer

Yes, Mark, this is Jeff. You asked a great question. In the first quarter, we became more active with our share repurchase efforts. Typically, the first quarter has lower operating cash flows throughout the year, leading to less buyback activity during that time. Given the market volatility and our confidence moving forward, we decided to be more aggressive in the first quarter and wanted to be open about that activity continuing into April. Since 2007, we've returned about $1 billion to shareholders through dividends and share buybacks, which accounts for roughly 75% of the cash we've generated. Our long-term consistency in returning capital is important, and we've been actively buying back stock for quite some time. We are committed to this approach, and as we move ahead, I don’t anticipate changing our strategy. Joe and Dave have discussed our organic growth strategy, which we believe is the best path for Kforce. Fortunately, we started the year with a strong balance sheet, and we're effectively utilizing it.

Operator, Operator

And that looks to be all the questions we have today. So, I will now turn it back over to Joe for closing remarks. Joe?

Joe Liberatore, President and CEO

Well, thank you for your interest and support of Kforce. I would 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 with you again after the second quarter 2025. Have a great evening.

Operator, Operator

Thanks, Joe. And ladies and gentlemen, that does conclude today's call. Again, thank you for joining, and you may now disconnect. Have a great evening.