Kforce Inc (KFRC) September 2026 Conference Transcript

Ladies and gentlemen, thank you for joining us, and welcome to the K-Force Second Quarter 2026 Earnings Conference Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Joe Liberatore, President and CEO. Please go ahead, sir.

Good afternoon and thank you for your time today. This call contains certain statements that are forward-looking, are based upon current assumptions and expectations, and are subject to risk and uncertainties. Actual results may vary materially from the factors listed in K-Force's public filing and other reports and filings with the SEC. We cannot undertake any duty to update any forward-looking statements. You can find additional information about our results in our earnings release and SEC filings. In addition, we have published our prepared remarks within the investor relation portion of our website. We are extremely pleased to have delivered results in the second quarter that again exceeded our expectations from both a revenue and profitability perspective. Overall revenues positively affected in the first quarter of 2026 meaningfully expanded in the second quarter, and our guidance for the third quarter contemplates continued sequential improvement. As a point of reflection, the year-over-year growth rate in Q2 for our technology business was at its highest level since the end of 2022, and our sequential improvement was the best we've experienced in four years. I am incredibly proud of the determination of our people and deeply appreciative of the trust of our world-class clients continue to place in K-Force as we help them advance more meaningful, high-value engagements. Our go-to-market approach, shaped by our integrated strategy efforts, is clearly gaining traction. Across the firm, our people are operating more fully as 1K force, bringing the full breadth of our capabilities to bear across our service offerings. The revenue inflection that we experienced in our business in the first half of 2026 is consistent with the improving macro demand environment for talent as evidenced by indicators such as the ISM Services PMI, ASA Staffing Index, and the SIA Bullhorn Staffing Indicator that have strengthened over the last several months. In addition, overall U.S. job growth has moderated in recent months, but recent gains have been increasingly concentrated in professional and business services, which are far more aligned to K-Force's end markets than the growth drivers over the past couple years. Our results reflect disciplined execution and a meaningful shift in client behavior. Organizations are increasingly turning to flexible talent models to advance large backlogs of high-priority technology initiatives, particularly as AI accelerates transformation and CEOs remain measured in adding permanent headcount. Broader uncertainty, including the geopolitical tensions and related volatility in the global energy markets, has further reinforced the need for agility. We believe these dynamics highlight the value of flexible workforce solutions as clients adapt to near-term uncertainty while assessing the longer-term implications of emerging technologies on their business and talent strategies. As a result, we remain encouraged that our operating trends and consecutive quarters of revenue improvements are consistent with a more typical cyclical demand recovery. K-Force has a very rich 64-year operating history, and as such, we've witnessed and participated in major technology shifts before, including personal computing, the emergence of the Internet, the mobile revolution, and the move to cloud computing. Each of these periods affected the labor markets, but over time, workers, and specifically technologists, adapted by upskilling and retraining as technology evolved, resulting in a net increase of technology-related roles. From an AI perspective, we continue to take a disciplined approach both internally and externally. Internally, we are evaluating our core business processes and selectively deploying AI-enabled solutions where we see the greatest opportunity to enhance productivity, improve the associate and client experience, and drive operating leverage. Externally, we continue to educate and train our sales associates and leaders while adding specialized AI expertise within our consulting solutions organizations. We believe AI as one of the most significant technology shifts over the last several decades. However, we believe enterprise adoption remains in the early stages and is likely to follow a progression similar to prior transformative technology cycles. While much of the current focus remains on the underlying technology, our experience suggests the greatest value creation will come from effectively integrating AI into business processes and operating models. Successful adoption will require organizations to align strategy, talent, data, governance, and change management capabilities in order to translate AI potential into measurable business outcomes. As a result, we believe demand will continue to grow for highly skilled professionals and talented teams who can help organizations design, implement, and scale AI, data, and digital transformation initiatives through our technology talent solutions and consulting capabilities we believe k force is well positioned to help clients navigate this transformation accelerate modernization efforts and realize the value of their technology investments creating a competitive advantage regardless of how quickly the underlying technology evolves organizations will continue to require skilled professionals and teams of individuals who can bridge the gap between innovation and execution. We believe this dynamic supports the long-term demand environment for technology talent and consulting solutions that are central to our strategy. Our business model is intentionally simple, organically driven, and intensely focused. By limiting inorganic growth within our existing service areas, we protect our teams from unnecessary complexities and distractions. That focus allows our people to do what they do best, build deep relationships, and partner with clients to solve their most critical business challenges. Our strategy has been thoughtfully refined over time, not overhauled, because it has proven durable. That focus, combined with a unified and resilient culture, is a real differentiator for us and central to our consistent market outperformance. Before I hand it off to Dave, I am grateful every day for the opportunity to work alongside such talented and dedicated colleagues. Their passion, expertise, and commitment continue to strengthen our business, advance our enterprise initiatives, and position us well for the future. Because of their efforts, I remain confident in our strategy, our momentum, and the opportunities ahead. Dave Kelly, our Chief Operating Officer, will now give greater insights into our performance and recent operating trends. Jeff Hackman, K-Force's Chief Financial Officer, will then provide additional detail on our financial results as well as our future financial expectations. Dave.

Thank you, Joe. Total revenues of $349.3 million represented overall revenue growth of 4.5% on a year-over-year basis and 4.1% on a sequential billing day basis, both of which represent levels not seen in nearly four years. There has been a lot of discussion about whether we and the broader sector can continue to deliver revenue growth given the much-speculated negative demand impact of AI tools and technologies. Encouragingly, we've been successful at delivering three consecutive quarters of revenue growth that has returned to pre-pandemic and thus pre-AI advancement norms. This growth is being seen both in our consulting revenues and our traditional staff augmentation business. The strength in direct hire revenues across both our technology and FA businesses was also a positive contributor for us in the second quarter, further signaling the desire for companies to add critical long-term talent. Our client portfolio is exceptional, our strategic direction is clear and unchanged, and our culture is unmatched. We recognize that there is still uncertainty in the geopolitical and macroeconomic environment. While we've been successful in our go-to-market strategy, leveraging the progress made with our integrated strategy efforts, clients continue to take a measured approach to technology spend with that said our results and operating trends suggest that they are actively prioritizing critical initiatives in areas such as data digital and the platforms that underpin ai strategies among other areas that may have been previously postponed and that we are taking client and overall market share importantly the improvement in our business has been broad-based, with positive trends evidenced across a wide range of industries and skill sets within our client portfolio. We continue to see growth in AI-related data, digital, and cloud projects, while also experiencing a ramp in demand for platform and application development roles in projects. Overall technology demand remains broad, with eight of our top 10 industries showing sequential growth and similar performance on a year-over-year basis. We We continue to make targeted organic investments to fortify the depth of expertise in our consulting solutions business to meet rising client demand for cost-effective access to highly skilled talent. Our consulting-led offerings are contributing positively to the performance of our technology business supported by an increasing volume of opportunities. Our fully integrated sales and delivery model, which also leverages a combination of onshore, near shore, and offshore talent from our Pune Delivery Center addresses a growing need in the market, offering clients a seamless experience across consulting, project-based work, and more traditional staffing assignments spanning multiple technologies and skill sets. We are seeing clear signs of a healthy demand environment across the full spectrum of our service offerings, as clients are increasingly receptive to discussions on potential opportunities, many of which are focused outside the CIO function as evidenced by a meaningful year-over-year improvement in client visits. Indicators in our business that support this and suggest a continuation of sustained strong demand in addition to meaningful gross margin expansion include approximately 18% year-over-year improvement in both job orders and in new assignment starts in Q2, though June and early July are typically slightly slower months for front-end activities and new starts due to increased client PTO, more normal activity levels have resumed over the last two weeks and these indicators suggest a healthy demand environment that is conducive to driving continued sequential revenue growth in Q3, which is contemplated in our guidance. The net is that we are driving disproportionately better results than the macro industry readings would suggest and the forward momentum in the business is good. We've maintained a stable average bill rate of approximately $90 per hour over the last four years while continuing to build a higher quality, higher margin revenue stream. This reflects the growing mix of consulting-oriented engagements which command higher bill rates and stronger margin profiles as well as discipline management of wage inflation in core technology skill sets. Together, these factors have effectively offset the bill rate pressure associated with a greater mix of consultants based outside the U.S. Frankly, we would expect to continue seeing stability in our average bill rate as we look forward with the potential for slight enhancements as technology labor continues to upskill in the face of advancements in AI. Demand remains strong across core practice areas including data and AI, digital platform engineering, and cloud. The number of opportunities in our consulting solutions offering continues to expand and will be a primary driver for our sequential growth in Q3. These disciplines are foundational to the development and deployment of AI solutions, and we believe organizations will increasingly require specialized talent to execute their strategies. This creates meaningful and durable growth opportunities for our firm. Looking forward to Q3, we expect the pace of overall technology activities to continue to improve across along historical pre-pandemic levels and for revenue to improve sequentially in the low single digits, which will result in further improvements in our year-over-year and performance. Over the last several years, we've made responsible adjustments to align headcount levels with revenue levels and productivity expectations. We believe we have sufficient capacity to absorb near-term improvements in demand without requiring significant incremental resources, particularly as we continue to drive greater efficiency through AI-enabled solutions. At the same time, we remain committed to investing in our consulting solutions business and other strategic initiatives that we believe will support long-term revenue and profitability growth. We remain energized by the opportunities ahead and confident in our ability to sustain recent momentum while continuing to deliver strong results that exceed overall market averages. Our success is grounded in the deep trust and the long-standing partnerships we've built with our clients, candidates, and consultants. These relationships remain the foundation of our growth, innovation, and long-term success. I'll turn the call over to Jeff Hackman, KFORCE's Chief Financial Officer.

Thank you, Dave. Second quarter revenue of $349.3 million was up 4.5% on a year-over-year basis, and earnings per share of $0.73 was up approximately 24% year-over-year. Our second quarter results not only demonstrate our ability to drive revenue growth in the face of secular growth concerns, but were parlayed with stronger than expected gross margins and enhanced profitability levels. Overall gross margin was 28.5 percent, up 140 basis points year to year, driven by expanding flex margins and stronger than expected direct hire revenues. Sequentially, gross margin increased to 120 basis points, reflecting improved flex spreads, a stronger-than-expected direct-hire mix, and a typical seasonal recovery from Q1 payroll tax resets. The enhanced gross margin profile has been a true standout for us, especially as revenues have inflected positively. This success reflects the value we deliver to our clients and our focus on improving the quality of our business mix. As discussed previously, solutions-oriented engagements along with our offshore business typically carry higher margins, and growth in these areas have been an important contributor to our overall margin expansion. Looking ahead to the third quarter, we expect bill pay spreads to remain stable sequentially, reflecting the continued benefits of our pricing discipline and business mix strategy. SG&A expense was 22.7% of revenue in the quarter, an increase of 50 basis points year-over-year. The increase was primarily driven by higher performance-based compensation, which is rebounding from historically low levels, reflecting the strong financial results we achieved thus far in 2026. While the initial positive inflection of revenues and strength in gross profit is resulting in some SG&A de-leverage, we do not expect this to perpetuate at even higher revenue levels. In fact, as revenues grow, improving productivity levels will create meaningful improvements in operating leverage as the business scales. We are beginning to see tangible benefits through improved productivity metrics across the organization. As these initiatives mature, we expect the resulting efficiency gains to drive additional operating leverage over time. While we are likely to see some elevated non-cash depreciation and amortization expense in early 2027 post-go live from our workday implementation, consistent with our prior commentary, we continue to anticipate realizing more meaningful benefits towards the end of 2027 and more fully into 2028 which should further enhance operational effectiveness and support long-term margin expansion. Our operating margin was 5.4 percent and our effective tax rate in the second quarter was 30.6 percent. On a year-to-date basis we have experienced negative operating cash flows of 6.7 million which is consistent with historical trends in periods where revenues have meaningfully and positively inflected. We expect to resume generating positive operating cash flows in the second half of 2026 as we monetize the higher levels of accounts receivable. We continue to carry a very high quality accounts receivable portfolio and days sales outstanding was stable with prior year levels. During the quarter, we continued to return capital to shareholders with $9.6 million distributed through dividends of $6.7 million and share repurchases of approximately $2.9 million. We were more aggressive with our repurchase activity in the first quarter of 2026, leveraging the strength of our balance sheet given what was believed to be, and has proven to be, a disconnect between our operating performance and demand trends in the current valuation of our stock. As a result, net debt increased to $106.8 million at quarter end from $90.2 million in the prior quarter. Despite this increase, our balance sheet remains strong, with leverage of approximately 1.4 times trailing 12-month EBITDA, which we continue to view as a conservative level. Looking ahead, we expect to continue balancing returning excess cash generated beyond our capital requirements and quarterly dividend commitments to shareholders through share repurchases and paying down debt. Our return on equity remains strong at approximately 30%, underscoring the effectiveness of our capital allocation strategy and our ability to generate attractive returns while continuing to invest in long-term growth initiatives. Turning to our outlook, the third quarter includes 64 billing days, consistent with both the second quarter of 2026 and the third quarter of 2025. We expect third quarter revenue to be in the range of $349 million to $357 million and earnings per share to be between $0.71 and $0.79. Our guidance assumes an effective tax rate of approximately 30%. At the midpoint of guidance, revenue is expected to increase approximately 1.1% sequentially and 6.1 percent year-over-year. Notably, earnings per share at the midpoint of guidance represents a 19 percent increase compared to the prior year. Our outlook assumes a stable operating environment and excludes the impact of any unusual or non-recurring items. We remain confident in our strategic position and our ability to deliver growth that outpaces the broader market. The The progress we have made in improving the quality of our business, expanding margins, and enhancing operating leverage reinforces our confidence in the earnings power of the company as market conditions continue to improve. We also remain confident in our ability to generate an operating margin of at least 8% when annual revenue returns to $1.7 billion. The 8% annual operating margin expectation represents more than 100 basis points of improvement compared to the margin profile we achieved the last time we operated at that revenue level in 2022. As a reference point, second quarter operating margin of 5.4% is notably higher than the 4.5% operating margin in Q2 of 2020 when revenues were at approximately the same level. We believe this demonstrates the benefits of our disciplined execution, improved business mix, pricing strategy, and investments in our sales solutions and enterprise capabilities. On behalf of the entire management team, I would like to thank our associates for their dedication, hard work, and continued commitment to serving our clients. Their efforts have been instrumental in delivering our strong results and positioning the company for continued success in the future. We would now like to turn the call over for questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster.

Your first question comes from the line of mark marken with baird your line is open please go ahead good afternoon and thanks for taking my questions and uh congratulations on the strong progress particularly on the margin front as well as the uh inflection in terms of revenue continuing and accelerating in terms of the revenue growth joe or or dave um you you mentioned that there's an 18 increase in terms of the number of orders that you had in q2 how does that compare to like the year-over-year increase that you had in the orders in q1 and how is that how's that trending as we get into

um you know into q3 and and how should we think about fill rates yeah mark i appreciate the question um and the comments so i would say in in the comments that i made both related to just general activity levels and visits as well as starts activity which I'd mentioned approximated about 18% year-over-year in the second quarter that's roughly what it was in the first quarter as well so we've had good consistent demand and as we look at and I mentioned this in my prepared remarks as well some of the at least some of the visit activity we've seen some good results I think I said two weeks it's actually the last three weeks of really strong activity levels as well. So we feel good about not only what we've seen from a consistency perspective, but additionally what we are looking at in the third quarter, so some good momentum. And I would tell you, obviously, we've had some improvement year-over-year growth rates in Q2, we expect the same, some incremental additional year-over-year improvement in technology revenue growth in Q3. I think that basically reflects a pretty consistent fill ratio. So about the same, which I think continue to be very positive. That's great.

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

Yeah, Mark, this is Jeff. Maybe I'll start and maybe Dave Kelly can take part too here. Anticipated the question and good to be with you again here, Mark. You know, certainly the margin story for us, in addition to the significant inflection that we've had, certainly with our revenue trends, has been a really positive part of the story. I think when you look at our technology flex margins, they improved about 120 basis points on a year-over-year basis in the second quarter, and I think they were up about 80 basis points on a year-over-year basis in the first quarter. So certainly some sequential improvement there in our bill pay spreads, which is great to see. When you layer that on top of the direct higher revenues, sequentially we're up pretty strongly, I think up 20% sequentially that really gives you a pretty powerful margin story overall. We've talked about this probably, Mark, gosh, probably for the last four or five calls that we've really seen some really nice margin enhancements. And I think, frankly, in the second quarter, not much has changed. The success that we're seeing not only is by the increase in demand and some of the harder to find talent. We've talked on prior calls that we really are focused in that highly skilled technology skill set area. And I think that continues to bode well as far as pricing, but also several strategic initiatives. We've talked about the better pricing discipline to help ensure that our rates better reflect the value that we're providing to our clients. And I think certainly the business mix has also helped. You mentioned two of those. Our consulting solutions business continues to carry pretty significantly higher margins. We continue to improve the overall mix of revenue and KCS engagements. And then also on nearshore and offshore, business continues to expand sequentially and year over year. So that continues to benefit us. And I'd be remiss, Mark, if I didn't say thank you to our people. Really, really proud of what our team has accomplished over the last 12 to 15 months, you know, against a, you know, overall not so great macro environment. So I think from a spread perspective, I mentioned it in my preparator marks that we're expecting stability Q2 to Q3, you know, reflection point for me, when you look at our technology flex margins in Q2 of 2022, you know, flex GP was 26.9%. and we sit here today at 26.8%. So, you know, I think a lot to be proud of, very thankful to all of our associates and leaders for their efforts.

So, yeah, maybe adding a couple of things to Jeff's comments. So first of all, I think, and we've talked about this a lot, right? We've got a pretty highly concentrated set of skills, right? High-end skills that we regularly place, highly concentrated around, we mentioned $90 bill rate. I think this frankly is also a reflection of demand for that scarce talent, right? It continues, it has been, it continues to be an area where there's a scarcity of talent. We meet those needs well, maybe better than any in our space. Just to kind of remind you of a couple of things to add on to Jeff's point, the margins in our consulting business are typically 400 to 600 basis points higher than in our traditional staff augmentation business. You mentioned our offshore operations, as we've mentioned in the past, We've built that predominantly in support of our solutions business. So that is a contributor to that point, Mark, to that incremental margin. We feel good about the pipeline for that business. I had mentioned in my prepared remarks that the growth that we expect sequentially in our technology business is predominantly going to be driven by growth in the solutions business, which, again, has got very strong margins. Pipelines in that business continues to be very good. I didn't mention, but I will. I think pipelines for, generally speaking, that profile of business are up 30% year over year. We feel really good about that. That is distributed pretty broadly, whether it be in the AI space or more of our traditional application development work. So we feel very good about the trajectory of that business and consequently really very good about where the margin profile is and where it will continue to go.

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

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

Okay, great. And then lastly, then I'll jump off, but the incremental flow through in terms of GP to the operating line was also pretty impressive. How were you thinking about what's that 410 with regards to your ultimate targets with regards to you talked about getting to 8% margins at $1.7 billion, but it seems like your incremental margins are running a lot higher. Are you getting close to diminishing your excess capacity or where would you say your excess capacities right now? How much more revenue could we end up absorbing before you have to meaningfully step up on SG&A?

Yeah, so maybe, Jeff, if you got some quantitative comments, I'd say a couple things, right? So we've had some really nice productivity improvements, and we, I think, do an excellent job. Our people are very strong, but we, as I mentioned, are confident that they've got some incremental capacity. And so, and frankly, are passionate, and we continue to be about running this business and maximizing productivity of our people and therefore the income that they generate as well. So we certainly think there's more room to go there. You mentioned our ultimate, well, you mentioned at $1.7 billion. I wouldn't say that's our ultimate operating margin objective. Certainly 8% is a waypoint from our perspective. But when Can you add to that some of the expectation of growth that we will see in the longer term offshore? Jeff mentioned in the remarks that he made, he made comment on the ongoing implementation of our ERP system and the fact that we're going to be going live in that in early 2027, the incremental operating margin, I think Jeff can remind us, I think it has a meaningful positive impact on operating margin. So there's a number of levers that we are in the process of pulling. Things are, quite frankly, going according to plan on all of those fronts. So we think there's real opportunity in a number of different places. I don't know if you have anything to add.

Yeah, Mark, the only thing I'd add to that, you probably noticed last quarter that as it relates to the 1.7 and the 8% at 1.7 billion. We previously referred to that as approximately 8%. Last quarter, we changed that to at least 8%. So certainly the relative degree of confidence quarter to quarter, given the productivity and the investments that we're continuing to make in technology to drive productivity has increased our confidence with our profitability objectives. You know, part of this, Mark, also, and the reason that we included in my prepared remarks a little bit of a reflection back to Q2 of 2020, we had relatively similar revenue levels as we did in Q2 of 2026, and we had 4.5% operating margin back in Q2 of 2020 and just achieved 5.4%. So it's certainly generating increased operating leverage because when you look at the gross margin line across those two periods, they're actually very close. So I think we're on the path that we've described with a bit of increased confidence You know, our integrated strategy efforts clearly are resulting in the, you know, flex margin improvement that we expected. And, you know, Dave mentioned our workday implementation as well. We expected a full 100 basis points of operating margin benefit from that. You know, part of that, of course, is no longer investing at the pace that we are today. And the other one is the benefits associated with it. So still very much on path.

Yeah. And one last point, Mark, that I would share with you. When we look at 2021, 2022, and we look at peak performance for our sales associates, we look at these populations based upon their tenure with the firm, the people who've been here less than a year, the people who've been here two to four years, people that have been here four plus years, because as I've articulated for many years, it's a compounding effect in terms of what those people are capable from a performance standpoint. In all of those buckets, people are significantly off where they were at that point in time, which leads us to believe we have ample capacity and we actually look forward to watching our people get back to those prior peak levels. These have been a grueling four years for them as well and nothing makes us happier than we can provide them the platforms, the tools, the environment to be successful and capture those opportunities both on the solutions front as well as on the talent front because of our integrated approach and so that they can capitalize and start to obtain their goals and objectives from a financial earnings potential. So very enthusiastic about that. I know our leaders are and I think our people are seeing the benefits of all the hard work over these past four years.

Great to hear. Thank you so much. Thank you, Mark. Thanks, Mark.

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

Hi, good evening. Thanks for taking the questions. Great to see the pipeline improve. I had a question particularly on the AI and data-related projects. I think you talked about making some investments in the consulting solutions business there, including adding specialized AI expertise.

And maybe it was shed a little bit of light on maybe how many experts you're looking to add, what specific skills or expertise they have, and then, you know, how hard is it to just find talent with the right skills in those types of areas right now? yeah trevor i would say um you know we we incrementally um bring people onto that team based on the demands that we're seeing so we're you know we've done a lot of work on uh bringing in individuals and we're hiring those individuals out of all the name brands that you would hear out there from uh from a consulting standpoint um they're mainly you know being brought in in those areas of focus that we constantly talk about um that are the key pillars of our go-to-market you whether they be app engineering, whether they be modernization, whether they be data, whether they be cloud, and obviously here over the last several years from an AI standpoint. So we're sizing our teams based upon the demand that we're generating from our customer base. There is a long lead time because of the nature of this talent. It's some of the most in-demand talent. We have a really good internal recruiting capability, as well as we have a partner network that we look at, as well as obviously some of our people are working with individuals. So we have an internal referral program. So this is front and center. Again, I go back to, you know, one of our core competencies is recruitment. And so, you know, we're all over this and, you know, we're going to continue to size the group to the appropriate size based upon what our pipeline demand is.

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

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

Yeah, Trevor. Yeah, I think, first of all, it's an important part of our model. It is not a critical place for significant investment, right? We will meet those needs as we need to make investments, as we see demand will make it. But intentionally, this is a small percentage of our revenue base, and I don't expect it to be meaningfully different from what we see as a percentage of total revenue, because we, quite frankly, think that the opportunities in the in the project space and in the staff augmentation space are the place that we should invest. And that's a much more predictable, sustainable revenue stream for us. So that is a strategy that we've undertaken and will remain committed to as it relates to the expectation, though, in the demand environment environment for direct hire. First of all, I'll say, you know, our expectation sequentially is for direct hire to be down. That is a seasonal thing. We see that every year. Our projection and our guidance for Q3 contemplates that both in the revenue and the margin line. As we think about the long term, you know, I think we think it's, again, we're talking about a scarce talent source that clients need both on a flexible basis and on a permanent basis. I think that they're clearly in the long term as a market for that talent and the needs in the direct hire space. So I think we feel good about it. You know, for us, we will take the opportunities to meet our clients' needs. But again, I don't see it accelerating as a percentage of total revenue.

Thank you very much. Thanks, Trevor.

Your next question comes from the line of Kartik Mehta with North Coast Research. Your line is open. Please go ahead.

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

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

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

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

Perfect. Thank you very much. I really appreciate it. Thanks, Carter.

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

Hi. Good afternoon, Joe, Dave, Jeff. Congrats on a good quarter. I was wondering if you could talk about your flex margin within technology, and you mentioned a lot of different drivers that contributed to the improvement, but I was wondering if you can bucket between, you know, I guess, mix, price, cost, like, what is the most impactful currently in terms of driving this type of margin improvement?

Yeah, Josh, thanks for the comments. Good to be with you. It's probably difficult to precisely break down each of those, but certainly, you know, pricing overall has been a very strong point for us in the marketplace. You know, some of that is the market in which we are playing in, but also the efforts from all of our people. We put a lot of focus and energy around this, you know, last year, and it's very clear that that's paying off. You can also see the business mix over time has also improved. You look over the last year and the things that we talk about, like our consulting solutions mix, as well as our nearshore and offshore. Those aren't parts of our business that we've only been investing in for the last 12 months. So that's much more of a longer term margin enrichment opportunity, that being business mix. So I would say pricing overall and prioritizing that within the firm. And then, of course, business mix has been also a tailwind for quite some time.

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

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

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

Yeah, I mean, I think you're starting to see some of the truth of this come out in the mainstream media at this point in time. We've been talking for a number of years. You know, we were in a job recession. The jobs that were being created were not the jobs that drive the economic engine. Also, you know, we stated for many years, you know, AI was being used as a scapegoat for downsizing and rightsizing. You know, it was a strategically it was a strategic benefit to say that you're downsizing because of AI productivity and efficiency gains versus to be candid and truthful and saying we did a little bit of overhiring in the pandemic and we need to right size our organization. So, you know, all of that now has kind of worked its way through. And now we're seeing what we believe is more indicative of a normal cycle recovery coming out of a recessionary period, this time being a job recession versus being a broad recession for a variety of reasons. I'm not going to get into the economics of that. That's not my expertise, but from the workforce and the employment world, I mean, that's just the truth of what's happened here. And now also you have the, you know, you have the air coming out of the balloon in terms of, you know, AI job destruction. You've seen the CEOs of the two major players walk back their comments. You know, AI is not going to be a jog apocalypse at this point in time. Now it's AI is going to drive efficiencies for the individuals. So it's all these pieces are coming together, which really gives us a lot of excitement of where we are at this point in time based on the landscape, based upon the competencies that we built out and based upon how our teams are executing.

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

Sure. I appreciate the color and congrats on the results. Thank you, Josh.

A reminder, if you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. Your next question comes from the line of Tone B Summer with Truist. Your line is open. Please go ahead.

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

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

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

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

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

That's definitely the case, Toby, right? I mean, and I think we've touched on this in past calls. It's clear clients are looking to identify talent. They're looking to identify it in a cost-effective way. They're looking to identify it in an efficient way that maybe they can meet the clock, 24-hour clock, any number of reasons. And there were places that we were provided opportunities from our client portfolio that historically we might have had to say no to. So this is built to support that business because of those trends that our clients are asking for. And so certainly we're expanding the addressable market that and we're showing some positive signs here. So, yeah, and I think, you know, frankly, it would surprise, I think, everybody around the table here if that didn't become even more significant to have that capability. It's just – it's table stakes at this point.

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

Yeah, Toby, this is Jeff. Good to talk with you. Yeah, so certainly year to date, you acknowledged it, negative operating cash of roughly $7 That's largely to be expected, given the meaningful inflection that we've seen from a revenue standpoint. of course, we're paying our consultants weekly. Our DSO is about 58 days. It's been very stable year over year. So you would expect a bit of working capital creep in these early innings. Certainly in Q3 and Q4, expecting meaningful operating cash flows. When you look back to last year, we were probably generating somewhere around 20 million on average in the back half of year. So that should give you a reasonable sense of what the possibility is there. Of course, Toby, you know, the leverage that we're currently carrying of 1.4 times, the good news is the denominator being trailing 12 months EBITDA has been improving. It's up, you know, 20% year on year. So very comfortable with the balance sheet flexibility, you know, share buybacks for us. When you look at our balance sheet, we've crossed the $1 billion in total return of capital. So, yeah, we feel very good about the balance sheet and the flexibility and the path that we're on from a cash perspective.

Thank you.

Thanks, Toby.

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

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

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