Kforce (NASDAQ:KFRC) reported first-quarter financial results on Monday. The transcript from the company's first-quarter earnings call has been provided below.
This transcript is brought to you by Benzinga APIs. For real-time access to our entire catalog, please visit https://www.benzinga.com/apis/ for a consultation.
View the webcast at https://events.q4inc.com/attendee/458426539
Summary
Kforce Inc reported Q1 2026 revenues of $330.4 million, marking the first year-over-year growth since Q4 2022, with earnings per share of $0.46 exceeding expectations.
The company anticipates revenue growth in Q2 to accelerate to mid-single digits, driven by increased demand for flexible workforce solutions and AI-related projects.
Kforce Inc continues to focus on its integrated strategy and global talent strategy, including expanding its India Development center and establishing AI Innovation Studio and AI pods.
Management highlighted strong execution in pricing and service delivery, leading to higher gross margins and operating leverage.
The company returned $18.6 million to shareholders through dividends and share repurchases, maintaining a conservative leverage ratio of 1.2 times net debt to EBITDA.
Full Transcript
OPERATOR
Good day everyone and welcome to the Kforce Q1 2026 earnings call. As a reminder, this call is being recorded at this time. I would like to hand the call over to Mr. Joe Liberatore. Please go ahead Sir.
Joe Liberatore
Good afternoon and thank you for your time today. This call contains certain statements that are forward looking, are based upon current assumptions and expectations, are subject to risks and uncertainties. Actual results may vary materially from the factors listed in Kforce Inc'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 our SEC filings. In addition, we have published our prepared remarks within the Investor Relation portion of our website. We are extremely pleased to have successfully driven results in the first quarter that again exceeded our expectations from both a revenue and profitability perspective. The momentum that we carried into the beginning of the year has continued to strengthen resulting in year over year revenue growth for the first time in several years. As Jeff Hackman will cover in more detail, our trajectory has continued to improve in the first month of the SECond quarter, which we expect will lead to accelerating year over year growth in Q2 in the mid single digits. I cannot be prouder of the tenacity of our people or more appreciative of the trust that our world class clients are increasingly placing in Kforce to drive more meaningful and valuable engagements with them. Our go to market approach which was born out of our integrated strategy efforts, appears to be paying dividends. Our people continue to operate more fully as one Kforce, leveraging the firm's capabilities across all service offerings. While recent economic data continues to point to a generally softer labor market and professionally oriented roles, our performance reflects strong execution and a clear shift we're seeing across our customer base. However, several of the leading indicators we track which have historically signaled strengthening demand for our services, are improving. Companies are increasingly turning to flexible talent strategies to move forward on significant backlog of high priority technology initiatives, especially in the age of artificial intelligence where CEOs remain cautious to add permanent headcount. At the same time, heightened geopolitical uncertainty, including the conflict involving Iran, has contributed to significant volatility in the global energy markets, resulting in sharp price increases across oil, gasoline, natural gas and electricity. In this environment, clients are focused on agility. We believe uncertainty is reinforcing the value of flexible workforce solutions as organizations seek to adapt while they gain greater clarity around geopolitical developments and the longer term impact of emerging technologies on their business and talent strategies. Against this backdrop, we remain optimistic that our recent operational data and several conSECutive quarters of improving revenue performance reflect a more typical historical cyclical pattern consistent with prior demand recoveries. As we have stated, we've witnessed and participated in transformative technology shifts before, such as personal computing, the emergence of the Internet, the mobile revolution and the move to cloud computing. Each of these periods of technological change impacted labor markets. Yet over time, workers, including technologists, have continued to upskill and retrain themselves to improve the relevancy of their skill sets. As technology has evolved over the last 50 plus years, we've placed skill sets that include mainframe operators, COBOL programmers, database administrators, web developers, mobile application developers, DevOps engineers, cloud architects, UI UX designers, data scientists, data engineers, AI platform engineers, AI product managers, prompt engineers, etc. The point is, the tasks change or in some cases completely go away. Job titles change, skill composition shifts and at the end of the day, new roles are created, new businesses are spurred, new industries are created resulting in a net positive amount of technology oriented job growth as society's unquenchable thirst for technology advancements and productivity gains. We believe generative AI, and its offshoots into agentic AI and cognitive AI is in the early stages of the evolution and may just be starting to align with historical patterns we've experienced. Recruiting the right in demand talent, assembling effective teams and implementing target enterprise level initiatives are crucial for organizations seeking to successfully integrate and leverage these new tools to maintain a competitive advantage. Our strong position enables us to grow our client portfolio and bring on new client opportunities, thereby sustaining our history of consistent above market performance fueled by client share growth, ultimately strengthening the foundation that delivers enduring value to our shareholders. Our business model is intentionally simple, organically driven and intensely focused. By limiting inorganic growth within our existing service areas, we protect our teams from unnecessary complexity and distractions. That focus allows our people to do what they do best, build deep relationships and partner with clients to solve their most critical business challenges. Our strategy has been thoughtfully refined over time, not overhauled because it has proven durable. That focus, combined with unified and resilient culture, is a real differentiator for us and essential to our consistent market outperformance. As our operating trends continue to improve, we're also making great progress on our key strategic initiatives, including the implementation of Workday scaling, our India Development center, advancing our internal AI initiatives and continued refinement of the execution of our integrated strategy. Further to that point, we are pleased to have recently announced the establishment of our AI Innovation Studio within our headquarters and associated AI pods in India to support evolving client needs. As I conclude my remarks, I want to acknowledge the outstanding people who make up the Kforce team. I'm incredibly proud of their fortitude, adaptability and dedication demonstrated across the firm, particularly given the challenging business environment over the past three years. I am grateful every day for the opportunity to work with colleagues who bring this level of skill and commitment. Thanks to their efforts, we are well positioned strategically and I feel confident in our trajectory and and the opportunities ahead. Dave Kelly, our Chief Operating Officer, will now give greater insights into our performance and recent operating trends. Jeff Hackman, Kforce's Chief Financial Officer, will then provide additional detail on our financial results as well as our future financial expectations.
Dave Kelly (Chief Operating Officer)
Thank you, Joe. Total revenues of $330.4 million represented a return to overall revenue growth for the first time since the fourth quarter of 2022. Encouragingly, we were successful at delivering year over year flex revenue growth in both our technology and FA&A businesses. The first quarter is typically characterized by sequential revenue declines on a billing day basis due to calendar year assignment ends. This is a very normal part of our business and the broader sector. There's been a lot of discussion about our ability and the sector's ability to deliver revenue growth given the much speculated demand impact of AI tools, and technologies. A data point that we think is particularly relevant is that our first quarter performance was meaningfully better than the average sequential decline over the past 15 years. Prior to AI becoming an hourly topic of conversation. Our results were driven by a combination of lower levels of project ends and a faster than normal rebound in new assignment activity. Further to this point, as Jeff Hackman will cover in his particular remarks, the midpoint of our guidance contemplates year over year growth in Q2 of approximately 4%. While clients continue to take a measured approach to technology spending amid an uncertain macroeconomic environment, investments in critical initiatives, particularly in data, digital and platforms that underpin long term AI strategies are actively being prioritized by our clients. Our recent momentum and operating trends suggest clients are increasingly green lighting long postponed initiatives through the use of flexible workforce solutions that are strategic to their needs and don't have an easy or obvious AI related solution. Importantly, improvements in our business have been broad based with positive trends evident across a wide range of industries within our client portfolio and utilizing a wide range of skill sets. While we certainly continue to see growth in AI related data, digital and cloud projects, we're also seeing a ramp in demand for platform and application development roles and projects. The demand for technology is broad based. We continue to make targeted organic investments in our consulting solutions business to meet rising client demand for cost effective access to highly skilled talent. These investments are strengthening our value proposition by expanding flexible delivery models and deepening differentiated expertise. As a result, our consulting led offerings are positively contributing to the performance of our technology business supported by a strong pipeline of high quality opportunities. Our fully integrated delivery model offering a seamless client experience across consulting, project based work and staff augmentation spanning multiple technologies and skill sets remains a clear point of differentiation in the market. We've seen clear signs of improvement improving demand across the entire spectrum of our service models. This integrated approach has been a core driver of our technology performance, enabling meaningful gross profit expansion over the past year despite a challenging macroeconomic backdrop while maintaining stability in average bill rates. We leverage long standing client relationships as the foundation of our model and focus on simplifying the buying process and accelerating decision making. An increasingly important component of our ability to deliver cost effective solutions is our global talent strategy, including access to highly skilled professionals outside the United States. Our development center in Pune, combined with strong domestic sales and delivery capabilities and a high quality vendor network enables a scalable multi shore delivery model that comprehensively addresses client needs. Demand for this channel continues to accelerate, reinforcing its strategic importance and strengthening our confidence in the durability of this model. We now have a multi shore delivery model being utilized within 60% of our 25 largest clients. We've been able to maintain a stable average bill rate of approximately $90 per hour over the last three years while building a higher quality, higher margin revenue stream. The increasing mix of consulting oriented engagements which command higher bill rates and significantly stronger margin profiles, along with disciplined management of wage inflation and core technology skill sets is effectively offset the downward pressure on bill rates from a greater mix of consultants based outside of the US Demand across our core practice areas including data and AI, digital platform engineering and cloud remains strong and our pipeline of consulting opportunities continues to expand. These disciplines represent foundational capabilities for the development and deployment of AI solutions and we believe organizations will increasingly require access to specialized talent to execute their strategies, creating meaningful and durable growth opportunities for our firm. Over the last several years, we have made responsible adjustments to align headcount levels with revenue levels and productivity expectations. As noted in last quarter's call, we implemented further refinements to our organization in the first quarter. Despite these actions, we believe we have sufficient capacity to absorb the near term improvements in demand levels without the need for significant incremental resources, particularly as we continue to enable greater efficiency through our use of AI Solutions. We remain committed to investing in our consulting solutions business and other strategic initiatives that we believe will drive long term revenue and profitability growth. The actions taken in the quarter provide increased confidence in our ability to continue making these investments while maintaining our previously stated profitability objectives. We are energized by the opportunities ahead and confident in our ability to sustain recent momentum while continuing to deliver strong results. Our success reflects the deep trust and long standing partnerships we built with our clients, candidates and consultants. These are relationships that continue to serve as the foundation for our growth and innovation. I will now turn the call over to Jeff Hackman, Kforce's Chief Financial Officer.
Jeff Hackman (Chief Financial Officer)
Thank you Dave first quarter revenue of 330.4 million exceeded our expectations and earnings per share of 46 cents was above the high end of our guidance. Our results for the first quarter demonstrate our ability to grow revenues while also driving a higher quality of business as evidenced by better than expected gross margins in the quarter as well as generating enhanced operating leverage. Overall gross margins of 27.3% were up 60 basis points on a year over year basis due to expanding flex margins which more than offset the impact from lower direct hire mix. Sequentially, gross margins were up 10 basis points in a quarter when they were expected to be seasonally down as improved flex spreads and favorable health care costs more than offset the seasonal payroll tax resets. The success we have had expanding our margin profile can be attributed to our teams pricing more effectively with clients to more appropriately reflect the value of our services and the benefit of higher quality business that we have been strategically driving. We have discussed that solutions oriented engagements have an appreciably higher margin profile as that mix has continued to improve that has driven margin improvement. In addition, Dave mentioned that the mix of consultants working outside of the us, both through our nearshore partners and through our India business continues to grow. We have seen higher margins from our business abroad which although it's had a relatively small positive impact on current margins, it could continue to provide upward opportunity if the overall mix were to continue to grow. As we look forward to Q2, we expect overall flex margins to improve sequentially due to the alleviation of higher seasonal payroll taxes, but for spreads to be relatively stable with first quarter levels Overall SG and a expense as a percentage of revenue of 23.2% increased 40 basis points Year over year which was primarily driven by greater performance based compensation due to the higher levels of financial performance we have been successful delivering in 2026. As discussed on our last call, the refinements we have made to headcount levels have provided incremental operating leverage and we are continuing to make targeted investments in our sales and solutions capabilities while also maintaining investments in advancing key enterprise initiatives. While this will continue to impact near term SGA levels, we are beginning to see the benefits of these investments in our productivity metrics and expect continued improvements to create future operating leverage. As we have stated on prior calls, we anticipate beginning to realize benefits from our workday implementation. More Significantly, in the second half of 2027 our operating margin was 3.6% and our effective tax rate in the first quarter was 30.2%. During the quarter we remained active in returning capital to our shareholders with 18.6 million in capital being returned through dividends of 6.8 million and share repurchases of approximately 11.8 million. We were incrementally opportunistic with respect to share repurchases in the first quarter and utilized our strong balance sheet during a typically low cash flow quarter. Given what we believe is a disconnect between our operating trends and demand environment and the valuation of our stock, this resulted in an increase in net debt to 90.2 million from 64.3 million against trailing twelve month EBITDA. Our leverage of 1.2 times continues to be relatively conservative. Looking ahead, we expect to continue returning excess cash generated beyond our capital requirements and quarterly dividend to shareholders through repurchases while being prudently opportunistic in repurchasing our shares. Operating cash flows were negative 4.1 million due to higher cash outflows in the first quarter associated with the actions we announced on our last call. In addition to the timing of cash collections which we expect to Normalize in the second quarter, we expect positive operating cash flows of approximately $20 million in Q2. Our return on equity remains at approximately 30%. The second quarter has 60 billing days, which is one additional day compared to the first quarter of 2026, but the same as the second quarter of 2025. We expect Q2 revenues to be in the range of 344 million to 352 million and earnings per share to be between 67 and $0.75. The effective income tax rate for the second quarter is 31%. The midpoint of our guidance of 34048 million in revenue is up approximately 4% on a year over year and sequential basis per billing day. Notably, earnings per share at the midpoint of guidance reflects a 20% increase year over year. Our guidance assumes a stable operating environment and excludes the potential impact of any unusual or non recurring items. We feel strongly about our strategic position and our ability to deliver above market results while continuing to invest in initiatives that drive long term growth. We are increasingly confident in our ability to generate at least 8% operating margin when annual revenues return to 1.7 billion, which is more than 100 basis points higher than when that revenue level was achieved in 2022. On behalf of our entire management team, I want to extend our sincere appreciation to our teams for their outstanding efforts. We would now like to turn the call over for questions.
OPERATOR
Thank you sir. And everyone, if you would like to ask a question Today, please press Star 1 on your telephone keypad. Again, that is Star 1. If you have a question, the first question comes from Mark Marcon from Baird.
Mark Marcon (Equity Analyst)
Good afternoon and thanks for taking my questions and congratulations on the strong quarter and the even better guidelines. I was wondering if you could just talk a little bit about what you're seeing in terms of your trends by major verticals. And I'm particularly interested in terms of the financial services vertical. What are you seeing there? And just given the strength of the guide and the better than normal sequential uptick, at least relative to recent years, can you talk about any sort of new contracts that you, you may have won or gains that you're seeing among existing clients? Thank you.
Dave Kelly (Chief Operating Officer)
Hey Mark, this is Dave. Thanks. So I would say generally speaking, Mark, across industries we're seeing either stability or growth pretty broadly. In fact, year over year growth in six of our top 10 sectors that we segregate the business in. In particular, I'd note strength in the information space and manufacturing space. Retail has been also strong as well. And we, you know, we've had some benefit in particular with some pretty digitally enhanced clients in the retail space. So when we think about our business footprint, professional services has had some negative impacts. When you kind of look year over year, those are really pretty much COVID-19 related. We think though financial services you asked about specifically, we, we've seen a little bit of seasonal decline there, some reasonable however stability. So I would say nothing materially out of some, any variation across any industry. Maybe just follow on, maybe give you a little bit more color. You asked a little bit about some of the indicators and pipeline, you know, when we think about industry and activities projects, maybe I'll segregate a little bit into some metrics and then maybe a little pipeline information. When we think about some of the things that we cover from a metric standpoint to give you some sense of what we're Seeing in terms of demand, we have had a pretty good strength as we've looked at this over the last year. When you look at client visit information in the first quarter, that really is up nearly 10% year over year. That's some good strength. From a job order perspective as well. That's up nearly 20% year over year. Really translating into some good new assignment starts, really that also in the low double digits. You know, the point there is that's, that's again pretty broadly distributed. You know, in terms of project related activity, we're seeing strength as we've been talking about, you'd expect in the areas where our consulting service is focused, digital data, platform engineering, cloud, all of those have been pretty good. I think notably our data and AI pipeline is up nearly 50% year over year. So, you know, I would say generally speaking, Mark, in terms of the strength in the revenue stream, we're seeing it, as Joe alluded to, across our service spectrum, from staff augmentation all the way through consulting project work, we're certainly seeing strength in those AI and AI related revenue streams. But also some of the more traditional areas of strength for the firm we're continuing to see growth in as well. Right. Platform engineering, application engineering, application development, all pretty strong. So it's a pretty good story across the entire spectrum of the revenue stream. Yeah, Mark, so I just netted out, I mean it was broad based, it was across our enterprise accounts, our market accounts. So it was across geographies. So we're just, we're seeing a broad base.
Mark Marcon (Equity Analyst)
And then can you talk a little bit to what extent you think you're gaining share and to what extent are your, you know, it's still relatively new for you, but your Indian operations, to what extent are those helping you to capture share and what percentage of the work is now being done in India? And since you're still relatively early in that, in that journey, where do you think that could go and what are the implications as it relates to gross margins for that?
Dave Kelly (Chief Operating Officer)
Yeah, so, well, let me first talk about India. You asked a few questions about that. Then we can get to the share question. So just as a reminder, we started this initiative, approximately, less than two years ago. The focus of this really is to enhance the capabilities of our domestic footprint. Right. As I'd mentioned and Joe had mentioned in the past, we're seeing a lot of demand from our client base to build blended projects. Obviously cost is a key driver here. So this is not specifically set up to go and capture business in India. With India clients. So I think probably the best way to think about this is how our clients are thinking about our prospects and how we're providing services in the types of business that we've been performing, right across the spectrum of services that we provide. I made a comment in my prepared remarks. 60% of our 25 largest clients are using those services in a blended model. So it's a combination of a blended model. There are some projects that are offshore entirely. This is true in the consulting space. And that is really where we set up this initially. We're just now starting to think about providing some staff from a talent solutions perspective. So more staff augmentations. That's early on. So we've seen some good growth there. It is still a very small percentage of the revenue stream. I think, you know, we're seeing a pretty significant increase in new orders, but still a very small percentage in terms of future prospects. I think it's pretty clear our clients are always looking for ways to cost effectively find great talent. And I would say the talent that we find in India is as good as that which we would find, as we would find in the United States. There's been a lot of firms who've had success there as well. So I wouldn't necessarily put a precise percentage number on it, but it wouldn't surprise me that a very, very high percentage of our clients use this as a blended model. And it could be a very meaningful percentage over the next couple of years. The one thing that I would add there, Dave touched upon it a little bit there, but I want to accentuate this point, that talent level, especially when you get into AI skills, of what we're identifying and find finding in India, you know, real shortage in the US we're definitely seeing much more talent availability, especially from an AI standpoint, especially as we built out our AI pods over there to get some leverage for our people.
Jeff Hackman (Chief Financial Officer)
So, Mark, I think the second part of your question, or the first part, I should say, was a question around share, market share, client share. You know, I think again, we're quite proud of our performance this quarter. Just to reiterate, the expectation is revenue growth we believe is going to accelerate in the, in the next quarter. We've had the benefit of generating some additional client share that is certainly a part of the revenue growth. We've also continued to attract a lot of new clients as well. So when you look more generally across the market is I kind of look at the metrics of how the market might be performing. I think our growth rates certainly are in excess of that and are certainly expected to be in excess of that. So the math basically tells me we're capturing share both within existing clients as well as acquiring new clients.
Mark Marcon (Equity Analyst)
And then just as I look at the, and this is the last one for me and then I'll jump back in the queue. But when I take a look at the bill rates moving up as well as the gross margin, can you just talk a little bit about the Indian, you know, portion of the mix? To what extent is it actually, you know, margin accretive as it relates to gross margin and how are you able to offset, you know, the lower bill rates over there to end up actually increasing the bill rate? Thanks.
Jeff Hackman (Chief Financial Officer)
Now Mark, this is Jeff, appreciate the question. Let me first say I think you touched on a couple of things, bill rate and margin. Let me first say I'm really proud of the broader Kforce team for the collective efforts and ensuring that we're pricing the value into our engagements and assignments that we're bringing to our clients. You know, look at our gross margin profile and we're up 60 basis points year on year. You look at our flex gross profit margins, Those are up 90 basis points year over year. The preponderance of that, Mark, is driven by good solid bill and pay spread expansion out of that 90 basis points that comprised 70 basis points of that, you know, part of that is driven by, as I mentioned, the execution of our teams, the adjustments we made some adjustments and refinements and how we're incentivizing and how we're compensating our people to put that a little bit more towards the forefront of the conversation. And then at the last component, I would say Mark, is just what we're driving from an overall higher quality of business. To that last point, we've talked about the growing mix of consulting solutions business that margin delta continues to run in that 400 to 600 basis points of higher margin. So certainly as that mix continues to improve, we're getting the benefit of that. You asked about our nearshore offshore business. The margins there have also been very healthy relative to overall flex margins. So today, Kelly's point, as that business continues to scale, we expect that to lead to enrichment at the flex margin line. So I think Mark, in the near term these things don't change overnight. You heard the comments from us. This is a culmination of a lot of activities over the last year. Plus I think in the near term we certainly expect spreads to be stable but over the medium to longer term, certainly an opportunity to see some Further enrichment here.
Dave Kelly (Chief Operating Officer)
Just maybe a little added emphasis on Jeff's comments to make sure it's clear the impact on flexible margins from the offshore facility are nominal. Right. That spread improvement is a result of the demand for the services that we're providing here, the execution of our teams, the emphasis we're putting on execution just generally and the mix of business that we're seeing as it relates to the consulting work that we're doing. So that is an opportunity for us as we move forward.
Mark Marcon (Equity Analyst)
Thank you very much.
OPERATOR
Thanks, Mark. The next question comes from Trevor Romeo from William Blair.
Trevor Romeo (Equity Analyst)
Good evening. Thanks for taking the questions. I appreciate it. Maybe a couple of AI related questions. So one is just along the lines of flexible talent becoming especially valuable in the AI era. I think I appreciate Joe highlighting how things have kind of evolved from mainframe operators all the way to prompt engineers and the like now. So the question is just to get a sense of how things can quickly change and how your model can adapt. Is there some kind of way to think about what percentage of the demand you're seeing now for the flex business or the consulting projects? What percentage of that is new roles or project categories that really weren't even around, say, five years ago? And how have things evolved?
Joe Liberatore
That's a great question. I guess I would start, and I don't want this to come across the wrong way. Virtually almost 100% of what we're doing today didn't exist five years ago because even the traditional roles that still exist today, that existed five years ago, now they're being augmented with certain skills in AI. The bulk of the requirements that our people are coming across some type of AI aspect is embedded in virtually every role that we're working on. In terms of what I'll say are newly created roles, I think we're still in the early stages of new role creation. Outside of some of the general ones that you hear about with prompt engineering and certain other AI engineering specific. I think this will continue to evolve. It's one of the reasons why I've always appreciated this business that we're in because we don't create demand, we follow where demand is. And at the end of the day, you know, that's what we've been. I've been doing this for 38 years. And you know, the people that we're placing today aren't the same people that I was placing 38 years ago. Although I did hear from some of our people that there's been a resurgence of demand for COBOL people. Half kidding. But the point being you know, the roles are constantly evolving and our responsibility is to identify that talent that's in demand. So that's why we get really excited because we're not locked into any specific footprint. We typically move with where the footprint is moving towards. This is a lot of what we're seeing from an AI standpoint, you know, not what I would consider pure AI, but augmented AI in terms of the skills and the skills evolution. So I don't know if that just gives you a little bit of a feel in terms of what we're seeing. I appreciate that, Joe. That was helpful. And then you also mentioned the new AI Innovation Studio, so maybe you could talk a little bit more specifically about what that entails and what kind of value you can deliver to clients with that. Yeah. One of the things, you know, in today's world with AI, you know, the days of when you're in front of clients and you're trying to work through solutions for those clients, of presenting PowerPoints or walking them through something visual like that organizations really want something that's tangible, that is a prototype, a working model. And so that's really what we're doing with our Innovation Studio, which is part of our broader innovation experience. And so that's so that we can work with clients on ideation, get real world examples of what they're using, also expose them some with some of the tools that our people have developed, which can also accelerate some of the development. So it's, you know, we've already been doing this mostly on client sites, but what we're also seeing is there are select clients that would prefer to get out of their environment and to get into a studio environment based upon the nature of what they're looking to do. And that's all also tied into what we're doing in India. You know, we've established what we call AI pods in India, which is where we get a really, a lot of leverage on building out some of these, these tools and the platforms that we're working with with the clients. And we'll scale that accordingly based upon, you know, how demand evolves.
Jeff Hackman (Chief Financial Officer)
Helpful again, thank you. If I could maybe sneak one, one more quick one in for, I guess either for Jeff or Dave. I think you typically give segment level expectations on these calls for the next quarter. So just any color you can provide on what's built into the guide for each of the segments in Q2. Yeah, Trevor, it's Jeff. I appreciate the question. Yeah. And certainly can. Happy to cover this in more detail tonight. But I think we mentioned in Dave Kelly's script that overall at the midpoint of our expectations that the year over year and very close to that is a sequential performance of roughly 4%. So you look at technology with that being 93% of what we do, that technology performance is a preponderance of the driver there. I think when you go down and look at our FA business again, we reorganized that business in early 2025, started to see sequential growth in the second quarter of last year, started to see some really nice sequential growth into the mid to high single digits in quarters three and four. Certainly saw some seasonal downtick to faa. But you know, when you look at the year over year and our FAA business at the midpoint of our guide, that's in the mid to slight high single digit range. Then you look at our direct hire business. The first quarter was the last year over year, difficult comp for us. So really do expect at the midpoint, Trevor, some stability in our direct hire both season sequentially and year on year. So now you look across the market. Very clear to us. Dave Kelly mentioned, you know, client share and market share. Very clear at the midpoint that 4%
Trevor Romeo (Equity Analyst)
certainly is taking share. So hopefully that helps. Trevor. Great. Yeah, very helpful. Thank you all.
OPERATOR
I appreciate it. Thank you. Thank you. The next question is from Toby Summer from Truist.
Toby Summer (Equity Analyst)
Thanks. When you talk about your AI groupings in India, are you developing sort of repeatable solutions that maybe you could price differently than a bill rate, pay rate, classic staffing or time and materials consulting model?
Joe Liberatore
Yeah, I would say more so, you know, as we're working with clients, clients are looking for us to bring solutions to the table which accelerate the development process, leveraging AI. So yes, the tools in themselves are repeatable, but in terms of, you know, products that we're, that we're looking to go to market with, we're not a product based organization. But when it comes to methodologies, when it comes to tools and all those things obviously get embedded into, into margins and pricing. So I would say that's more the approach. Now I will say one of the things obviously we see is, you know, with industry focus, you know, different organizations within a given industry, you know, they're dealing with the same problem. So some of those things which are not proprietary in nature, it does provide us an opportunity to bring those solutions that are more industry specific to our other industry clients within, within the marketplace where we can leverage some of those past capabilities.
Toby Summer (Equity Analyst)
Right. So. Well, I didn't mean to intimate you're a product company, but if you're able to apply some of those learnings within different industry players and still, you know, respect confidentiality and all that, as I'm sure you would prize.
Joe Liberatore
Are you able to generate a higher return, higher margin on the second, third, fourth time you sort of take take a swing at a similar set of projects. Yeah. Hypothetically that that would be the case. You know, we don't have the practical experience that I can give you tangible that we've created a given AI solution and then we've taken that broadly across an industry. So I think time will tell on that. But logic would lead you down, down that path.
Jeff Hackman (Chief Financial Officer)
Okay. And Jeff, from a capital allocation standpoint, first quarter is a low cash quarter. So it makes sense that you're going to continue to return sort of at a more of an average quarter trend line. But given the valuation way that the stock has traded, you know, tomorrow notwithstanding for it's likely to be up, do you think you'll continue on a more sustained basis, lean into repurchasing shares at a greater level than annual cash flow? Yeah, I think, Toby, you've certainly seen that first. Thanks for the question. You certainly saw that in 2025. I think we returned in excess of 100% of operating cash flows in 2025, took on leveraged the balance sheet, the strength of the balance sheet that we had going into 25. You know, we continued even in a, as you acknowledged, Toby, the first quarter for us, you know, relative to the other, certainly is the lowest cash flow quarter. You know, we maintain share repurchases. Obviously, we're looking at our operating trends every day, every week and assessing, you know, what that means for our future. You know, certainly in the first quarter, you know, looked like there was a significant dislocation between the underlying trends in the business and how the market was perceiving that with the valuation of our stock. So we're very comfortable outstripping the operating cash flows. Certainly in the first quarter that led to debt of roughly 90 million, you know, 1.2 times levered. Toby, you've been here long enough. I think since I joined in 2007, I think maximum leverage that I've seen in my tenure here is roughly two times. So I think we're going to continue to pay attention to the trends, the valuation of our stock. But as we sit here today, we've got a very strong balance sheet. Historically, we have been conservatively leveraged at 1.2 times as of March 31st. So you're not going to see us get super aggressive and super wild. But we do have a strong balance sheet moving forward.
Toby Summer (Equity Analyst)
And last question for me. I think in the prepared remarks you kind of said that this would be could look like a recovery from similar to historic recoveries. Is it your expectation that, you know, it is possible to have in year one or year two of this budding recovery the kind of growth that we've had exiting prior recessions where there was, you know, relatively rapid growth for a year or two before settling into a more normalized rate?
Joe Liberatore
Yeah, I would say, you know, let's remove the great shutdown, which was a little bit unique coming out of that. But if we look at prior cycles, that's really what our trends are telling us and what we're seeing. So, you know, Toby, this, this goes back to the cycles that I know I spoke about, I know Michael spoke about, you know, where we typically see companies when we go into tougher times. The first thing they do is they let go of contract or temporary labor. The next thing they typically do is they right size their organization. Then as there starts to become some firming and visibility, they start to bring flexible workforce back in. And until there's great certainty, then they start to rebuild their permanent workforces. There is no question in looking at the data that the dynamics that were driven by coming out of the great shutdown, all of the over hiring, all of the hoarding of people, basically our belief is as we've now, over the course of three years, organizations by natural attrition versus right sizing have basically gotten to a baseline of workers that they can't support the work that needs to be done. So we're at that same point that we historically have seen during normal recessionary cycles, we usually get there in a matter of 12 months. It's taken over 36 months to get there. So we would anticipate short of anything macro happening or major disruptions, that that's where we are in the cycle and that the use of flexible workforce will continue to build from this point forward. Thank you, Joe. Sure. Thanks, Susie.
OPERATOR
As a reminder everyone, please press Star one on your telephone keypad if you have a question. Up next is Josh Chan from ubs.
Josh Chan (Equity Analyst)
Hey, good afternoon guys. Thanks for taking my questions. I guess on that cyclical recovery point. I guess in past cycles you normally have like a broader economy recession before everything recovers. So I guess I'm wondering your thought about the ability to have a staffing recovery without a broader economic recession to kickstart it all.
Joe Liberatore
I guess, yeah, I guess I would answer that a little bit differently. While we didn't have a GDP oriented recession for the better part of the last three years for professionally oriented roles, there has been a job recession. So you know, a recession is a recession when it comes to the employment environment and that's what we've experienced over the course of last three years, meaning the businesses. And this isn't just Kforce, this is just not just technology. It's broad based across all of the players. You know, you saw what took place in terms of demand dropping and again that was because. I'll go back to this. Employers were holding on to people. So basically they were supplementing the work that normally would have been pushed off into, you know, temporary workforce models. They were getting it done internally by holding onto the people, letting natural attrition take place until now where they've gotten to a place where they can't get the amount of work that needs to be done done.
Josh Chan (Equity Analyst)
Okay. Yeah, thanks for the call, Joe. That makes a lot of sense. And then on the bill spread pay bill spread increasing, I guess. Do you feel like the market is becoming less competitive because it's improving or do you feel like Kforce is securing the better portions of what's available in an otherwise stable market?
Jeff Hackman (Chief Financial Officer)
Yeah. Josh, this is Jeff. I appreciate the question. I don't think the competitive environment itself is becoming any tighter or any looser. As you mentioned on the margin question in my commentary earlier, much of this is execution and mix driven within our business. The higher quality revenue stream that we're driving with respect to our consulting solutions. Those engagements, Josh, we talked about it many times are 4 to 600 basis points of higher margin. That mixed benefit is benefiting overall gross margins. I know the nearshore offshore is a relatively minor portion now as we move forward, expect a little bit of momentum there as well. But when you look holistically across our enterprise and market based clients, we're executing well from a margin perspective. The mix clearly is benefiting us. So I do not believe that it's a competitive, you know, change in the marketplace.
Josh Chan (Equity Analyst)
Yeah. To further that. Yeah. I don't. You haven't seen broadly margin degradation in the space. And one of the things that we've continued to say talent is sometimes difficult to find.
Joe Liberatore
Right. So companies understand especially highly, we're talking about highly skilled talent in the space that we play. And so paying a premium to make sure you get the right individual with the right skill set or the right team of people, you are less price sensitive than you might otherwise be if you didn't need to get to work done. So it's a combination of those things. But this isn't just a pure dynamic that you have an individual and you just price it to the lowest price because you need the talent.
Josh Chan (Equity Analyst)
Right? Right. Okay. Yeah. Appreciate the color. And congrats on the good quarter and guidance. Thank you, Jeff. Thanks, Josh.
OPERATOR
And everyone. At this time, there are no further questions. I'd like to hand the conference back to Mr. Joe Liberator for any additional or closing remarks.
Joe Liberatore
Thank you for your interest in support of Kforce. I'd like to express my gratitude to every Kforcers for your efforts and to our consultants and clients for your trust and faith in partnering with Kforce and allowing us the privilege of serving you. We look forward to talking with you again after our second quarter. 2026.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.
Login to comment