Kforce - Q4 2025

Transcript

Operator (participant)

Well, good day everyone and welcome to the Kforce Q4 2025 earnings call. Just a reminder that today's call is being recorded. I would now like to hand the call over to Mr. Joe Liberatore. Please go ahead, sir.

Joe Liberatore (President and CEO)

Good afternoon and thank you for your time today. This call contains certain statements that are forward-looking, are based upon current assumptions and expectations, and are subject to risk and uncertainties. Actual results may vary materially from the factors listed in Kforce'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 and our earnings release and our SEC filings. In addition, we have published our prepared remarks within the investor relations portion of our website. We are pleased to have delivered fourth quarter revenues that exceeded our expectations and were reflective of the continued build of momentum that we discussed in our last earnings call. The sequential flex revenue growth that we delivered in our technology business represents the highest sequential billing day growth since the second quarter of 2022.

This momentum appears to be carrying over into the first quarter as January results suggest that 2026 is our best start since 2022. These trends are suggestive of the strength in our client portfolio, the criticality of the work that we are doing, and the resilience of our people. We also believe that our trends are evidence that clients may increasingly be pursuing a flexible talent model as a means to complete critical projects in this uncertain macro landscape and the growing belief that returns that will be generated from continuing AI investments may take longer to realize and may be more specific in nature to unique business problems rather than an overarching solution to all technology challenges. I am very proud of our team's accomplishment in driving our business forward and making the necessary adjustments to maintain high levels of performance.

To that end, our results for the fourth quarter reflect certain charges related to the refinement of our internal headcount and organizational structure that further align the current revenue levels and position us well to execute in 2026 and beyond. We also took certain actions to streamline other areas of our operating costs which Jeff Hackman will cover in more detail in his remarks along with the expected benefits. We have made tremendous progress in 2025 with our strategic initiatives including the advancement of the implementation of Workday as our future state enterprise cloud application for HCM and Financials, the evolution of our offshore delivery capabilities in India, and the further integration of all of the firm's capabilities across the full spectrum of our service offerings as one Kforce. Each of these initiatives are transformational in nature and will be a meaningful contributor to us meeting our long-term financial objectives.

2025 marked the third consecutive year of revenue declines for Kforce in the broader technology services sector. The latest economic data continues to suggest a persistently weak and largely frozen labor market marked by prolonged stagnation of job gain coming off the post-pandemic peaks and companies' protective reaction to the Great Resignation. That being said, our historical experience is that companies typically turn to flexible talent solutions as an initial step prior to making core hires while they assess the durability of the macroeconomic conditions. We are optimistic that our recent operating trends are suggestive of a more typical cyclicality. The debates continue on the relative impact of AI on the technology services sector revenue trends versus the impact of economic uncertainty and a soft labor market.

Regardless, this uncertainty may intensify the use of flexible talent as companies prioritize agility until they gain clearer insight into how these technologies and at what pace they will reshape their overall business and talent strategies. We have witnessed transformative shifts before such as migration of the mainframe to distributed processing, the emergence of the internet, the mobile revolution, and the move to cloud computing. The emergence of the internet likely most closely aligns with AI. Unlike other secular technology shifts, the internet and AI directly impact operating models and broadly touch virtually all white-collar roles in some manner. The internet secular shift followed a typical investment and integration cycle pattern where we had initial exuberance, massive infrastructure investment, premature abandonment of legacy systems, realization of integration and modernization needs, a return to balanced strategic investment, and finally workforce transformation and skill shortage.

We believe generative AI and its offshoots into agentic AI and cognitive AI is in the early innings of the evolution and may just be starting to mirror this historical pattern which has in past cycles been an opportunity for Kforce and the broader technology sector. Securing the right talent, organizing the right teams, and launching focused enterprise-level initiatives is essential for organizations to successfully adopt and maximize these new tools to remain competitive. Our strong position should allow us to increase client share and expand into new clients continuing our track record of gaining market share and reinforcing the solid foundation that drives lasting value for our shareholders. Our domestically focused organic growth strategy continues to serve us well minimizing distractions and enabling our people to fully concentrate on partnering with clients to solve their most critical business challenges.

Before I conclude, I want to express my appreciation for the exceptional people who make up the Kforce team. I am proud of the performance, resilience, and commitment demonstrated across the organization. It is a privilege to work alongside such talented and dedicated group. Their passion and contributions place us in a strong strategic position and I am confident in our direction and enthusiastic about the opportunities ahead. Dave Kelly, our Chief Operating Officer, will now give greater insight into our performance and recent operating trends. Jeff Hackman, Kforce's Chief Financial Officer, will then provide additional detail on our financial results as well as our future financial expectations. Dave?

Dave Kelly (COO)

Thank you, Joe. Total revenues of $332 million surpassed our expectations and represented a 3% overall sequential improvement per billing day in the fourth quarter. Flex revenues in our technology and F&A businesses grew sequentially 3% and 5.7% respectively on a billing day basis in the fourth quarter. As we entered the second half of 2025, we began to see signs of improvement across much of our portfolio. The second half momentum punctuated by our Q4 sequential growth and the strong start to 2026 puts us in a position where our Q1 guidance contemplates year-over-year revenue growth on the high end and only a slight revenue decline on the low end.

Although many clients continue to take a measured approach to technology investments as they await greater evidence suggesting a sustained period of economic stability, they continue to prioritize mission-critical initiatives that require high-end talent to execute as well as investments in areas such as data and digital that are critical for the realization of their AI strategies. Our recent momentum and operating trends suggest to us that clients may be reaching a point where they can no longer wait to execute their long-term roadmap of critical technology needs and are looking to begin addressing the significant backlog of initiatives. The improvements in our business spanned many industries as evidenced by sequential growth in eight of our top 10 industries. We continue to fuel further organic investments in our consulting solutions business in response to increasing client demand for cost-effective access to highly skilled talent.

This evolution positions us to deliver greater value through flexible delivery structures and differentiated expertise. Our consulting-led offerings have continued to contribute positively to the overall results in our technology business which is further supported by a robust pipeline of qualified opportunities. The integrated approach we've taken in delivering a seamless client experience through a variety of engagement models across various technologies and skill sets is rather uncommon across our industry and has been a key driver to our success. It also has enabled us to slightly enhance our margin profile against a challenging macro backdrop and maintain stability in our average bill rates. Whereas many companies have siloed their staff augmentation in consulting businesses, our integrated approach leverages our deep long-standing client relationships as the bedrock to greatly enhance the seamlessness of the client experience and ease the buying decision.

The expansion of solutions-based engagements underscores our adaptability and commitment to meeting evolving client needs and evolving our brand in the marketplace. Our consulting solutions business has continued to organically grow over the last three years. An increasingly important aspect of providing cost-effective solutions is our ability to source highly skilled talent from outside the United States. Our development center in Pune, when combined with robust U.S. sales and delivery capabilities and a high-quality vendor network, enables us to comprehensively address client needs through a multi-shore delivery model. We've begun to see an acceleration in demand for this offering over the last few months, which is an encouraging sign as we head into 2026. The average bill rate in our technology business has remained steady at roughly $90 per hour over the past three years even amid macroeconomic uncertainty.

The growing mix of consulting-oriented engagements which typically command higher bill rates and deliver stronger margin profiles and wage inflation in technology skill sets is offsetting the pressure on our average bill rates from a greater mix of consultants in nearshore and offshore locations. Demand across our core practices, data and AI, digital, application engineering, and cloud continue to be robust and our pipeline of consulting-led opportunities is expanding. These disciplines are essential foundational pillars for the development and deployment of AI tools and we expect companies will increasingly require access to specialized talent to achieve their objectives creating significant opportunities for our firm. Our ability to provide flexible talent whether through traditional staff augmentation and consulting-oriented engagements positions Kforce to capitalize on growing investments in AI including data modernization and readiness initiatives while continuing to support core technology areas that remain active.

Our core strength lies in delivering quality talent at scale and adapting to evolving skill demands. By providing cost-effective access to the very best professionals on a nearly real-time basis who can solve complex technological challenges, we ensure our services remain indispensable even as broader industry trends fluctuate. As technology has advanced over the decades, we've consistently evolved alongside it reinforcing our role as a trusted partner in driving clients' technological progress. Looking ahead to Q1 with momentum in new engagements building throughout Q4 and carrying into early Q1, we anticipate a seasonal sequential billing day decrease in our technology business in the low single digits. Flex revenues in our FA business declined 2.4% year-over-year but saw 5.7% sequential growth in the fourth quarter.

This marks the third consecutive quarter of sequential billing day growth after declines over the past several years as we've transformed that business and further focused our efforts organizationally. Our average bill rate of approximately $53 per hour notably improved year-over-year and is reflective of the higher skilled areas we are pursuing. As to our first quarter expectations, despite unexpected seasonal sequential billing day decline in the mid-single digits, we expect F&A to be up in the mid to high single digits on a year-over-year basis for the first time since the third quarter of 2021. I want to express my appreciation to our teams for their persistence in driving positive momentum in our FA business. Over the last several years, we've made responsible adjustments to align headcount levels with revenue levels and productivity expectations. Today, we announce further refinements.

While taking these actions is always difficult, we've aligned our support infrastructure to current revenue levels and continue to prioritize the retention of our most productive associates while making targeted investments to ensure we are well-positioned to capitalize on accelerating market demand. Despite these reductions, we believe we have sufficient capacity to absorb increased demand without adding significant resources particularly as we enable AI solutions to gain greater efficiency. We remain committed to investing in our consulting solutions business as well as our other strategic initiatives that we believe will drive long-term growth in both revenues and profitability. The actions taken provide additional confidence in continuing these investments while allowing the firm to maintain its previously stated profitability objectives. We are energized by the opportunities ahead and are confident in our ability to continue delivering exceptional results and sustaining the recent momentum.

Our success reflects the deep trust and partnership we share with our clients, candidates, and consultants, relationships that continue to drive our growth and innovation. I'll now turn the call over to Jeff Hackman, Kforce's Chief Financial Officer.

Jeff Hackman (CFO)

Thank you, Dave. In my commentary, I will discuss certain non-GAAP items. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid investors in further understanding the impact of certain costs on our financial results. Our press release provides the reconciliation of differences between GAAP and non-GAAP financial measures. Revenues for fiscal 2025 of approximately $1.33 billion decreased roughly 5% year-over-year. GAAP earnings per share of $1.96 included fourth quarter 2025 charges of $0.13 related to refinements in our organizational structure and certain other costs that further streamline our operating costs net of the related tax effects. Adjusted earnings per share for fiscal 2025 of $2.09 declined approximately 22% year-over-year.

Fourth quarter revenue of $332 million exceeded our expectations and GAAP earnings per share was $0.30. Adjusted earnings per share of $0.43 fell below the midpoint of a range of guidance due to higher healthcare costs and performance-based compensation given higher levels of financial performance. Overall gross margins of 27.2% were down 50 basis points sequentially due to a decrease in flex margins principally due to higher healthcare costs, normal seasonal declines around the holidays, and a lower mix of direct hire revenues. On a year-over-year basis, gross margins grew 20 basis points as improvements in flex margins more than offset a lower direct hire mix. Our teams have done a nice job working effectively with our clients to recognize the value of our services from a pricing standpoint.

Notably, flex margins in our technology business increased 40 basis points year-over-year due to improved bill pay spreads and declined 40 basis points sequentially due to higher healthcare costs and normal seasonal declines around the holidays. The higher healthcare costs experienced in the fourth quarter were on the heels of the third quarter where healthcare costs were significantly lower than we anticipated. For the full year, healthcare costs were essentially as expected though the interquarter timing of costs is difficult to predict. We continue to refine our program through our annual renewal process to mitigate significant cost escalation and don't expect any meaningful negative impact on margins in 2026. As we look forward to Q1, we expect overall flex margins to decline as a result of normal seasonal payroll tax resets but for spreads to be relatively stable with fourth quarter levels.

We expect the seasonal payroll tax resets to impact flex margins by 60 basis points in our technology business and 120 basis points in our FA business. Overall SG&A expense as a percentage of revenue on a GAAP basis was 24.2%. As adjusted for the previously mentioned charges, SG&A expense as a percentage of revenue of 23.2% increased 120 basis points year-over-year primarily driven by deleverage from the lower revenue and gross profit levels. We have made appropriate adjustments to headcount levels, refinements in our organizational structure, and made decisions in the fourth quarter to further reduce certain other operating costs. With that said, going forward, we expect to continue to make targeted investments in our sales and solutions capabilities while maintaining investments in advancing key enterprise initiatives while impacting near-term SG&A is expected to create operating leverage and are critical to our long-term strategy.

As we have stated on prior calls, we anticipate beginning to realize benefits from our Workday implementation more significantly in 2027 post-go live. Our operating margin on a GAAP basis was 2.6% and as adjusted for the charges, operating margin was 3.6%. Our effective tax rate in the fourth quarter was 33.6% and slightly exceeded our expectations due to true-ups and certain federal income tax deductions. During the quarter, we remained active in returning capital to our shareholders with $14.1 million and capital being returned through dividends of $6.7 million and share repurchases of approximately $7.4 million. We continue to maintain a strong balance sheet with conservative leverage relative to trailing 12-month EBITDA. Looking ahead, we expect to continue to return any excess cash generated beyond our capital requirements in quarterly dividend program to be directed toward share repurchases while maintaining reasonably stable debt levels.

Our dividend remains an important driver for returning capital to shareholders, the level of which leaves ample room for continued share repurchases. Our Board of Directors recently approved an increase to our dividend, which marks the seventh consecutive year of increases. We continue to maintain significant capacity under our credit facilities. Operating cash flows were $19.7 million and our return on equity remains at approximately 30%. The first quarter has 63 billing days, which is one additional day than the fourth quarter of 2025 but the same as the first quarter of 2025. We expect Q1 revenues to be in the range of $324 million-$332 million and earnings per share to be between $0.37 and $0.45. The effective income tax rate for the first quarter is expected to be 29%, which is higher than usual due to lower expected income tax credits and higher non-deductible compensation.

While there may be some volatility in certain quarters in 2026, we expect that the effective tax rate for 2026 also could approximate 29%. Our guidance assumes a stable operating environment and excludes the potential impact of any unusual or non-recurring items. As a result of the refinements in our headcount and organizational structure along with other decisions to reduce our operating costs, we expect the annualized benefit from these actions to be approximately $7 million or roughly $0.30 per share. Our guidance for the first quarter contemplates a partial benefit from these actions given the timing of the events though is more muted in our guidance because of greater performance-based compensation given our recent operating trends, the higher effective income tax rate, and certain other non-recurring investments we are making in the first quarter of 2026.

Given the actions taken, we expect to improve operating margins in 2026 even without improvement in revenue trends, which if trends accelerate provides additional operating leverage. We remain confident in our strategic position and our ability to deliver above-market results while continuing to invest in initiatives that drive long-term growth and support our profitability objective of achieving approximately 8% operating margin when annual revenues return to $1.7 billion, which is more than 100 basis points higher than when that level was achieved in 2022. On behalf of our entire management team, I want to extend our sincere appreciation to our teams for their outstanding efforts. We would now like to turn the call over for questions.

Operator (participant)

Thank you, sir. Everyone, if you have a question today, please press star one on your telephone keypad. We'll take the first question from Mark Marcon from Baird.

Mark Marcon (Senior Research Analyst)

Good afternoon, everybody. I'm wondering if Joe, perhaps if you could elaborate a little bit in terms of some of your opening remarks. I mean, it's clearly very encouraging to see sequential improvement in terms of the revenue per billing day and how widespread it was. And then you mentioned in your remarks that perhaps there's a growing belief that returns will be generated from continuing AI but it may take longer and it may be more specific. Can you elaborate a little bit on that in terms of what you're hearing from clients and also what you're hearing in terms of the pent-up demand that has basically all the projects that have basically been delayed as companies try to ascertain what the macro future is as well as AI and what that could end up meaning to you as the year unfolds?

Joe Liberatore (President and CEO)

Yeah. Thank you, Mark. Yeah. I guess where I would start is when we look at performance going back to, I think it was in August of 2025, and I know you follow this American Staffing Association Index, which tracks changes in temporary and contract employment. That turned positive after three years of being negative. Probably no coincidence. That's when we started to see our sequential improvements, and we continue to see that through the end of the year with momentum here into 2026 being really our best start since 2022. I think to really touch upon some of the other comments I made, every day there's more articles, interviews, white papers referencing. We're clearly in the reality stage, and we're hearing from clients really moving more to that rebalancing of investment stages that I mentioned in my opening comments. Let's face reality. AI is real. It's here to stay.

However, reality that we're hearing that's setting in is the pace and complexity of executing corporate AI initiatives as compared to what I'll call more simplistic consumer AI. That's really what's been surfacing. There's a couple of good things that have hit the press here in January. One, Gartner put out a really nice piece. I don't know if you saw it. It's called Dispel the Fear of AI Displacing Jobs. That write-up really touched upon humans plus AI outperform AI and that AI being leveraged by the humans will really become the more dominant operating model. And they even specifically in that referenced the impact on software engineers. And then I think it was I think it was on I think January 21st, a really good article that Wall Street Journal put out. CEOs say AI is making work more efficient. Employees tell a very different story.

I think this gets to the heart of the question that you ask and the article really talks about the disconnect of what employees are experiencing in terms of trust, the amount of rework, accuracy, and actually the amount of time they're picking up in comparison to where CEOs and it's almost cascades from CEO to senior managers in terms of the disconnect with the employees of what they're experiencing. And what we're hearing from clients is a lot of that also has to do with the change management aspect. So even when there is a successful AI technology deployed, 70%-75% of success is attributed to change management and there's a lot of socialization that has yet to happen. I mean, we are in the early stages of what I'll call the behavioral changes which are really the primary obstacles.

So I guess the way that I would summarize that, I think the one cycle and I know Michael talks to you a lot about this when we talk about the cyclicality of contract versus FTE of where we are in the cycle, is that going to be exaggerated because now the concern of I don't want to hire people because of AI and maybe displacing it, is that going to create more demand for flexible work models? Time's going to tell on that. Likewise, I think only time's going to tell if AI is going to follow that same similar five-cycle pattern that we experienced during the internet. We are seeing it and we are hearing it from our clients but we're still in the early stages of all that.

Dave Kelly (COO)

So maybe, Joe, maybe amplify one other point that you made early on and I think maybe to Mark's question about general demand. AI is only part of it for us, right? So you mentioned what happened in the ASA stats turning positive in August. A lot of that and what we have seen in our business and we alluded to it in our prepared remarks relates to more of our traditional staff augmentation business. There are a lot of critical initiatives. They're not AI-focused that also have been greenlighted recently. So it is a combination of things. This is not an AI on, AI off thing, right? This is just a general need for high-skilled technology talent for things that are critical for businesses to continue to invest. So I think you can't disassociate that from some of the revenue trends that we've seen as well.

Mark Marcon (Senior Research Analyst)

Great. Can you talk a little bit about what you ended up seeing from clients just in terms of kind of the end-of-year dynamics? It sounds like some of your clients ended up keeping more of their consultants on staff instead of reducing them towards the end of the year and that you're starting out at a better point here in the first quarter if I'm correct on that and then what that ends up portending for the balance of the year as we kind of go through the normal seasonality.

Joe Liberatore (President and CEO)

Yeah. Actually, the momentum going into the holidays was the strongest that we've seen probably going back to the back end of 2021 meaning clients desiring to take client visits, to evaluate submittals of applicants, to interview applicants ultimately resulting in closed deals. We saw that bouncing right up to the holidays whereas these past three years, we saw things pretty much once Thanksgiving, things really lightened up. So a major difference on that front. And then moving into the beginning of the year, correct. We're at this point in time at a higher jump-off point. The best that we've seen going back to 2022 as well in terms of a jump-off and actually better than we were in 2022. So yes, they held onto more of the consultants. One of the other things we observed is they converted less of our consultants as well.

So conversions were down, which means the desire to keep those people on from a flexible standpoint versus committing from an FTE standpoint also was a significant shift that we saw this cycle. So where we are right now, I mean, if these trends were to continue, then where it leads us is we get back to our pre-holiday highs earlier in this quarter, which historically, you get there by the end of March. If the pace were to continue, we could get there a little bit early, which gives us great momentum going into Q2 and really sets up the remainder of the year.

Mark Marcon (Senior Research Analyst)

That's great. And then just on the margin side, it looks like things are holding up. It sounds like from your comments in the prepared remarks, it's basically due to the increase in terms of the consulting that and that's kind of offsetting a little bit on the traditional staff aug. Is that right? And then with the margins being up year-over-year despite the healthcare costs, how should we think about the tech flex gross margins over the balance of the year based on what you're currently seeing?

Jeff Hackman (CFO)

Yeah. Mark, good question. I think you partly answered the mixed dynamic there and no doubt as you look at our margins and our technology business, the help if you look at it from that perspective on a year-over-year basis, of course, the higher skilled areas that we're playing in, of course, are continuing to see some level of wage inflation that obviously then as we work to pass that on to clients would result in an average bill rate improvement. And from a margin perspective, they've been working effectively from that standpoint to pass those on. The mix that we're driving in our consulting solutions group, which continues to grow from an overall mixed standpoint, that continues to benefit us both from an average bill rate and in addition to that, to the overall flex margin lines.

So I really think, Mark, we started seeing some slight spread improvement starting in the second quarter of this past year of 2025. I mentioned in my prepared remarks that our teams have done a really nice job there working to be much more disciplined with the conversations that we're having with clients. That's been evident to us. We've done some training and put some incentives in place in that regard. So really proud of what our teams are doing from a pure pricing standpoint and certainly from a mixed perspective to your question, Mark, that certainly is benefiting us both from a stability in bill rate and some slight improvements that we've had in spread. As to your question on going forward, we obviously have the payroll tax resets in the first quarter. That's very traditional as you well know.

Aside from that, expect stability in spreads moving into the first quarter with a potential opportunity for us to see some continued mixed benefit as we move through 2026. Overall, very pleased and encouraged with the trends there, Mark.

Mark Marcon (Senior Research Analyst)

Great. Last one from me and then I'll jump back in the queue. Just can you talk a little bit about what the software write-off was for in terms of that $2.2 million? And in terms of the guide, are you anticipating any sort of possibility of any other restructurings or do you think the table's pretty well set now?

Jeff Hackman (CFO)

No. I think, Mark, to answer the last one first, I think the table is pretty well set. Certainly not anticipating any additional actions in the first quarter. Certainly not from a write-off perspective. And then as we communicated on the call, we made some refinements in our organizational structure as well. Part of that $0.13 that we recognized in the fourth quarter was certainly related to severance. That was about a third of that. The overall write-off of the asset was something that we had implemented many years ago and just frankly haven't gotten the value that we expected out of it and made the decision to discontinue using that in the fourth quarter but nothing that's critical to the operation of the business, Mark, moving forward.

Dave Kelly (COO)

Yeah. So the only thing I would add to Jeff's comment as it relates to your question about expectations in the future. Actually, the thought process and the timing of this action was a result of what we believe is a bit more stability and a bit better visibility. And so refining things today with an expectation that things are stable and we are optimistic in improving was the driver here. So maybe a bit contrarian if you might think about what you see other companies do, but this is a result for us of a positive expectation of what the future holds at least in the near term.

Mark Marcon (Senior Research Analyst)

Perfect. Thank you.

Operator (participant)

The next question comes from Trevor Romeo from William Blair.

Trevor Romeo (Global Services Research Analyst)

Afternoon. Thanks a lot for taking the questions. I guess maybe wanted to do one follow-up on kind of the demand confidence environment. I think in Joe's remarks, he talked about clients not being able to wait anymore to execute on some of their technology projects. I think the pent-up backlog of IT projects has been there for a while. I guess when you think about the more visits, more interviews, willingness to have conversations you're seeing now, what is it about the environment right now that's kind of making clients unable to wait any longer at this point qualitatively?

Joe Liberatore (President and CEO)

Yeah, Trevor. It's a great question and I think, again, it ties back to those five stages that I mentioned in my opening comments. Reality is set in and organizations that had started experimenting and playing with AI realize how much work they have ahead of them. So ultimately, what we're seeing is that modernization and the digital aspects and the data aspects are really what's turned up. In fact, our data practice and our digital practice are on a percentage basis our fastest growing practices. So I think many organizations got the wake-up call as they started to go down these paths with experimenting with AI just how much foundational work they need to do to really be prepared to maximize the opportunity and leverage. And modernization in these phases, this isn't something that's going to happen overnight. I mean, these are multi-year endeavors.

In fact, we've also heard more conversation at the client front of upgrades happening with ERP-oriented systems. And I think that's organizations now that had not migrated to the cloud looking to get to the cloud. So again, that they are prepared for when they can start leveraging AI, that they have the foundation set up to be able to do so.

Dave Kelly (COO)

So just to think about that translation into our business, right? So we talk about our consulting business, right? So those data and digital backlogs that we're seeing in terms of demand for talent continue to increase at double-digit rates, right, on a percentage basis. So that's part of the reason why Joe's earlier comments about the companies and the work that they need to do will manifest in a positive environment for our business and for the foreseeable future.

Trevor Romeo (Global Services Research Analyst)

Thanks, guys. That's really helpful. I guess maybe to quickly follow up on that, do you see the sequential momentum that you're seeing now as more of a I guess more of an increase of aggregate spending by clients on IT projects or is it more of a shifting around of their priorities that you guys are starting to benefit from?

Joe Liberatore (President and CEO)

Yeah. I think it's really more of a shifting around of priorities and diverting dollars in given areas into laying this foundation because they get benefit from the foundation even before they start to potentially leverage AI down the road. So it's definitely more that. I would say, in combination with that, what we're also hearing from our clients is they're tapped out internally, meaning their workforces have basically migrated to a level where they're doing everything they can internally and they don't have capacity to be assuming some of these initiatives as they're coming on. So we've been picking up some of that work as well, both from a staff augmentation standpoint and from a solution standpoint.

Trevor Romeo (Global Services Research Analyst)

Okay. Very helpful. And then maybe just one more would be I think you also talked about an acceleration in demand for the India Development Center the last few months. So would just love any more color on what's driving that, maybe any examples of wins you've had recently or anything you can kind of share on that solution would be great.

Dave Kelly (COO)

Yeah. So just as a reminder, that business that we set up is meant to provide support for our domestic project work, right? So there is, as we stated in the past, a continuing demand obviously for a more blended model because cost obviously is something that's really important. The ability to access highly skilled talent at a very attractive rate in India is something very important. So this is tying into everything that we're doing, right? So we mentioned the data and digital work, right? That is part of it, right? Any type of consulting-related engagements, in particular large companies, are the type of engagement that they'll be looking for that type of support. Additionally, obviously, given its cost-effectiveness, some of the demand that we're seeing is also in our traditional staff augmentation business.

So it really plays to both sides of our, I mean, of our value propositions for our clients. So pretty broadly, pretty broadly.

Trevor Romeo (Global Services Research Analyst)

Okay. Thank you, guys. I appreciate it.

Dave Kelly (COO)

Thank you.

Joe Liberatore (President and CEO)

Thank you.

Operator (participant)

Next up is Tobey Sommer from Truist Securities.

Tyler Barishaw (Equity Research Associate)

Hi. This is Tyler Barishaw on for Tobey. On the tech bill rates, those tech bill rates have been remaining stable for about three years. Can you maybe discuss some strategies you're pursuing to raise those bill rates this year?

Dave Kelly (COO)

Well, good question. So stable is right actually for 3+ years now. So we obviously don't make markets per se, right? So part of the reason why those bill rates are stable is the fact that there's still a scarcity of highly skilled talent in the marketplace. And so our clients recognize that. We pass through those pay rates with a reasonable margin in them. And so therefore, it is really in many respects a market-driven opportunity as we think about our staff augmentation business. From a project perspective, obviously, we're delivering, I think, a very valuable project delivery method for many of our clients and we price appropriately there. That still is a model that is very attractive relative to maybe some of the other higher-end consulting businesses that we see.

So it actually gives us an opportunity to be attractively pricing for our clients and make a reasonable margin. So again, it's a competitive marketplace. So we're always looking for those opportunities but it's about delivering the right talent and the right solutions that's going to provide the opportunity to provide price opportunities for us.

Jeff Hackman (CFO)

Yeah. And I think the only thing just to tag on to Dave's comments, I had mentioned earlier that our consulting solutions mix has been continuing to grow on a year-over-year basis. That certainly is going to help from an average bill rate perspective. And of course, the higher skilled areas that we play in, that also I think would be a help when you think about average bill rates. Dave mentioned the acceleration that we've seen in the operation, the number of consultants on assignment that we have nearshore and offshore also on a year-over-year basis has grown significantly. That would tend to put pressure on your average bill rate.

So you have a little bit of a netting effect as you look at the overall average bill rate in our technology business being stable, which we take to be an encouraging sign as you look over the last three years, especially against a difficult macro environment, against revenue declines that have been fairly persistent in the industry to have a stable average bill rate. In addition to that, seeing stability if not some slight improvement as you look at our flex margin profile as well.

Tyler Barishaw (Equity Research Associate)

Got it. And then just on operating margins, you mentioned you expect those can improve in 2026 even without revenue trends materially improving. Can you maybe just give us some guidelines for how much you think those can improve in 2026?

Jeff Hackman (CFO)

Yeah. And I think part of that's going to depend upon what the assumption is from a top-line perspective. But of course, we've continued to drive the right mix of business as we look into 2026. So you look at flex margins have improved as I mentioned in the back half of this year. So that gives us a little bit of year-over-year help from that perspective. Of course, we're continuing to get ourselves more cost-efficient. We had mentioned some of the actions that we took in the fourth quarter to refine our headcount, our organizational structure, and a few other areas. That's going to give ourselves a bit of leverage on a year-over-year basis as well. And I think I had mentioned in my commentary even if revenues were to be flat for the full year that we would expect some operating margin improvement in 2026 versus 2025.

Dave Kelly (COO)

So the only other thing I would say and Jeff started with saying the revenue trajectory is really important. So he alluded to the fact or maybe I did that we've got significant capacity in our model, right? So as productivity improves, the cost to drive revenue go down. So just as has always been the case, when revenues start to improve in this business, you generate pretty significant operating leverage. So yes, the actions that we've taken and the careful management of cost is going to help us. But we really have built this model for the long term for sizable productivity improvements and a really strong fixed infrastructure that's going to drive significant leverage as revenues increase.

Tyler Barishaw (Equity Research Associate)

Makes sense. Thank you.

Jeff Hackman (CFO)

Thank you.

Operator (participant)

The next question comes from Kartik Mehta from Northcoast Research.

Kartik Mehta (Executive Managing Director and Director of Research)

Hey, good afternoon. Jeff, maybe I know this is going to be a hard question to answer but any perspective you can give would be great. If the trends kind of continue the way they are, would you anticipate we've kind of turned the corner and we should see positive revenue growth kind of year-over-year going forward for the rest of 2026?

Jeff Hackman (CFO)

Yeah. Kartik, we like difficult questions. So thank you for that. We had mentioned I think it was in Dave's commentary and maybe in Joe's as well. As you look at our first quarter guidance, on the low end of the expectation to contemplate a slight decline on a year-over-year basis. And when you look at the high end of our expectation, it suggests some year-over-year growth. So if you look at the midpoint, it's effectively flat. It's down very slightly. In Q1, of course, the acceleration that Joe had mentioned in the first quarter that we typically see heading into the second quarter, we've seen sequential growth in the second quarter over the last couple of years. So it's certainly Kartik, as we think about 2026, provided that the macro stays relatively intact with no adverse change.

The momentum that we've built through the fourth quarter, the better start that we've had to January which is factoring into our guidance for the first quarter, it certainly could get you to the point where you could see some year-over-year growth.

Kartik Mehta (Executive Managing Director and Director of Research)

And I think, Joe, you mentioned that this is the best start since 2022. And I realize 2022 was a lifetime ago, right now seems like. But if you compared kind of cancel rates or order entry or size of the pipeline, whatever metrics you think are most relevant, how would you compare that to where we are today?

Joe Liberatore (President and CEO)

Yeah. I think well, the way I always look at the front-end indicators are probably the best indicators of what's to come. I think our client visits in Q1 so far are the highest levels that I can recall maybe in our firm history. So that tells you that clients are wanting to meet with our individuals to begin scoping work and understanding demand. So that's probably one of the more optimistic what I'll call front-end indicators that we see. Likewise, usually when we come into the beginning of the year, things are a little bit slower and there's a lull to build. We saw things hit the ground running from day one. I mean, in certain of our operating units, they jump right back to pre-holiday peak levels which again, we haven't seen that since the beginning of 2022. And 2022, it's interesting, right?

Because as we started to move to that mid-part of 2022, that's when we saw enterprise clients start to slow things down. And then as we move through the back end and into 2023, that's when things got much more challenging. So we are hearing very positive things from our people as I go around the horn and talk to all of our different regions and different individuals in operating units and some of our top-performing salespeople. Clients are wanting conversations. Order flow also jumped right back to where it was pre-holiday which usually, again, takes the better part of January to pick up. So very positive on those front-end indicators.

Kartik Mehta (Executive Managing Director and Director of Research)

Thank you. I appreciate the color.

Joe Liberatore (President and CEO)

Sure.

Operator (participant)

As a reminder, everyone, if you have a question today, it is star one on your telephone keypad. We'll go next to Josh Chan from UBS.

Josh Chan (Executive Director and Equity Research Analyst)

Hi, Josh Chan. Thanks for taking my questions. Just two quick ones from me, I think. I think, Jeff, you mentioned margin expansion in 2026. It sounds like it's maybe both a gross margin and an SG&A-driven expansion. Could you just confirm that? Because I think in Q1, it seems like you're still going through some SG&A headwind on a percentage of revenue basis.

Jeff Hackman (CFO)

Yeah. No. I think, Josh, I think it is a bit of a combination from top-line gross margins and in addition to SG&A leverage that we would expect in 2026. A couple of dynamics that I did put in my prepared remarks, the tax rate assumption that we've made for the first quarter is 29%. I also mentioned in my prepared remarks that that's the rate that we expect for the full year. Normally, you see about 26%. That's what we had for all of 2025. The drivers to that, Josh, are we had a couple of tax credits one of which was referred to as a Work Opportunity Tax Credit that we had expected might be extended. That was not extended moving into 2026. So that has a bit of an impact to the tax rate.

In addition to that, our Research and Development Tax Credits are informed by the level of spend on our Workday implementation. They incentivize you to spend more year-over-year. So that's expected to be down a bit. Then we've got some non-deductible compensation that's also driving our tax rate up. So that is part of the dynamic that you could be seeing from a compression perspective. In addition to that, Josh, I had mentioned that some of the actions that we took had a more muted effect. We are continuing to make investments in the business. In the first quarter, we're making some investments in the business that I do not expect to continue moving into the second quarter.

So we should get the full benefit of the annual benefit associated with our realignment of headcount in addition to the abatement of some of the investments that we're making in the first quarter moving into Q2.

Josh Chan (Executive Director and Equity Research Analyst)

Great. That's great color. And then I guess based on your view of the cycle and where we are, what's a reasonable path for the direct hire business from here? I know that usually lags but what's your view for that in 2026?

Joe Liberatore (President and CEO)

Yeah. So it's an interesting question because one of the things that we've been noticing is small to mid-businesses which is where we do a lot of our direct hire business, they've actually become more active. And I think it's because they've had so many years of running so lean from a staff standpoint that they're having to backfill or add to their staff to prepare. So that's what we're seeing there. When we talk about the conversions that I mentioned earlier, those conversions that we usually see which are predominantly on our tech side of our business, that's usually in what I'll call the Fortune 1000 which are actually down. So I would say from a small to mid-size, I'm pretty optimistic in terms of the direct hire.

From a large enterprise, they've actually slowed their direct hire here over the course of, let's just say, the better part of the second half of last year as we head into this year.

Josh Chan (Executive Director and Equity Research Analyst)

Great. Thanks, Joe. Thanks all for the color.

Joe Liberatore (President and CEO)

Sure.

Jeff Hackman (CFO)

Thanks, Josh.

Operator (participant)

Everyone, at this time, there are no further questions. I'd like to hand the conference back to Mr. Joe Liberatore for any additional or closing remarks.

Joe Liberatore (President and CEO)

Thank you for your interest in supporting Kforce. I'd like to express my gratitude to every Kforcer for your efforts and to our consultants and clients for your trust and faith in partnering with Kforce and allowing us the privilege of serving you. We look forward to talking with you again after first quarter 2026.

Operator (participant)

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