Kforce Inc. (KFRC) Q4 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call and Q&A indicate a positive sentiment with strong client engagement, stable margins, and a promising outlook for 2026. The company's strategic focus on AI, consulting-led growth, and flexible work models are seen as positive drivers. Despite some management ambiguity, the overall momentum and strong start to the year suggest potential stock price growth, likely resulting in a positive market reaction.

Key Financial Performance

Total revenues for Q4 2025 $332 million, a 3% sequential improvement per billing day. This growth was attributed to signs of improvement across the portfolio and sequential growth in 8 of the top 10 industries.

Flex revenues in Technology and FA businesses Technology grew 3% and FA grew 5.7% sequentially on a billing day basis in Q4. This was due to increasing client demand for cost-effective access to highly skilled talent and mission-critical initiatives.

Revenues for fiscal 2025 Approximately $1.33 billion, a 5% year-over-year decrease. This decline was attributed to a persistently weak labor market and economic uncertainty.

GAAP earnings per share for fiscal 2025 $1.96, including $0.13 charges related to organizational refinements. Adjusted earnings per share was $2.09, a 22% year-over-year decline due to lower revenue and gross profit levels.

Gross margins for Q4 2025 27.2%, down 50 basis points sequentially due to higher healthcare costs and seasonal declines. However, year-over-year gross margins grew 20 basis points due to improved Flex margins.

Flex margins in Technology business Increased 40 basis points year-over-year due to improved bill pay spreads but declined 40 basis points sequentially due to higher healthcare costs and seasonal declines.

Average bill rate in Technology business Approximately $90 per hour, steady over the past 3 years. This stability was due to a mix of consulting-oriented engagements and wage inflation in technology skill sets.

Flex revenues in FA business Declined 2.4% year-over-year but saw a 5.7% sequential growth in Q4. This was due to a focus on higher-skilled areas and organizational transformation.

Average bill rate in FA business Approximately $53 per hour, improved year-over-year due to a focus on higher-skilled areas.

Operating margin for Q4 2025 2.6% on a GAAP basis and 3.6% as adjusted for charges. This was impacted by deleverage from lower revenue and gross profit levels.

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Operating Highlights

Workday Implementation: Advancement of Workday as the future state Enterprise Cloud Application for HCM and financials.

Consulting Solutions Business: Continued organic growth over the last 3 years, with a robust pipeline of opportunities.

Flexible Talent Solutions: Clients increasingly pursuing flexible talent models to complete critical projects amidst economic uncertainty.

Multi-Shore Delivery Model: Expansion of offshore delivery capabilities in India, with growing demand for this offering.

Revenue Performance: Fourth quarter revenues of $332 million exceeded expectations, with sequential growth in Technology and FA businesses.

Cost Optimization: Refinements in headcount and organizational structure, along with streamlined operating costs, expected to save $7 million annually.

AI and Technology Investments: Focus on data modernization, AI, and digital initiatives to support client needs and long-term growth.

Integrated Client Approach: Seamless client experience through integrated engagement models, enhancing margin profiles and client relationships.

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Risk or Challenges

Economic Uncertainty: The uncertain macroeconomic landscape and weak labor market are causing companies to delay technology investments and core hires, impacting revenue growth and creating challenges in forecasting demand.

AI Investment Returns: The returns from AI investments are taking longer to materialize and are more specific to unique business problems, creating uncertainty in the technology services sector and delaying broader adoption.

Revenue Declines: 2025 marked the third consecutive year of revenue declines for Kforce, reflecting broader challenges in the technology services sector and economic conditions.

Organizational Restructuring: Refinements in headcount and organizational structure, while necessary for cost alignment, indicate challenges in maintaining operational efficiency and adapting to current revenue levels.

Healthcare Costs: Higher-than-expected healthcare costs impacted margins in Q4 2025, adding financial pressure and unpredictability to operating expenses.

Seasonal Payroll Tax Resets: Expected seasonal payroll tax resets in Q1 2026 are anticipated to negatively impact Flex margins, adding to cost pressures.

Client Hesitation: Many clients are taking a measured approach to technology investments, awaiting greater economic stability, which delays project execution and revenue realization.

Offshore Delivery Challenges: While offshore delivery capabilities in India are expanding, reliance on nearshore and offshore talent may pressure average bill rates and require careful management to maintain profitability.

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Guidance & Outlook

Revenue Expectations: Q1 2026 revenue guidance is projected to be in the range of $324 million to $332 million, with year-over-year revenue growth on the high end and a slight revenue decline on the low end.

Margin Projections: Operating margins are expected to improve in 2026 due to refinements in headcount and organizational structure, along with other cost reductions. The company aims to achieve an 8% operating margin when annual revenues return to $1.7 billion.

Capital Expenditures: Annualized benefits from cost reduction actions are expected to be approximately $7 million or roughly $0.30 per share. Investments in sales and solutions capabilities and enterprise initiatives will continue.

Market Trends: Clients are prioritizing mission-critical initiatives and investments in areas such as Data and Digital, which are critical for AI strategies. Demand for flexible talent solutions is expected to grow as companies address backlogs of critical technology needs.

Business Segment Performance: The Technology business anticipates a seasonal sequential billing day decrease in Q1 2026 in the low single digits. Flex revenues in the FA business are expected to grow mid-to-high single digits year-over-year in Q1 2026.

Strategic Plans: The company plans to continue investing in consulting solutions, offshore delivery capabilities, and AI-related initiatives. The Workday implementation is expected to deliver significant benefits starting in 2027.

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Shareholder Return Plan

Dividend Program: The company returned $6.7 million to shareholders through dividends during the quarter. The Board of Directors approved an increase to the dividend, marking the seventh consecutive year of increases. The dividend program is highlighted as an important driver for returning capital to shareholders.

Share Repurchase Program: The company repurchased approximately $7.4 million worth of shares during the quarter. Excess cash generated beyond capital requirements and the quarterly dividend program is directed towards share repurchases. The company emphasizes maintaining reasonably stable debt levels while continuing share repurchases.

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Key Q&A

Q:Can you elaborate on the sequential improvement in revenue per billing day and the impact of AI on business?

A:The CEO, Joseph Liberatore, explained that the sequential improvement in revenue per billing day aligns with the American Staffing Association Index turning positive in August 2025 after three years of being negative. He noted that AI is real and here to stay, but the pace and complexity of corporate AI initiatives are significant challenges. He highlighted the importance of change management, which accounts for 70%-75% of AI project success, and mentioned that behavioral changes are primary obstacles. He also referenced Gartner and Wall Street Journal articles discussing AI's impact on jobs and efficiency.

Q:What were the end-of-year dynamics observed from clients, and how does it affect the start of the year?

A:Joseph Liberatore noted that momentum going into the holidays was the strongest since 2021, with clients actively engaging in visits, interviews, and deal closures. Clients retained more consultants and reduced conversions to full-time employees, indicating a preference for flexible work models. The company started the year at a higher jump-off point, better than in 2022, which could lead to earlier pre-holiday highs and strong momentum for Q2 and the rest of the year.

Q:How are margins holding up, and what is the outlook for Tech Flex gross margins?

A:CFO Jeffrey Hackman stated that margins are holding up due to a mix of consulting solutions and higher-skilled areas with wage inflation being passed on to clients. The company has seen slight spread improvements since Q2 2025 and expects stability in spreads in Q1 2026, with potential mix benefits throughout the year. The company has implemented training and incentives to improve pricing discipline.

Q:What was the $2.2 million software write-off, and are there any anticipated restructurings?

A:The $2.2 million write-off was for an asset implemented years ago that did not deliver expected value. About one-third of the write-off was related to severance. The company does not anticipate additional actions or write-offs in Q1 2026. The timing of the action reflects a belief in stability and optimism for the near-term future.

Q:What is driving the demand for technology projects and the India development center?

A:The CEO explained that clients are prioritizing modernization, digital, and data projects as foundational work for future AI leverage. The India development center supports domestic project work, offering cost-effective, highly skilled talent. Demand is driven by consulting engagements and traditional staff augmentation, with the center playing a role in both areas.

Q:What strategies are being pursued to raise tech bill rates?

A:David Kelly, COO, stated that tech bill rates have been stable for over three years due to the scarcity of highly skilled talent. The company focuses on delivering the right talent and solutions, with consulting solutions mix growth contributing to average bill rate stability. Nearshore and offshore operations, while cost-effective, put pressure on average bill rates.

Q:What is the outlook for operating margins in 2026?

A:CFO Jeffrey Hackman expects operating margin improvement in 2026, driven by a mix of gross margin and SG&A leverage. Actions taken in Q4 2025, such as headcount realignment, will contribute to cost efficiency. The company has significant capacity in its model, allowing for operating leverage as productivity improves.

Q:Have we turned the corner for positive year-over-year revenue growth in 2026?

A:CFO Jeffrey Hackman noted that Q1 2026 guidance suggests flat to slightly positive year-over-year revenue growth. With no adverse macro changes, the momentum built in Q4 2025 and a strong start to 2026 could lead to positive year-over-year growth.

Q:How does the current start of the year compare to 2022 in terms of client activity?

A:Joseph Liberatore stated that client visits in Q1 2026 are at the highest levels in the company's history, indicating strong demand. Order flow returned to pre-holiday levels immediately, unlike the usual January lull. This activity is reminiscent of early 2022 before enterprise clients began slowing down.

Q:What is the outlook for the direct hire business in 2026?

A:The CEO noted that small to mid-sized businesses are more active in direct hiring due to lean staffing levels, while large enterprises have slowed direct hiring. This trend is expected to continue, with small to mid-sized businesses driving direct hire growth.

Q:Review of Unclear Management Responses

A:Management avoided directly answering questions about the specific strategies to significantly raise tech bill rates beyond maintaining stability and leveraging consulting solutions. Additionally, while they provided general optimism about operating margin improvement and revenue growth, they did not offer precise numerical guidance or detailed plans for achieving these outcomes.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

KFRC Transcript

Kforce Inc. (KFRC) Q4 2025 Earnings Call Transcript

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The earnings call reveals a stable financial performance with positive elements like sequential growth in FA business, increased Flex margins, and stable average bill rates. The Q&A highlighted strong consulting engagements with higher margins and minimal risk from H-1B visa changes. Despite some uncertainties in staffing revenue bottoming, the broad-based demand and strategic AI investments are promising. The company's return on equity exceeds 30%, indicating strong shareholder returns. Given the market cap of $1.2 billion, the overall sentiment suggests a positive stock price movement of 2% to 8% over the next two weeks.

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The earnings call presents a mixed picture: stable financial performance with strong shareholder returns, yet muted growth and project reallocations. The Q&A reveals cautious optimism about AI and technology investments but also highlights uncertainties and strategic reallocations by clients. Despite positive long-term strategies, the lack of immediate positive catalysts and stable margins suggest a neutral stock price movement in the short term, especially considering the company's market cap.

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The earnings call reveals multiple concerns: economic uncertainties, client investment hesitation, higher healthcare costs impacting margins, and a revenue decline. Although shareholder returns are strong, EPS missed expectations, and Q&A reflects cautious client behavior. Despite stable IT Flex staffing margins and aggressive share repurchases, the overall sentiment is negative due to economic and competitive pressures, and the missed EPS. Given the market cap, the stock is likely to react negatively, with a potential decline between -2% to -8% over the next two weeks.

KFRC Report

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