KFORCE INC Q1 FY2026 earnings call

• Successfully drove results in Q1 exceeding expectations in revenue and profitability, with year-over-year revenue growth for the first time in several years. • Go-to-market approach from integrated strategy efforts paying dividends, people operating as one K-force leveraging firm's capabilities. • Recent economic data shows softer labor market but leading indicators for services demand improving, companies turning to flexible talent strategies for technology initiatives, especially with AI. • Geopolitical uncertainty contributing to energy market volatility, clients focused on agility and value of flexible workforce solutions. • Made responsible adjustments to headcount, implementing refinements in Q1, with sufficient capacity to absorb near-term demand improvements. • Investing in consulting solutions business and other strategic initiatives, recently announced AI innovation studio in headquarters and AI pods in India to support client needs.

Total revenues of $330.4 million in Q1. Technology and FAA businesses had year-over-year flex revenue growth. First quarter typically has sequential revenue declines due to calendar year assignment ends, but Q1 performance was meaningfully better than average sequential decline over past 15 years prior to AI being a major topic. Q2 guidance midpoint contemplates year-over-year growth of approximately 4%. Gross margins in Q1 were 27.3%, up 60 basis points year-over-year due to expanding flex margins offsetting lower direct-hire mix. SG&A expense as a percentage of revenue was 23.2%, up 40 basis points year-over-year. Operating margin was 3.6% and effective tax rate was 30.2%.

• Expect Q2 revenues to be in the range of $344 million to $352 million and earnings per share to be between $0.67 and $0.75. • Midpoint of revenue guidance ($348 million) is up approximately 4% year-over-year and sequentially per billing day. • Earnings per share at midpoint reflects a 20% increase year-over-year. • Guidance assumes a stable operating environment and excludes potential impact of unusual or non-recurring items. • Expect to continue returning excess cash through share repurchases while being prudently opportunistic. • Anticipate positive operating cash flows of approximately $20 million in Q2. • Confident in generating at least 8% operating margin when annual revenues return to $1.7 billion.

• Heightened geopolitical uncertainty, including conflict involving Iran, contributing to global energy market volatility and sharp price increases in oil, gasoline, natural gas, and electricity. • Uncertainty in the macroeconomic environment affecting client technology spending, although investments in critical initiatives for long-term AI strategies are being prioritized. • Potential disconnect between operating trends and stock valuation impacting share repurchase decisions.

Q: Mark Marcon from Baird asked about trends by major verticals, financial services, share gain, and Indian operations' impact on gross margin.

A: Dave Kelly responded that across industries, there's stability or growth, with strength in info, manufacturing, retail; financial services had seasonal decline but stability; growth rates in excess of market, capturing share from existing and new clients; Indian operations' margin impact is nominal now but could be margin accretive in medium to long term.

Q: Trevor Romeo from William Blair asked about AI-related demand, new roles, AI innovation studio, and segment level expectations for Q2.

A: Joe Liberatore said virtually 100% of current work didn't exist 5 years ago with AI aspect in most roles; AI innovation studio provides tangible prototypes for client ideation; Q2 guidance midpoint has tech as major driver, FAA in mid to slight high single-digit range, direct hire stable.

Q: Toby Summer from Truist asked about AI groupings in India, repeatable solutions, capital allocation, and cyclical recovery.

A: Joe Liberatore said AI groupings in India work on solutions accelerating development, capital allocation with balance sheet strength, and cyclical recovery based on normal recessionary cycle dynamics.

Q: Josh Chan from UBS asked about bill spread, market competitiveness.

A: Jeff Hackman said bill spread increase is due to execution and mix, not a change in competitive environment, mix of consulting solutions benefiting margins.