Kforce's Q3 2025: Contradictions Emerge on AI Engagement Readiness, Consulting Growth, and Healthcare Cost Impact on Margins

Date of Call: November 3, 2025

Financials Results

• Revenue: $332.6 million, exceeded the high end of guidance
• EPS: $0.63 per share, exceeded the high end of guidance
• Gross Margin: 27.7%, up 60 basis points sequentially; down ~20 basis points year-over-year; Flex margins +50 bps sequentially
• Operating Margin: 4.5% (no prior-period comparison provided)

Guidance:

• Q4 revenue range $326M–$334M and EPS $0.43–$0.51 (midpoint revenue $330M).
• Q4 has 62 billing days (2 fewer than Q3 2025; same as Q4 2024).
• Expected Q4 income tax rate ~32.5%, creating ~ $0.04 EPS headwind vs prior year and ~$0.07 vs Q3 levels.
• Flex margins expected to remain stable aside from seasonal PTO impacts.
• Plan to maintain net debt near Q3 levels; excess cash to be directed to share repurchases; Board authorized up to $100M repurchase capacity.
• Expect to close a 5-year credit facility refinance in ~1–2 weeks.
• Long-term objective: double-digit operating margins and ~8% operating margin when annual revenues reach $1.7B.

Business Commentary:

* Revenue and Earnings Performance: - Kforce Inc. reported revenue of $332.6 million and earnings per share of $0.63 for Q3 2025, both surpassing the high end of guidance. - This exceeded expectations due to strong demand for its technology and FA services, despite macroeconomic uncertainties.

• Consultant and Assignment Growth:
• Kforce experienced a 4% increase in consultants on assignment from early Q3 lows, signaling stabilization and growth in demand.

• Factors contributing to this growth include strong technology business performance, increased demand across various industries and geographies, and the expansion of consulting solutions capabilities.

• Gross Margin Improvement:

• Kforce's gross margins improved to 27.7%, up 60 basis points sequentially, driven by better-than-expected Flex margins and a more favorable mix of direct hire revenues.

• The improvement was due to lower health care costs, expanded spreads, and a growing mix of consulting-oriented engagements.

• AI and Emerging Technologies:

• Kforce is seeing increased interest in AI-related projects, with a focus on foundational AI readiness and modernization of legacy systems.
• This interest is attributed to companies preparing for AI implementation and leveraging flexible talent solutions to address uncertainties in macroeconomic conditions.

Sentiment Analysis:

Overall Tone: Positive

• Management: "Results for the third quarter exceeded our expectations... revenues of $332.6 million and earnings per share of $0.63"; "We are confident in our path forward"; guidance anticipates sequential improvement in Technology and F&A and continued share repurchases and balance-sheet strength.

Q&A:

• Question from Trevor Romeo (William Blair & Company L.L.C.): You noted a ~4% increase in consultants on assignment from early-Q3 lows—is this a return to normal seasonality or something more?
  Response: Consultants on assignment rose ~4% from early-Q3 lows and continued into October; management views this as a healthy, sustained improvement but not definitively a return to pre-pandemic seasonality.

• Question from Trevor Romeo (William Blair & Company L.L.C.): What drove the stronger-than-expected Flex gross margins—was consulting mix included and were underlying spreads increasing?
  Response: Gross margin strength was driven by lower healthcare costs, a mix shift toward higher-margin consulting engagements (historically +400–600 bps vs staffing) and disciplined pricing; average bill rate remains ~ $90/hr.

• Question from Trevor Romeo (William Blair & Company L.L.C.): What is your exposure to new H‑1B fees and potential impacts to the talent pipeline?
  Response: Near-term exposure is minimal—Kforce does virtually no new H‑1B sponsorships (focus on in‑country transitions/renewals that are exempt); long-term sourcing shifts are possible but the firm believes its recruiting/compliance strengths mitigate risk and may present competitive opportunity.

• Question from Alexander Sinatra (Robert W. Baird & Co. Incorporated): What types of AI-related engagements are you seeing and how is demand evolving?
  Response: Most engagements are AI readiness work—data modernization, legacy system modernization, cloud, security/governance—with broader businesses narrowing to focused operational use cases; ROI challenges persist but preparatory work sustains demand.

• Question from Alexander Sinatra (Robert W. Baird & Co. Incorporated): Can you color the consulting contribution and where you expect it to go as AI grows?
  Response: Consulting (cloud, digital, data/AI, application engineering) is a bright, margin-accretive contributor with an expanding pipeline and growing share of Technology revenue.

• Question from Tyler Barishaw (Truist Securities, Inc.): How much revenue comes from AI engagements and what's their margin profile?
  Response: AI-related work is a growing but sub‑majority revenue stream; consulting/solutions projects generally deliver ~400–600 bps higher gross margin than traditional staff augmentation.

• Question from Tyler Barishaw (Truist Securities, Inc.): How close are you to a staffing revenue bottom and what would allow staffing to return to growth?
  Response: Staffing appears to be stabilizing—Q3 delivered sequential growth across staff augmentation and consulting and trends continued into Q4; management sees signs of firming but will not yet declare a definitive bottom.

• Question from Karandeep Singhania (UBS Investment Bank): Any benefits this quarter from prior reallocation of budgets you highlighted last quarter?
  Response: The prior-quarter client-specific reallocations were not a persistent headwind in Q3; management reports pent‑up demand and clients favoring flexible talent, reversing those earlier impacts.

• Question from Karandeep Singhania (UBS Investment Bank): Are any specific industries showing early signs of stabilization or are trends concentrated in particular markets?
  Response: Improvement is broad‑based across industries and geographies—management cannot pinpoint a single sector as the primary driver.

• Question from Marc Riddick (Sidoti & Company, LLC): Are AI/digital engagements driven more by cost-savings (productivity) or growth initiatives?
  Response: Early AI efforts emphasized productivity but successes are emerging in narrow, operational use cases with measurable ROI; the mix is shifting toward focused operational initiatives rather than broad, unmeasured productivity plays.

Contradiction Point 1

AI Engagement Demand and Readiness

It highlights discrepancies in the portrayal of AI engagement demand and client readiness levels, which are crucial for understanding market trends and strategic positioning.

Can you provide details on AI-related engagements and their demand outlook? - Alexander Sinatra (Robert W. Baird & Co. Incorporated)

2025Q3: Foundational AI readiness work is involved, especially in data management, modernization, and security. Much of the current AI work is in data preprocessing and will continue as preparation for advanced AI applications. - Joseph Liberatore(CEO)

Can you discuss the current level of AI discussions and when significant resources will be allocated for client support areas? - Mark Steven Marcon (Baird)

2025Q2: The majority of external work is focused on foundational readiness aspects. Most organizations are in the preparation phase for AI. Only about 10% of organizations are ready to leverage AI fully. - Joseph J. Liberatore(CEO)

Contradiction Point 2

Consulting Growth and Market Positioning

It underscores inconsistencies in the description of consulting growth and market positioning, which are critical for investors' understanding of the company's strategic direction and market capitalization.

What is the size of consulting contributions and their prospects as AI gains prominence? - Alexander Sinatra (Robert W. Baird & Co. Incorporated)

2025Q3: Consulting contributes positively to growth, especially in cloud, digital, data, AI, and application development. There is a growing pipeline of qualified opportunities, particularly in data and AI, as clients invest in readiness initiatives. - David Kelly(COO)

What drove the sequential growth in the FA business, and is the repositioning complete? - Trevor Romeo (William Blair)

2025Q2: The sequential growth in the second quarter and expected continued growth in the third quarter are due to a focus on higher skill sets. The repositioning of the business to higher value areas has been effective, with an average bill rate in the mid-50s. The business is now stable, with strong execution by the team. - David M. Kelly(COO)

Contradiction Point 3

AI and Consulting Demand

It involves differing perspectives on the demand and impact of AI-related engagements, which is crucial for understanding the company's strategic focus and potential growth areas.

How significant is consulting revenue contribution and its growth outlook with AI's increasing prominence? - Alexander Sinatra (Robert W. Baird & Co. Incorporated)

2025Q3: Consulting contributes positively to growth, especially in cloud, digital, data, AI, and application development. There is a growing pipeline of qualified opportunities, particularly in data and AI, as clients invest in readiness initiatives. - David Kelly(COO)

What areas are driving your technology business as AI initiatives grow? Can you elaborate on client feedback and factors that would prompt them to act on delayed projects? - Mark Marcon (Baird)

2024Q4: While there is a growing conversation around AI, the emphasis is on data cleanup and rationalization, which is becoming an increasing business opportunity. The current focus for clients is on critical technology initiatives, and there is no specific event that would trigger them to initiate projects. - David Kelly(COO)

Contradiction Point 4

Healthcare Costs Impact on Margins

It involves changes in the impact of healthcare costs on margins, which are critical for understanding the company's financial health.

How much did the consulting mix shift contribute to gross margin improvement, and what drove the 50-basis-point spread increase? - Trevor Romeo (William Blair & Co. L.L.C.)

2025Q3: Flex gross margins improved due to significantly less pressure from healthcare costs. - Jeffrey Hackman(CFO)

Is the health care cost impact a one-time event or an ongoing cost increase? - Tobey Sommer (Truist)

2025Q1: Higher health care costs are due to claim severity rather than volume. The costs are factored into our annual pricing. - Jeff Hackman (Chief Financial Officer)