KFRC - NASDAQ

Good afternoon, everyone, and welcome to the Kforce Q2 2025 Earnings Call. As a reminder, this call is being recorded. At this time, I would like to hand things over to Mr. Joe Liberatore, President and CEO. Please go ahead, sir.

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 risks and uncertainties. Actual results may vary materially from the factors listed in Kforce's public filings 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 our Investor Relations portion of our website. Against the backdrop of a macroeconomic environment that has faced heightened uncertainty for a prolonged period of time, we are pleased to have delivered sequential Flex revenue growth in both our Technology and Finance and Accounting businesses in the second quarter. Overall results were largely consistent with the expectations and I'm proud of how our teams are continuing to execute and take market share. While the enactment of the One Big Beautiful Bill removed some uncertainty related to tax policy, the global trade negotiations and potential retaliatory measures are far from settled and the potential derivative negative effects on the U.S. consumer and broader U.S. economy remain highly uncertain as exhibited by continued mix economic data. Conversations with our clients, which are predominantly market-leading companies, and our operating trends suggest that we are continuing to operate in a demand-constrained environment. With that said, our clients continue to carry a significant backlog of strategically imperative technology investments that they expect to execute once greater positive visibility exists. Over the past 3 years, job gains have been concentrated in a handful of sectors, health care, leisure and hospitality, construction, education and government. These areas have driven the bulk of the labor market growth. Outside of these sectors where our client presence is modest, job creation has been minimal to nonexistent. Unemployment claims have remained low, which suggest that companies, broadly speaking, continue to be reluctant to lay off workers after allowing natural attrition to downsize their workforce over the last 3 years. These data points, when combined with the increasing backlog of critical technology initiatives, suggest to us that companies may not have sufficient capacity and an expanding economic environment that is free of the current significant macro uncertainties. In addition, 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. The emergence of AI may intensify this trend as companies prioritize agility until they gain clearer insight into how these technologies will reshape their overall talent strategies. Generative AI continues to dominate the headlines, has become a fixture in conversations with our clients and our people. As we have previously articulated, over the long term, we believe that AI and other innovative technologies will continue to play an increasing role in powering businesses. This is informed by decades of experience operating in the technology sector, where we have seen new and disruptive technologies introduced such as the rise of the Internet, the mobility revolution and proliferation of applications and the transition to cloud-based technologies to name a few. Each of these technology evolutions went through similar phases where companies look to understand the technology, assess the implications on their business, determine their strategy, begin to assemble their road maps and take advantage of the technology. There were also concerns in the early phase of these evolutions of disruption to certain areas of the labor market. What eventually unfolded through each was the creation of new roles, expansion of existing roles and redefinition of roles which led to the acceleration of additional technology investment. We believe we are in the early phases of genAI. And while the demand we are seeing is not yet evident at scale, we are seeing meaningful opportunities with market-leading companies to assist them in aspects of their overall genAI journey. Dave Kelly will cover this in more detail. Access to the right talent will be at the heart of company's success in preparing and utilizing these new tools. We are ideally positioned to meet what we expect to be an increasing demand in AI foundational readiness work in combination with our ability to access evolving skill sets that will be required as companies move deeper into their AI road maps. We remain strongly positioned to further expand our footprint within existing clients while continuing to expand in new clients to take additional market share as we've been doing successfully for years, reinforcing the foundation we are building to deliver substantial long-term value for our shareholders. As we look ahead to the third quarter and the remainder of 2025, as has been the case over the last few years, we will continue to stay close to our clients and monitor our key performance indicators and make any necessary adjustments to our business while continuing to invest in our long-term strategic priorities with a keen focus on retention of our most productive associates. We remain encouraged by recent trends that continue to affirm the stability of our Technology business. We've established a strong foundation at Kforce and remain committed to investing in the transformation of our business through our strategic priorities, all of which are meaningfully progressing. 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 turning the call over, I want to take a moment to recognize the incredible people who make up our Kforce team. I am deeply proud of the performance, resilience and unwavering commitment shown across the organization. We're privileged to work alongside such talented, united and passionate group of professionals. It's because of the people who make up Kforce we're in such a strong strategic position, one I wouldn't trade with anyone in our space. The future is bright, and I couldn't be more excited about what lies ahead. Dave Kelly, our Chief Operating Officer, will now give greater insights into the 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?

Thank you, Joe. Total revenues of $334.3 million declined 6.2% year-over-year and were largely consistent with our expectations. Flex revenues in our Technology and Finance and Accounting businesses both improved slightly sequentially in the second quarter, while Direct Hire revenues were more challenged in the quarter, given the sensitivity in this line of business to macro conditions and came in below our expectations. While macroeconomic uncertainties have largely persisted, our clients continue to prioritize mission-critical initiatives though given the backdrop continue to take a measured approach, while they await a period of greater confidence. As increasingly requested by our clients, we've continued to drive with strategic intent, a greater mix of our business through consulting-oriented solutions that align with the desire to access highly skilled talent in a cost-effective manner. Demand for our consulting-led offerings remains strong as evidenced by continued sequential and year-over-year growth and a growing pipeline of qualified opportunities. This offering continued to be a key driver to our overall Technology top line outperformance versus our peers and stability in our margin profile and average bill rate. This growth highlights our adaptability and our success in meeting the changing needs of our clients. While our traditional staffing business has seen year-over-year revenue declines, the expansion of solutions-based engagement underscores our strategic shift and the increasing value clients place on our capability to provide talent through various delivery structures. 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, combined with our robust U.S. sales and delivery capabilities and a high-quality vendor network, enables us to comprehensively address the evolving needs of our clients whether onshore or blended onshore, nearshore or offshore teams. The overall average bill rate in our Technology business of $90 has remained stable over the past 3 years despite the uncertain economic environment due to a higher mix of consulting-oriented engagements which carry a higher average bill rate and margin profile. The demand within each of our practice areas, data and AI, digital, application engineering and cloud has continued to be strong, and the pipeline of consulting-oriented engagements has continued to improve. Each of these areas are critical to the preparation and implementation of AI tools and companies are expected to need access to critical talent to meet their objectives, which we believe provides significant opportunity for our firm. Joe referenced the opportunities we're seeing in the overall AI space. We thought it would be helpful to articulate a few examples on how we're partnering with clients. In a recent engagement with a market-leading technology company, we're partnering with one of their key organizations to implement agentic AI workflows. These AI-driven solutions enhance end user productivity and efficiency while also unlocking deeper insights through improved visibility into data patterns and trends. In another engagement with a top-tier networking technology company, we help drive measurable value by equipping their sales organization with agenetic AI-powered workflows. These solutions are designed to sharpen pipeline visibility and guide sales teams toward the most strategic next actions, ultimately accelerating deal velocity and improving alignment with customer priorities. Our focus on providing flexible talent via traditional staff augmentation engagements or through our consulting-oriented engagements, especially in times of uncertainty, positions Kforce ideally to participate in the growing investments in AI, including the required readiness work in addition to more traditional areas of technology that are still progressing. Our ability to source and provide top-tier professionals who can address complex technological challenges has ensured that our services remain indispensable, even as overall industry trends have slowed. Our core competency lies in sourcing quality talent at scale for our clients, adapting to evolving demand for various skill sets. As technology has evolved over the decades, we've efficiently adapted to the changing skill set demands of our clients, ensuring we remain a trusted partner in their technological advancements. Our client portfolio is diverse and is predominantly comprised of large market-leading companies. Our focus on addressing their needs continues to be critical to our ability to drive sustainable, long-term above-market performance. Looking forward to Q3, the pace of overall new engagements and project ends remain stable with Q2 levels, though clients continue to reallocate spend within their businesses to areas they find most promising. As a result of such actions and a small number of clients at the end of Q2, we experienced some unanticipated project ends and therefore expect a modest sequential decline in our Technology business in Q3. Flex revenues in our FA business, currently about 6% of revenues, declined 16.8% year-over-year. But as previously noted, we saw a sequential growth in the second quarter, the first time in several years that this quarter has seen expansion. Our average bill rate of approximately $54 per hour notably improved sequentially and year-over-year and is reflective of the higher skilled areas we are pursuing. We expect Q3 revenues in FA to be up sequentially on a billing day basis in the mid-single digits. I want to thank this team for their perseverance in driving positive momentum in this space. An area where we've seen the most significant impact from the economic uncertainty is in Direct Hire, which represents approximately 2% of overall revenues. We expect Direct Hire to be relatively flat sequentially in Q3. We continue to align our associates a staffing levels with productivity expectations, prioritizing the retention of our most productive associates while making targeted investments to ensure we are well prepared to capitalize on market demand as it accelerates. Over the past 3 years, we selectively invested in our sales teams while rationalizing our delivery resources, which have decreased by close to 45% over that time period. Despite these reductions, we believe we have ample capacity to absorb several quarters of increased demand without adding significant resources. Additionally, we continue to invest in our consulting solutions business. We believe the slight sequential growth we experienced in Q2 reflects the continued stabilization of demand. We remain tremendously excited about our strategic position and our ability to continue delivering above-market performance in our Technology business as we have for well over a decade. The success we achieve as an organization is a testament to the unwavering trust that our clients, candidates and consultants place in us. I'll now turn the call over to Jeff Hackman, Kforce's Chief Financial Officer.

Thank you, Dave. Second quarter revenue of $334 million and earnings per share of $0.59 were both largely consistent with our expectations. Overall gross margins increased 40 basis points sequentially to 27.1% due to an increase in Flex margins of 80 basis points, primarily resulting from the seasonal pickup in payroll taxes. This was partially offset by a lower-than-expected mix of Direct Hire revenues. On a year-over-year basis, overall spread and business mix have been stable though gross margins declined 70 basis points due to higher health care costs and lower Direct Hire mix. Flex margins in our Technology business increased 70 basis points sequentially due to the alleviation of Q1 payroll tax resets. Flex margins in Technology declined 30 basis points year-over-year due to higher health care costs, which were partially offset by slightly improved spreads. As we look forward to Q3, we expect Flex margins to remain stable. Overall, SG&A expenses as a percentage of revenue of 22.2% were within the range of our expectations as we have continued to manage productivity and profitability levels well. SG&A expenses as a percentage of revenue increased 40 basis points year-over- year, primarily driven by deleverage from lower revenue levels and higher health care costs, which were partially offset by leverage gained from continued refinements in our head count and lower performance-based compensation. We are continuing to make targeted investments in our sales capabilities, while tightly scrutinizing spend in all other areas of our business. We also continue to advance our enterprise initiatives, which contributes to some of the negative leverage we are seeing in SG&A costs, including the implementation of Workday, the maturation of our India development center and further integration of our solutions offering, all of which are expected to significantly contribute to our longer-term financial objectives and prepare us well for when companies more aggressively invest in their technology initiatives. We expect to begin to realize the benefits of our Workday implementation towards the end of 2026 as we stabilize ourselves post go-live with 2027 as the year we would expect to begin to realize significant annualized benefits. Our operating margin of 4.5% and our effective tax rate in the second quarter was 24.6%. The effective tax rate was slightly lower than we expected due to a favorable adjustment in certain 2025 tax credits in the second quarter. We also expect a lower effective tax rate in the third quarter related to the finalization of 2024 tax credits and our income tax returns. During the quarter, we remained active in returning capital to our shareholders with $17.4 million in capital being returned through dividends of $6.9 million and share repurchases of approximately $10.5 million. We continue to carry a very solid balance sheet and historically conservative leverage against trailing 12 months EBITDA levels. As we move forward, we intend to maintain net debt levels relatively consistent with where we ended the second quarter of roughly $67.5 million. Any excess cash the business generates beyond fulfilling our capital requirements and quarterly dividend program will be utilized to repurchase our shares. Of course, we have significant remaining availability under our credit facility to get more aggressive in repurchasing shares if we believe there is a disconnect between our operating trends and expectations and our valuation. Operating cash flows were $18.4 million, and our return on equity continues to exceed 30%. We continue to execute our organically driven business well, and we believe our industry-leading relative performance is a result of our intense focus in technology staffing and solutions in the U.S., augmented by our nearshore and offshore capabilities. We continue to carry a pristine balance sheet with conservative debt levels and return significant capital to our shareholders. This consistent repurchase activity continues to be strongly accretive to earnings. We have returned approximately $1 billion in capital to our shareholders since 2007, which has represented approximately 75% of the cash generated, while significantly growing our business and laying a foundation for significant profitability gains as revenues grow. Our threshold for any prospective acquisition remains very high. The third quarter has 64 billing days, which is the same as the second quarter of 2025 and the third quarter of 2024. We expect Q3 revenues to be in the range of $324 million to $332 million and earnings per share to be between $0.53 and $0.61. Our guidance is based upon the assumption of a continuation of a stable environment and does not consider the potential impact of any other unusual or nonrecurring items that may occur. We remain excited about our strategic position and prospects for continuing to deliver above-market results while continuing to make the necessary investments to help drive long-term growth and enable us to achieve our longer-term profitability objective of attaining double-digit operating margins. As we mentioned previously, we expect operating margins to approximate 8% when we return to $1.7 billion in annual revenues, which is more than 100 basis points higher than when that revenue level was achieved in 2022. This improvement is being driven by the expected benefits derived from investments in our strategic priorities, which will drive down operating costs. On behalf of our entire management team, I'd like to extend a sincere thank you to our teams for their efforts. We would now like to turn the call over for questions.

[Operator Instructions] We'll take the first question from Mark Marcon, Baird.

Joe, you mentioned where we are in terms of AI, and you mentioned a few projects that you guys have been working on. Can you just talk a little bit more about the levels of discussion that you're having there? And when you think the spigot will actually turn up to a greater extent in terms of the areas that you can really assist clients in? Obviously, there's lots of questions about that.

Yes, it's a great question, Mark. It's good to hear from you. I'd say, when we look at the external environment, the majority of the actual work our teams are focused on continue to be with clients in and around the foundational readiness aspects associated with governance, data, cloud and security. Most organizations continue to remain in what I would call this preparation phase associated with AI. On the use case side of things, we have worked, and I think Dave Kelly touched upon some of this in his opening comments, with some technology clients which are further ahead of the curve to leverage AI aspects really within their products. I would say -- I would really say that's the exception versus the norm right now. There's a couple of studies out there that kind of estimate that about 10% of organizations are really fully equipped to truly leverage AI. And I would say those are really -- most of those organizations are on the technology. Of course, there are some that are outside of technology. But in general, that's what I would categorize it up. So I think there's a significant opportunity, especially in and around data, which this is not going to be a short horizon for organizations to get their data organized, do everything they need to be able to leverage future AI opportunities. And then the whole digital aspect. This is where we see a lot of modernization activity going on. Similar to what we're doing here at Kforce, right? I mean we're in the stages of implementing Workday from our legacy PeopleSoft environment, and that's going to prepare us so that we can fully take advantage and leverage AI down the road. And that's kind of what we're seeing within our particular customer set. So hopefully, that gives you a little bit of flavor.

That's very helpful. And then there was a comment with regards to -- if we take a look at the sequential trend for Tech Flex going into Q3 where there was -- it sounded like there were a few project ends that came along unexpectedly. Can you talk a little bit about what you're seeing in terms of those early project ends? I've been hearing a number of comments from other companies along the same lines. And I'm just wondering, are these projects that are ending because the budgets just don't allow for them to continue? Are they bringing those projects in-house? Any sort of color that you could provide would be really helpful. Or do you expect those projects to resume?

Yes. Mark, this is Dave. Yes, you're alluding to the comment we made about those a couple of clients that we saw some unanticipated ends at the end of the year. So maybe to kind of give you a bit more color because we've made some commentary around what we see as some general stability in the marketplace, to give you some perspective, right, of ends and/or what we're seeing and have been seeing over the course of the last couple of quarters, and I'll share a little bit of color on these ends as well of these projects. So we've really seen over the course of the last couple of quarters, Q1, Q2 and certainly into the third quarter, some real stability in the new assignments that we've seen, the new project wins that we've had, some stability in starts, if you will. And actually, clients looking to maintain the resources, we've seen attrition levels be a little bit lower than we had anticipated. Frankly, that had resulted in as we were into -- other than the last couple of weeks of the second quarter, we'd actually seen mild increases in the amount of consultants that we had seen on assignment. So pretty consistent with what we had seen in the first quarter and then similar to what we've seen in the first few weeks of the third quarter as well. And then right at the end of the quarter, really, the last couple of weeks of the quarter is when we saw these ends. Just as a specific example, I would tell you, we were actually in the throes of discussing an extension and an increase in the number of consultants for the projects that we're undertaking. And right at the end of the quarter, the client basically decided that they found a better utilization of that investment in another technology project, and they ended our -- unexpectedly really, ended this project as opposed to increasing it. So this was not a reduction in spend -- technology spend. It was just a reallocation of spend. Unfortunately, it was in a project that we weren't participating in. So I mean I look at all of those things, those -- the data set that I just shared with you and what has happened here, and frankly, as we think about what we've listened to over the last couple of weeks, the general tonality of stability, and I think it really resonates with us that we're seeing very, very stable investment environment in technology.

How would you characterize the pipeline right now?

That's a really good question. I would say the pipeline continues to be, well, strong. I think Jeff alluded to the fact that we still see a lot of pent-up demand on more of those legacy projects that clients are looking to invest in, that they were looking for some greater insights as to an inflection. And I think we're benefiting potentially in the near term with some greater certainty in the marketplace. But additionally, and maybe more specifically to your question, we have seen a pretty significant increase in the pipeline in the areas that Joe mentioned a minute ago, data, digital, clearly, there's additional spend there. So there's building pipeline, I think, generally in the hopes that we see some improvement in the economic landscape for those projects that are waiting on the sidelines. And then we're also seeing investments in areas that are essential as we've always said, and data preparation and AI preparation is one of those areas where the pipeline actually is building. So I think, generally speaking, some promising indicators for us.

Great. And then can you just talk to what extent do you see companies potentially holding off on some legacy projects that they had on their pipeline just because they're uncertain about what the impact of AI is going to be in terms of potentially making those legacy solutions obsolete or really out of date and therefore, just being a little bit uncertain just from where we are from a technology development perspective.

Yes. I don't think thematically that is what we're hearing, Mark, frankly. I think what we continue to hear, it's really the story remains the same. There's a lot of work that needs to be done, right? Everything that is being done in technology is not being done in AI. Yes, there is investment there. But there's a lot of work, I can say that is true for our own shop. We are always looking for people to do a lot of work here. We've got a transformation in our back office. We've got a lot of resources that we are looking for internally as well as through third parties to help us with that. A lot of companies are going through the same thing. And what the hesitancy is, is saying, great, I can see value being derived from these investments, but they're looking for, because of the economic uncertainty, a more immediate return and therefore, are hesitant to pull the trigger. So I don't think that really that story has changed. And it's not a matter of them saying, we're not going to really spend this money at great scale because we're waiting for AI to change everything. As a matter of fact, as Joe alluded to, there's a lot of preparatory work. There's years, we think, of work that needs to happen in order for companies to realize those benefits. So you can't just wait years and I don't think companies are willing to do that as it relates to AI. It's more economically driven than anything else.

Yes, Mark, and I would add on to that, that a lot of what we're seeing is what I'll call for a broader term, modernization. Organization, the legacy systems that you're talking about, yes, they're redirecting dollars to modernize those systems so that they can be positioned for AI. But the spend is still there. Are people continuing to maintain legacy systems only because they have to? One of the hypothesis out there is AI could be the catalyst to one day retire the legacy COBOL systems that I used to place programmers in about 37 years ago, I think most of them are retired at this point in time. But I do think that AI can assist. And there was a really good article, Wall Street Journal, I think it was probably about a month or 1.5 months ago, talking about Morgan Stanley's situation of migration of their COBOL and how they're leveraging AI. But it's not like you just throw this at AI and it rewrites the code and now you have a new system. What it's really helping them with is basically to get out all of the information so that now then they can start the development and migrate that to more modern systems. And then the next phase of that like we've seen with other situations with secular shifts, we're beginning now to hear about a lot of newer roles that are being introduced. In fact, there was an article just read recently that one out of every four jobs posted from a tech standpoint have something AI related. And we're seeing new jobs come out, not just the prompt engineers, but AI support specialists, automation support managers, AI security engineers, AI project managers. And that will be that whole next wave as organizations get through the data and the modernization aspects, which is a long journey for most organizations to get there.

The next question today comes from Trevor Romeo, William Blair.

I had one to start on the FA business. I know it's a smaller part of the company. But you pointed out the sequential growth in Q2. I think you expect it to grow again in Q3, just given the trends have been, I guess, the reverse of that for a long time now. So any more color on what's driven the trends to flip positive there? And are we now at the point where you think the sort of repositioning you've been working on is fully done?

Yes. Trevor, this is Dave. I appreciate the question. First of all, I think it goes without saying we're exceptionally proud of this team and the work that they have done. As you pointed out, it's been a couple of years here of probably some painful times for them and have really done a great job. Yes, we've been in the process, as you said, repositioning this business, the success here that we're seeing recently is a redoubling really of focus in building an executable model. We've got a highly tenured team, right, as you would imagine, over the course of time, given the size of the revenue stream, the best and brightest are still here. And obviously, you can rely upon them. They're executing well. You had mentioned that we saw sequential growth in the second quarter, and we're signaling again that we expect even stronger sequential growth. So I think the repositioning of the business to higher skill sets, right, we're out of the administrative F&A work. And we're clearly with an average bill rate in the mid-50s in the accountant and above, analyst type of territory, which we think marries quite well to what the needs of our clients, our more sophisticated clients are in our technology footprint. So we're very pleased with that synergy. I think that we're going to see on a go-forward basis, I think it's fair to say with a couple of quarters of sequential improvement that certainly things have stabilized here. We expect stability and great execution from the team. Obviously, the market itself is going to be a factor in our continued success but feel really good about where we are and the future of how -- where F&A is.

That's great, Dave. Would you say, I guess, that that's more reflective of, I guess, Kforce's specific execution in the area? Or any sort of uptick in demand that you're seeing or maybe a little bit of both?

Yes. I think it's a couple of things, right? Like I said, we've got some exceptional people. We've got -- I think the average tenure of this group is more than 10 years, right? So you got to have a lot of experienced people who are very good at what they do. The market itself, I think it's fair to say it's not great per se, but they're executing well. We've got a great client base, right? One of the things that Kforce has the great benefit of is great relationships over a long period of time with nameplate companies. And so I think it's a function of our footprint, the simplicity of our model and the capability of our people more than the market.

Okay. That's great. And then I just wanted to ask quickly on -- I guess, on gross margin, I think it came in a little below your guidance in the past couple of quarters. So the question is, is the health care cost issue, I guess, is it still unfavorable to your expectations? Is it primarily a Direct Hire mix issue because that has a big impact on the margins? Because I know you've said that the bill/pay spreads have been pretty stable. So just any more color on the pieces there would be helpful.

Yes. Trevor, it's Jeff. Appreciate the question. Yes, I think the net of the story when you look at second quarter results is direct Hire Mix certainly came down in the second quarter, and that put a bit of pressure on overall gross margins. Really the story when you look at our -- both our Technology and our FA Flex businesses, both are behaving somewhat similar from a stability standpoint. If you look back to the last 1.5 years and our Technology Flex margins have been very stable. Health care costs on a year-over-year basis were still up. But against our expectation that was not a driver, positive or negative, in the quarter. So the stability that we have been seeing in our Flex margin profile, we continue to see moving into the second quarter. Actually, when you look at a year-over-year basis, spreads are actually slightly improving in our Technology business. So that helped to offset some of the increased health care costs year-over-year. Sequentially, we received the same seasonal payroll tax benefit that we traditionally see. Again, health care cost was not a driving factor sequentially and spreads improved very mildly in our Technology business sequentially. And frankly, going forward, we've been seeing stability. We would expect stability moving forward. We've talked, part of the reason for that stability over a longer-term period of time is the progress with our consulting-oriented solutions. That continues to contribute positively to our financial performance and the gross margins in that line of business are still 400 to 600 basis points higher. So we certainly get the mix benefit up there. So a little bit longer, Trevor, than maybe what you're looking for, but hopefully, that helps.

Tobey Sommer from Truist Securities has the next question.

In terms of offshore, you mentioned that as a bright spot. Does the company have a wide enough array of sort of different price points because of the footprint that you have to be able to offer sort of as many menu choices as customers may want?

Yes. Tobey, this is Dave. Our footprint in Pune has been built specifically to complement the skill sets that we are utilizing and placing here domestically. So as we've mentioned before, clients obviously are looking for ways to be more cost effective. They're driving requests through blended models, both to provide talent onshore, nearshore, offshore. So the intent of this endeavor here has been to support the revenue footprint that we have in the United States. So what I mean by that is we are not and we don't intend to build a delivery center in India to expand the type of roles that we are placing, right? We're not going to build help desk service centers to capture revenue. This objective here is meant to help drive revenue in the United States specifically. So it's relatively speaking, narrowly focused. We are obviously narrowly focusing skill sets, broadly focusing -- broadly focus is a bit of an oxymoron, the footprint to meet the needs of all of our clients, however, because I would say the vast majority of clients are looking for this type of service.

Okay. From -- looking at your guidance, how would it compare, do you think, versus what would seasonally happen sequentially to your revenue, gross margin and in bottom line in the third quarter? It's been a while since we've had a seasonal norm because the industry has had a few years here of declines and off the great resignation when things were crazy good. So what would it look like historically?

Yes. Tobey, this is Jeff. Totally fair question. I think I'll answer the third quarter. I think in the second quarter, when we were sequentially positive in both our Technology Flex and our FA Flex business, what would typically be the case is somewhere probably closer to 3%. In the second quarter, we came in slightly positive. Typically, for us, the second quarter is obviously the highest sequential billing day increase coming off the seasonally low first quarter. As you go into the third quarter, the growth there is certainly a bit more muted. I guess, Tobey, I'll give you a comparison maybe on pre-COVID, it was probably around 2% sequential might be an average pre-COVID because we had certainly 2020, which was anomalistic. And then we had the hyper growth in '21 and '22 and then relatively subdued growth since then. So what might be normal is maybe somewhere closer to 2% on an average for a third quarter sequential in [ Tech. ]

Okay. I appreciate that. And could you remind us on the cost saves associated with Workday in '27 and thereafter? And are there additional saves from the other internal investments that you'd care to quantify?

Yes. I think, Tobey, to answer your first question on our Workday implementation and we've given this comment over the years, certainly compared, Tobey, to the level of investment that we currently have with our Workday implementation, we expect 100 basis points of net benefit throughout that Workday implementation. We've commented and Dave Kelly, I think, mentioned it in his prepared remarks that we would expect a go-live in 2026 and towards the end of the 2026 to start to inure the benefits associated with that program, with a kind of a full annualized benefits post go-live in 2027. So about 100 basis points is the way to think about it from an operating margin standpoint, largely getting to that point in 2027. As to the other enterprise priorities, certainly, and Dave commented on our Pune presence. We've talked there that the opportunity for us, certainly at a lower bill rate overall, but we would expect the Flex margin profile on that business to be better as we pursue a blended onshore and offshore mix of business. I would say, Tobey, that's -- yes, that's a contributor, but not a significant driver to our future profitability. And then certainly, the path for us on driving to a higher quality revenue stream through our integrated strategy efforts certainly is part of the overall equation and getting us to that, I'll give you the nearer term [ bogey ] of the $1.7 billion and 8%. So certainly, some significant contributors there as we move forward that we didn't have when we reached that level in 2022.

[Operator Instructions] Josh Chan from UBS is next.

I guess, Dave, you mentioned one example of a project end. But I guess as you think about the totality of all the project ends that kind of are impacting this trend, is there any common thread that you can pull from just a combination of all the ends? And then I just want to confirm that excluding those project ends, are you expecting the rest of the business to be in line with normal seasonality?

Well, I don't know that there's a lot of seasonality in Q2 to Q3. But I would say, generally speaking, thematically, this is a matter of projects and ending, right, kind of normal in some respects, although in a couple of these cases, we didn't necessarily anticipate them to end when they did as a result. The other thing, I think important to note thematically, these resulted in reallocation of technology investments with these companies to other projects that we weren't participating in. So -- and then the other thing I would mention to you in terms of the portfolio as a whole, just to kind of reiterate what I was commenting about. Absent these couple, I think for us, a bit of a surprise, ends at the end of the quarter, we were actually trending positively in terms of what the revenue trajectory in Technology was until literally the last couple of weeks, which is why we saw sequential growth from Q1 to Q2. And then our Q3 guide that's obviously coming off a lower baseline. So again, I think the sentiment here is one of stability. The sentiment here is one of companies engaging us at the same rate as we have. Again, you get surprises from time to time. This is just one of those.

Yes. What I would add to that is I think what we're seeing from clients in general is a heightened strategic competitive evaluation on a regular basis, which is really driving the shift of spend. So it really -- it manifests itself in 2 ways. Inside what I would say is the Fortune 500 where we work with 70-plus percent of the Fortune 500. They may have a division or a product that they conclude they are not going to be competitive within, and that's the example of what happened to us on the back end of Q2. The decision was made that we're not going to be competitive with this initiative. We're going to basically disband this, and we're going to redirect those dollars in area where we believe we can be competitive with the products that we're bringing to market. I think you have that one phenomenon going on. And then the other phenomena is you do have unique clients in any given industry that are not par with their competitive landscape and they're adjusting accordingly. So those are really the two more, what I would say, macro drivers that we're seeing.

That's really helpful color. And then I guess -- yes, of course. I guess my other question is on the nearshore, offshore dynamic. Obviously, it has some impact on your hourly rate, but is there a margin impact too, as more of your business potentially shifts in that direction?

Yes. Yes, Josh, actually, again, it's a small part of the business. So it's not having a meaningful impact on either bill rate or margin right now. But I can tell you, with the work that we have done over there, it has been actually slightly accretive to margin, right? So it has a positive impact, at least from what we've seen so far. But again, I would tell you at this point, I wouldn't dial that in either. It's been relatively neutral, even though we've had some good early success.

Yes. And Josh, the only thing I'd add to that, when you look at our average bill rate in Technology, you look at Q1 was sequentially up from Q4. We had a very slight decline from Q1 to Q2. So I wouldn't read into that being the progress that we're making in our nearshore and offshore. That's just natural puts and takes with the average bill rate. Think about that, Josh, as a stability over a very long period of time. I think if you go back, gosh, probably 3, 3.5 years, our average bill rate in our Technology business has been hovering in that $90 an hour range while we have been working to offer a multi-shore delivery model to our clients leveraging nearshore and offshore. The balance of that is the more consulting-oriented engagements that we have been pursuing in earnest are representing a greater mix of the overall business as well, and those have not only a higher margin but also a higher bill rate so that's bringing a lot of stability to what you're seeing externally.

And everyone, at this time, there are no further questions. I would like to hand the call back to Mr. Joe Liberatore for any additional or closing remarks.

Well, thank you for your interest and support of Kforce. I'd like to express my gratitude to every Kforcer for your efforts and to our consultants and our clients for the trust and faith you've placed in us in partnering with Kforce and allowing us the privilege to serve you. We look forward to talking with you again after third quarter 2025.