Prepared remarks
Ladies and gentlemen, thank you for joining us, and welcome to the Kforce Second Quarter 2026 Earnings Conference Call. After today's prepared remarks, we will host a Q&A session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to 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 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 in our earnings release and SEC filings. In addition, we have published our prepared remarks within the investor relations portion of our website. We are extremely pleased to have delivered results in the second quarter that again exceeded our expectations from both a revenue and profitability perspective. Overall revenues positively inflected in the first quarter of 2026, meaningfully expanded in the second quarter, and our guidance for the third quarter contemplates continued sequential improvement.
As a point of reflection, the year-over-year growth rate in Q2 for our technology business was at its highest level since the end of 2022, and our sequential improvement was the best we've experienced in four years. I am incredibly proud of the determination of our people and deeply appreciative of the trust of our world-class clients continue to place in Kforce as we help them advance more meaningful, high-value engagements. Our go-to-market approach, shaped by our integrated strategy efforts, is clearly gaining traction. Across the firm, our people are operating more fully as one Kforce, bringing the full breadth of our capabilities to bear across our service offerings. The revenue inflection that we experienced in our business in the first half of 2026 is consistent with the improving macro demand environment for talent, as evidenced by indicators such as the ISM Services PMI, ASA Staffing Index, and the SIA | Bullhorn Staffing Indicator that have strengthened over the last several months.
In addition, overall U.S. job growth has moderated in recent months, but recent gains have been increasingly concentrated in professional and business services, which are far more aligned to Kforce's end markets than the growth drivers over the past couple of years. Our results reflect disciplined execution and a meaningful shift in client behavior. Organizations are increasingly turning to flexible talent models to advance large backlogs of high-priority technology initiatives, particularly as AI accelerates transformation and CEOs remain measured in adding permanent headcount. Broader uncertainty, including geopolitical tensions and related volatility in the global energy markets, has further reinforced the need for agility. We believe these dynamics highlight the value of flexible workforce solutions as clients adapt to near-term uncertainty while assessing the longer-term implications of emerging technologies on their business and talent strategies.
As a result, we remain encouraged that our operating trends and consecutive quarters of revenue improvements are consistent with a more typical cyclical demand recovery. Kforce has a very rich 64-year operating history, and as such, we've witnessed and participated in major technology shifts before, including personal computing, the emergence of the internet, the mobile revolution, and the move to cloud computing. Each of these periods affected the labor markets, but over time, workers, and specifically technologists, adapted by upskilling and retraining as technology evolved, resulting in a net increase of technology-related roles. From an AI perspective, we continue to take a disciplined approach both internally and externally. Internally, we are evaluating our core business processes and selectively deploying AI-enabled solutions where we see the greatest opportunity to enhance productivity, improve the associate and client experience, and drive operating leverage.
Externally, we continue to educate and train our sales associates and leaders while adding specialized AI expertise within our consulting solutions organizations. We believe AI is one of the most significant technology shifts over the last several decades. However, we believe enterprise adoption remains in the early stages and is likely to follow a progression similar to prior transformative technology cycles. While much of the current focus remains on the underlying technology, our experience suggests the greatest value creation will come from effectively integrating AI into business processes and operating models. Successful adoption will require organizations to align strategy, talent, data, governance, and change management capabilities in order to translate AI potential into measurable business outcomes. As a result, we believe demand will continue to grow for highly skilled professionals and talented teams who can help organizations design, implement, and scale AI, data, and digital transformation initiatives.
Through our technology talent solutions and consulting capabilities, we believe Kforce is well-positioned to help clients navigate this transformation, accelerate modernization efforts, and realize the value of their technology investments, creating a competitive advantage. Regardless of how quickly the underlying technology evolves, organizations will continue to require skilled professionals and teams of individuals who can bridge the gap between innovation and execution. We believe this dynamic supports the long-term demand environment for technology talent and consulting solutions that are central to our strategy. Our business model is intentionally simple, organically driven, and intensely focused. By limiting inorganic growth within our existing service areas, we protect our teams from unnecessary complexities and distractions. That focus allows our people to do what they do best: build deep relationships and partner with clients to solve their most critical business challenges.
Our strategy has been thoughtfully refined over time, not overhauled, because it is proven durable. That focus, combined with a unified and resilient culture, is a real differentiator for us and central to our consistent market outperformance. Before I hand it off to Dave, I am grateful every day for the opportunity to work alongside such talented and dedicated colleagues. Their passion, expertise, and commitment continue to strengthen our business, advance our enterprise initiatives, and position us well for the future. Because of their efforts, I remain confident in our strategy, our momentum, and the opportunities ahead. Dave Kelly, our Chief Operating Officer, will now give greater insights into our performance and recent operating trends. Jeff Hackman, Kforce's Chief Financial Officer, will provide additional detail on our financial results as well as our future financial expectations. Dave?
Thank you, Joe. Total revenues of $349.3 million represented overall revenue growth of 4.5% on a year-over-year basis and 4.1% on a sequential billing day basis, both of which represent levels not seen in nearly four years. There has been a lot of discussion about whether we and the broader sector can continue to deliver revenue growth, given the much-speculated negative demand impact of AI tools and technologies. Encouragingly, we've been successful at delivering three consecutive quarters of revenue growth that has returned to pre-pandemic, and thus pre-AI advancement, norms. This growth is being seen both in our consulting revenues and our traditional staff augmentation business. The strength in direct hire revenues across both our technology and FA businesses was also a positive contributor for us in the second quarter, further signaling the desire for companies to add critical long-term talent.
Our client portfolio is exceptional. Our strategic direction is clear and unchanged, and our culture is unmatched. We recognize that there is still uncertainty in the geopolitical and macroeconomic environment. While we've been successful in our go-to-market strategy, leveraging the progress made with our integrated strategy efforts, clients continue to take a measured approach to technology spend. With that said, our results and operating trends suggest that they are actively prioritizing critical initiatives in areas such as data, digital, and the platforms that underpin AI strategies, among other areas that may have been previously postponed, and that we are taking client and overall market share. Importantly, the improvement in our business has been broad-based, with positive trends evidenced across a wide range of industries and skill sets within our client portfolio. We continue to see growth in AI-related data, digital, and cloud projects, while also experiencing a ramp in demand for platform and application development roles and projects.
Overall technology demand remains broad, with eight of our top 10 industries showing sequential growth and similar performance on a year-over-year basis. We continue to make targeted organic investments to fortify the depth of expertise in our Consulting Solutions business to meet rising client demand for cost-effective access to highly skilled talent. Our consulting-led offerings are contributing positively to the performance of our technology business, supported by an increasing volume of opportunities. Our fully integrated sales and delivery model, which also leverages a combination of onshore, nearshore, and offshore talent from our Pune delivery center, addresses a growing need in the market, offering clients a seamless experience across consulting, project-based work, and more traditional staffing assignments spanning multiple technologies and skill sets. We are seeing clear signs of a healthy demand environment across the full spectrum of our service offerings, as clients are increasingly receptive to discussions on potential opportunities, many of which are focused outside the CIO function, as evidenced by a meaningful year-over-year improvement in client visits.
Indicators in our business that support this and suggest a continuation of sustained strong demand, in addition to meaningful gross margin expansion, include approximately 18% year-over-year improvement in both job orders and in new assignment starts in Q2. Though June and early July are typically slightly slower months for front-end activities and new starts due to increased client PTO, more normal activity levels have resumed over the last two weeks, and these indicators suggest a healthy demand environment that is conducive to driving continued sequential revenue growth in Q3, which is contemplated in our guidance. The net is that we are driving disproportionately better results than the macro industry readings would suggest. The forward momentum in the business is good. We've maintained a stable average bill rate of approximately $90 per hour over the last four years while continuing to build a higher quality, higher margin revenue stream.
This reflects the growing mix of consulting-oriented engagements, which command higher bill rates and stronger margin profiles, as well as disciplined management of wage inflation in core technology skill sets. Together, these factors have effectively offset the bill rate pressure associated with a greater mix of consultants based outside the U.S. Frankly, we would expect to continue seeing stability in our average bill rate as we look forward, with the potential for slight enhancements as technology labor continues to upskill in the face of advancements in AI. Demand remains strong across core practice areas, including data and AI, digital platform engineering, and cloud. The number of opportunities in our Consulting Solutions offering continues to expand and will be a primary driver for our sequential growth in Q3. These disciplines are foundational to the development and deployment of AI solutions, and we believe organizations will increasingly require specialized talent to execute their strategies.
This creates meaningful and durable growth opportunities for our firm. Looking forward to Q3, we expect the pace of overall technology activities to continue to improve across historical pre-pandemic levels and for revenue to improve sequentially in the low single digits, which will result in further improvements in our year-over-year performance. Over the last several years, we've made responsible adjustments to align headcount levels with revenue levels and productivity expectations. We believe we have sufficient capacity to absorb near-term improvements in demand without requiring significant incremental resources, particularly as we continue to drive greater efficiency through AI-enabled solutions. At the same time, we remain committed to investing in our Consulting Solutions business and other strategic initiatives that we believe will support long-term revenue and profitability growth.
We remain energized by the opportunities ahead and confident in our ability to sustain recent momentum while continuing to deliver strong results that exceed overall market averages. Our success is grounded in the deep trust and the longstanding partnerships we've built with our clients, candidates, and consultants. These relationships remain the foundation of our growth, innovation, and long-term success. I'll now turn the call over to Jeff Hackman, Kforce's Chief Financial Officer.
Thank you, Dave. Second quarter revenue of $349.3 million was up 4.5% on a year-over-year basis, and earnings per share of $0.73 was up approximately 24% year-over-year. Our second quarter results not only demonstrate our ability to drive revenue growth in the face of secular growth concerns, but were parlayed with stronger-than-expected gross margins and enhanced profitability levels. Overall gross margin was 28.5%, up 140 basis points year-over-year, driven by expanding flex margins and stronger-than-expected direct hire revenues. Sequentially, gross margin increased 120 basis points, reflecting improved flex spreads, a stronger-than-expected direct hire mix, and a typical seasonal recovery from Q1 payroll tax resets. The enhanced gross margin profile has been a true standout for us, especially as revenues have inflected positively. This success reflects the value we deliver to our clients and our focus on improving the quality of our business mix.
As discussed previously, solutions-oriented engagements along with our offshore business typically carry higher margins, and growth in these areas have been an important contributor to our overall margin expansion. Looking ahead to the third quarter, we expect bill pace spreads to remain stable sequentially, reflecting the continued benefits of our pricing discipline and business mix strategy. SG&A expense was 22.7% of revenue in the quarter, an increase of 50 basis points year-over-year. The increase was primarily driven by higher performance-based compensation, which is rebounding from historically low levels, reflecting the strong financial results we achieved thus far in 2026. While the initial positive inflection of revenues and strength in gross profit is resulting in some SG&A deleverage, we do not expect this to perpetuate at even higher revenue levels. In fact, as revenues grow, improving productivity levels will create meaningful improvements in operating leverage as the business scales.
We are beginning to see tangible benefits through improved productivity metrics across the organization. As these initiatives mature, we expect the resulting efficiency gains to drive additional operating leverage over time. While we are likely to see some elevated non-cash depreciation and amortization expense in early 2027 post go-live from our Workday implementation, consistent with our prior commentary, we continue to anticipate realizing more meaningful benefits towards the end of 2027 and more fully into 2028, which should further enhance operational effectiveness and support long-term margin expansion. Our operating margin was 5.4%, and our effective tax rate in the second quarter was 30.6%. On a year-to-date basis, we have experienced negative operating cash flows of $6.7 million, which is consistent with historical trends in periods where revenues have meaningfully and positively inflected.
We expect to resume generating positive operating cash flows in the second half of 2026 as we monetize the higher levels of accounts receivable. We continue to carry a very high-quality accounts receivable portfolio, and days sales outstanding was stable with prior year levels. During the quarter, we continued to return capital to shareholders with $9.6 million distributed through dividends of $6.7 million and share repurchases of approximately $2.9 million. We were more aggressive with our repurchase activity in the first quarter of 2026, leveraging the strength of our balance sheet, given what was believed to be, and has proven to be, a disconnect between our operating performance and demand trends in the current valuation of our stock. As a result, net debt increased to $106.8 million at quarter end from $90.2 million in the prior quarter. Despite this increase, our balance sheet remains strong, with leverage of approximately 1.4x trailing 12-month EBITDA, which we continue to view as a conservative level.
Looking ahead, we expect to continue balancing returning excess cash generated beyond our capital requirements and quarterly dividend commitments to shareholders through share repurchases and paying down debt. Our return on equity remains strong at approximately 30%, underscoring the effectiveness of our capital allocations strategy and our ability to generate attractive returns while continuing to invest in long-term growth initiatives. Turning to our outlook, the third quarter includes 64 billing days, consistent with both the second quarter of 2026 and the third quarter of 2025. We expect third quarter revenue to be in the range of $349 million to $357 million, and earnings per share to be between $0.71 and $0.79. Our guidance assumes an effective tax rate of approximately 30%. At the midpoint of guidance, revenue is expected to increase approximately 1.1% sequentially and 6.1% year-over-year.
Notably, earnings per share at the midpoint of guidance represents a 19% increase compared to the prior year. Our outlook assumes a stable operating environment and excludes the impact of any unusual or non-recurring items. We remain confident in our strategic position and our ability to deliver growth that outpaces the broader market. The progress we have made in improving the quality of our business, expanding margins, and enhancing operating leverage reinforces our confidence in the earnings power of the company as market conditions continue to improve. We also remain confident in our ability to generate an operating margin of at least 8% when annual revenue returns to $1.7 billion. The 8% annual operating margin expectation represents more than 100 basis points of improvement compared to the margin profile we achieved the last time we operated at that revenue level in 2022. As a reference point, second quarter operating margin of 5.4% is notably higher than the 4.5% operating margin in Q2 of 2020, when revenues were at approximately the same level.
We believe this demonstrates the benefits of our disciplined execution, improved business mix, pricing strategy, and investments in our sales, solutions, and enterprise capabilities. On behalf of the entire management team, I would like to thank our associates for their dedication, hard work, and continued commitment to serving our clients. Their efforts have been instrumental in delivering our strong results and positioning the company for continued success in the future. We would now like to turn the call over for questions.
Questions and answers
Thank you. We will now begin the Q&A session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Mark Marcon with Baird. Your line is open. Please go ahead.
Good afternoon, and thanks for taking my questions, and congratulations on the strong progress, particularly on the margin front, as well as the inflection in terms of revenue continuing and accelerating. In terms of the revenue growth, Joe or Dave, you mentioned that there's an 18% increase in terms of the number of orders that you had in Q2. How does that compare to the year-over-year increase that you had in the orders in Q1, and how's that trending as we get into Q3, and how should we think about fill rates?
Mark, appreciate the question and the comments. In the comments that I made, both related to general activity levels and visits, as well as starts activity, I had mentioned approximately 18% year-over-year improvement in the second quarter. That's roughly what it was in the first quarter as well. We've had good, consistent demand, and as I mentioned in my prepared remarks, we've seen some good results. I had said two weeks earlier, it's actually the last three weeks of really strong activity levels as well. We feel good about not only what we've seen from a consistency perspective, but additionally what we are looking at in the third quarter. Some good momentum. I would tell you we've had some improvement in year-over-year growth rates in Q2. We expect some incremental additional year-over-year improvement in technology revenue growth in Q3. I think that basically reflects a pretty consistent fill ratio — about the same — which continues to be very positive.
That's great. I thought the gross margins were particularly impressive, and while the hourly bill rate is in the same neighborhood, it did have a nice sequential uptick. I'm wondering if we can dig down a little bit with regards to the revenue split that's enabling you to generate these higher gross margins. Obviously, your offshore has higher gross margins, your consulting has higher gross margins, but can you just talk a little bit about the sustainability in terms of increasing those gross margins, or how we should think about the mix and how that's trending and where gross margins could go?
Yeah, Mark. Maybe I'll start, and Dave can add as well. Anticipated the question; good to be with you again. The margin story for us, in addition to the significant inflection that we've had with our revenue trends, has been a really positive part of the story. When you look at our technology flex margins, they improved about 120 basis points year-over-year in the second quarter, and they were up about 80 basis points year-over-year in the first quarter. Some sequential improvement there in our bill pay spreads, which is great to see. When you layer that on top of the direct hire revenues, sequentially we're up pretty strongly — up 20% sequentially — which really gives you a powerful margin story overall. We've talked about this for several calls that we've had some nice margin enhancements. Frankly, in the second quarter, not much has changed in approach. The success we're seeing is driven by increases in demand and the harder-to-find talent, and we've been focused on that highly skilled technology skill set area, which continues to bode well for pricing.
Also several strategic initiatives, including better pricing discipline to ensure our rates reflect the value we're providing to clients. Business mix has also helped: our Consulting Solutions business carries higher margins and continues to grow, and our nearshore and offshore business continues to expand sequentially and year-over-year, benefiting us. I'd be remiss if I didn't thank our people — really proud of what our team has accomplished over the last 12 to 15 months. From a spread perspective, I mentioned in my prepared remarks we expect stability Q2 to Q3. A reflection point: our technology flex margins in Q2 of 2022 were 26.9%, and we sit here today at 26.8%. A lot to be proud of. Very thankful to all of our associates and leaders for their efforts.
Maybe adding a couple things to Jeff's comments. We've got a pretty highly concentrated set of high-end skills that we regularly place, concentrated around that approximately $90 bill rate. This is a reflection of the demand for scarce talent. We meet those needs well, perhaps better than many in our space. The margins in our consulting business are typically 400 to 600 basis points higher than in our traditional staff augmentation business. Our offshore operations, which we've built predominantly in support of our solutions business, contribute to that incremental margin. We feel good about the pipeline for that business. I mentioned in my prepared remarks that growth in our solutions business is expected to predominantly drive sequential growth in our technology business; that business has very strong margins and the pipeline continues to be very good. Pipelines for that profile of business are up about 30% year-over-year. We feel really good about the trajectory and consequently about where the margin profile is and where it will head.
That's great. I was just wondering if you were being a little conservative with regards to the flex gross margin guide, given that the higher margin areas are the ones that are growing the fastest. As I look at the third quarter, because obviously sequentially, you got that benefit from the normal seasonal tax thing. It seems like if those areas are growing faster, what would be the reason why flex gross margins wouldn't be slightly higher in the third quarter relative to the second quarter?
There's a little bit of seasonality between Q2 and Q3. At the midpoint of guidance, flex gross margins were expected to be down roughly 10 basis points. Q3 typically has slightly higher paid time off within certain clients; we typically see that a bit in Q3. Q4 has a much greater concentration of PTO; Q3 does have a little of that, which contributes partly to that seasonality.
Okay, great. Lastly, the incremental flow-through in terms of gross profit to the operating line was also pretty impressive. What's that portend with regards to your ultimate targets? You talked about getting to 8% margins at $1.7 billion, but it seems like your incremental margins are running a lot higher. Are you getting close to diminishing your excess capacity, or where would you say your excess capacity is right now? How much more revenue could we end up absorbing before you have to meaningfully step up on SG&A?
A couple of things. We've had some really nice productivity improvements, and our people are strong. We've made adjustments and continue to be confident they have incremental capacity. They're passionate and focused on maximizing productivity and the income they generate. We certainly think there's more room to go there. Regarding the $1.7 billion and 8% operating margin, I wouldn't say that's our ultimate objective — it's an important waypoint. When you add the expectation of growth in the longer-term offshore business and consider the Workday ERP implementation going live in early 2027, we expect a meaningful positive impact on operating margin. There are a number of levers we're pulling, and things are going according to plan. We think there's real opportunity across different areas.
Mark, the only thing I'd add is that last quarter we changed our phrasing from approximately 8% to at least 8% at $1.7 billion. Given the productivity improvements and the investments we're making in technology to drive efficiency, our confidence in the profitability objective has increased. We expect a full 100 basis points of operating margin benefit from our Workday implementation over time — part of that is reduced investment pace and part is the benefits associated with it. We're on path.
One last point: when we look at peak performance for our sales associates across tenure buckets — those here less than a year, two to four years, and four-plus years — performance in all those buckets is significantly above where it was previously. This leads us to believe we have ample capacity and we expect our people to return to prior peak levels. These past four years have been challenging, and it's gratifying to provide platforms, tools, and an environment for success so our teams can capture opportunities on the solutions and talent fronts.
It's great to hear. Thank you so much.
Thank you, Mark.
Sure.
Your next question comes from the line of Trevor Romeo with William Blair. Your line is open. Please go ahead.
Hi, good evening. Thanks for taking the questions.
Sure.
Great to see the demand and the pipeline improve. I had a question particularly on the AI and data-related projects. I think you talked about making some investments in the Consulting Solutions business there, including adding some specialized AI expertise. Maybe if you could shed a little more light on maybe how many experts you're looking to add, what specific skills or expertise they have, and then how hard is it to just find talent with the right skills in those types of areas right now?
Yeah, Trevor, we incrementally bring people onto that team based on the demands that we're seeing. We've done a lot of work bringing in individuals — hiring from the well-known consulting firms — mainly in those focus areas we constantly talk about: app engineering, modernization, data, cloud, and AI in recent years. We're sizing our teams based on the demand from our customer base. There is a long lead time because of the nature of this talent; it's among the most in-demand talent. We have a strong internal recruiting capability, a partner network, and an internal referral program. This is front and center. Recruitment is one of our core competencies. We're actively sizing the group to match our pipeline demand.
The combination of excellent talent works seamlessly with our sales and recruiting organization. Recruiting is a competency for us. Our integrated strategy combined with strong client relationships has worked well. The growth we're seeing is being driven from both the consulting solutions business and the staff augmentation business. The talent models can change, but it doesn't change the teams on the field that are providing services and identifying opportunities. That continues to be a significant differentiator for us.
That's great. Thank you both for that. I had a follow-up on the direct hire business, which I think Jeff had mentioned was a big driver for the gross margin expansion. You had a nice acceleration this quarter, and it was better than you expected. At the same time, you mentioned in the prepared remarks that CEOs are still measured in adding permanent staff generally. What's your confidence in direct hire continuing to improve from here? And then if you look over a longer period of time, I think that business was more than 3% of revenue and double-digit percent of your gross profit in the past at peaks. Is there anything different about the business today that would prevent you from getting back to those levels as this rebound continues to progress?
Trevor, it's an important part of our model, but intentionally a small percentage of our revenue base. We will meet client needs and make investments as demand dictates. We expect direct hire to be down sequentially in Q3 due to seasonality, and our guidance contemplates that for both revenue and margins. In the long term, direct hire needs persist for scarce talent on both flexible and permanent bases. We believe the market for that talent remains. For us, we will take opportunities to meet clients' needs, but I don't expect direct hire to accelerate significantly as a percentage of total revenue because we believe project work and staff augmentation are the places to invest for predictable, sustainable revenue.
Okay. Understood. Thank you very much.
Thanks, Trevor.
Your next question comes from the line of Kartik Mehta with North Coast Research. Your line is open. Please go ahead.
Hey, good afternoon. There's been a lot of talk, obviously, about AI, both in terms of helping drive revenue and helping maybe lower costs for you. I'm wondering, as you look at the AI opportunity, what do you think is a bigger opportunity? Is it a revenue opportunity for the company over the next 12 months, or is it the opportunity to help drive down costs for you?
This is Joe. I would say it's both. That's why we have an internal AI strategy aligned with our firm strategy and an external go-to-market AI focus. We're pursuing it from both fronts independently. We can apply learnings from client engagements internally, which can close the gap and improve our processes. It's not an either/or; it's both a revenue and a cost opportunity.
Joe, I know you mentioned June was seasonally slow, early part of July, and the last two weeks of July have picked up and normalized. When you talk about normalization, are we talking back to the kind of job order growth you were seeing before, or is it a little bit different? I know it's only two weeks; just to get maybe a little bit more granularity on how things are shaping up.
Hey, Kartik. Actually, I corrected myself earlier: it's the last three weeks, not two. I would characterize those activity levels as improving from where they had been. We've had a really nice three weeks. Three weeks don't make a long-term trend, but if we can sustain that, it would continue the gradual improvement we've been seeing. I would characterize it as continued positive momentum and revenue growth momentum in our technology business in particular.
Perfect. Thank you very much. I really appreciate it.
Thanks, Kartik.
Your next question comes from the line of Josh Chan with UBS. Your line is open. Please go ahead.
Hi. Good afternoon, Joe, Dave, Jeff. Congrats on a good quarter. I was wondering if you could talk about your flex margin within technology, and you mentioned that a lot of different drivers contributed to the improvement. I was wondering if you can bucket between, I guess, mix, price, cost. What is the most impactful currently in terms of driving this type of margin improvement? Thank you.
Josh, thanks for the comments. It's probably difficult to precisely break down each of those, but certainly pricing has been a very strong point for us in the marketplace. Some of that is the market in which we are playing, but also our efforts and focus on pricing over the last year are paying off. Business mix over time has also improved: Consulting Solutions mix and nearshore/offshore expansions are longer-term margin enrichment opportunities. Overall, pricing and business mix have been the most impactful factors.
I'll add that our margin improvements have been best-in-class relative to the space. We have a simple, focused business model and high-quality people who are focused on a few priorities and meeting client needs. That focus and execution are meaningful reasons for the margin and revenue improvements we've achieved relative to industry benchmarks.
I'll touch on execution: it goes back to leadership, training, and education. I'm proud of our teams and field leadership executing the plan and our corporate partners building the plan in an integrated manner. Margins don't magically happen — you have to assemble the pieces and execute, and our team has done a phenomenal job.
Right. Yeah. Appreciate the color and congrats on the results.
Thank you.
I guess my follow-up: you've been increasingly referring to this as a cyclical improvement. I was just wondering on the cycle, was there a catalyst looking backwards to why your customers are growing their demand, or was it just a point of where projects were deferred so long that it just must continue? Looking back, did you see anything change over the last one to three quarters?
You're starting to see some of the truth of this come out in mainstream commentary. We've said for years that we were in a job recession where the jobs being created weren't driving the economic engine. AI was sometimes used as a scapegoat for downsizing or rightsizing. Now that cycle has worked its way through, and we're seeing what we believe is more indicative of a normal cyclical recovery coming out of a job recession versus a broad recession. Also, some early hyperbolic comments about AI job destruction have been walked back by leaders. AI will drive efficiencies for individuals, but it's not a job apocalypse. These pieces together give us excitement about where we are based on the landscape, the competencies we've built, and how our teams are executing.
To add to Joe's comments, companies facing uncertainty or needing to get things done look for flexible talent. You're seeing those characteristics play through as well.
Sure. Appreciate the color and congrats on the results.
Thank you.
Thank you, Josh.
A reminder, if you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. Your next question comes from the line of Tobey Sommer with Truist. Your line is open. Please go ahead.
Thank you. Wanted to ask a question on the gross margins within the managed services in the context of ramping your Indian operations. Within those, are the Indian operations accretive even to the broader category or consistent with the broader category differential?
Tobey, to be clear, when I mentioned Consulting Solutions margins are typically 400 to 600 basis points higher than staff augmentation, that is inclusive of what we're seeing with our offshore business. It's not separately accretive to that figure; it contributes to the firm as a whole. If that's what you were asking, yes.
Is it primarily services, or are you able to provide discrete resources from a more traditional staffing perspective? If you do both, what's the nature of the split now and over the longer term if you have a vision of it?
The vast majority of the work in India is in support of our solutions business. There may be opportunities to support staff augmentation, and we're doing some of that, but we are earlier in that progress. Right now, it's significantly weighted towards supporting our solutions business. The story is still being written, but we're hopeful and continuing to make investments to test the hypothesis.
From a total addressable market perspective, did establishing that operation at scale increase your TAM or increase your gross profit? Were there projects you couldn't execute a couple years ago that you can now service via this mechanism?
Definitely. Clients are looking for cost-effective, efficient talent and capabilities we may have had to decline previously. Building this capability supports that business and expands the addressable market. We're seeing positive signs and expect that capability to become even more significant.
I appreciate that. Then just one question on cash and capital allocation. I understand the seasonal sequential drain on cash from operations when you're growing revenue sequentially at this pace. For the year, based on the Q3 guide, what sort of cash generation do you anticipate for the company? Broad range.
Tobey, year-to-date we've had negative operating cash of roughly $7 million, which is largely to be expected given the meaningful revenue inflection. We're paying consultants weekly and DSOs are about 58 days and stable year-over-year, so you would expect some working capital creep in the early innings. In Q3 and Q4, we expect meaningful operating cash flows. Last year we were generating around $20 million on average in the back half of the year, which provides a reasonable sense of what the possibility is. Our leverage at about 1.4x is comfortable and the denominator, trailing 12-month EBITDA, has been improving. We're comfortable with balance sheet flexibility. Share buybacks and returning capital will continue to be balanced with debt paydown as excess cash is generated.
Thank you.
Thanks, Tobey.
Thanks, Tobey.
There are no further questions at this time. I will now turn the call back to Joe Liberatore for closing remarks.
Well, thank you for your interest in and support of 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 to you again after the third quarter of 2026. Have a good evening.
This concludes today's call. Thank you for attending. You may now disconnect.