Kelly Services Q2 2026 Earnings Call Transcript

Kelly Services (NASDAQ: KELYB ) released second-quarter financial results and hosted an earnings call on Thursday. Read the complete transcript below. This content is powered APIs. 8% decline year-over-year but better than expected.

The company highlighted strategic growth initiatives, including its technology modernization and AI integration, which are enhancing operational efficiency and customer experience. Kelly Services achieved notable recognition, being named a leader in Everest Group's 2026 PEAK Matrix and ranked by Forbes among America’s Best Temporary Staffing companies. Segment-level growth was seen with ETM returning to growth, SET showing its first sequential growth in two years, and Talent Solutions growing due to new MSP wins. The company's education segment achieved a 100% renewal rate and increased new customer wins, positioning it for growth in the upcoming school year.

Kelly Services' future outlook is positive, expecting a return to year-over-year growth in the second half of 2026, driven by organic growth drivers and structural efficiency improvements. Management expressed confidence in strategic initiatives and highlighted the addition of Alan Sokolsky as Chief Product and Technology Officer to align technology and product strategy. Full Transcript OPERATOR Good morning and welcome to Kelly Services second quarter 2026 earnings conference call. All parties will be on listen only until the question and answer portion of the presentation.

Today's call is being recorded at the request of Kelly Services. If anyone has any objections, you may disconnect at this time. I would now like to turn the meeting over to your host, Mr. Scott Thomas, Kelly's Head of Investor Relations.

Please go ahead. Scott Thomas, Vice President, Corporate Affairs Good morning and welcome to Kelly's Second Quarter Conference Call. With me today are Kelly's Chief Executive Officer Chris Layden and our Chief Financial Officer Troy Anderson. Before we begin, I'll remind you that the comments made during today's call, including the Q and A session, may include forward-looking statements about our expectations for future performance.

Actual results could differ materially from those suggested by our comments. We do not assume any obligation to update the statements made on this call. Please refer to our SEC filings for a description of the risk factors that could influence the company's actual future performance. In addition, we'll discuss certain data on a reported and on an adjusted basis.

Discussion of items on an adjusted basis are non-GAAP financial measures designed to give insight into certain trends in our operations. com. With that, I'll turn the call over to Chris. Chris Layden, Chief Executive Officer Thank you, Scott, and good morning, everyone.

It's great to be with all of you. In the second quarter, we measurably exceeded our guidance for both total company revenue and adjusted EBITDA margin. These results were driven primarily by positive momentum from our growth and efficiency initiatives. We continue to capitalize on organic growth drivers and constructive demand trends across the enterprise as well.

Notably, Kelly's adjusted EBITDA margin returned to 3% in the quarter. This achievement demonstrates our ability to generate operating leverage in pursuit of growth as we continue to reengineer our cost base while driving greater value for our customers. As a strategic workforce partner, the value we deliver continued to be recognized in the quarter as Everest Group named Kelly a leader in its 2026 PEAK Matrix for RPO and for staffing and solutions in engineering, IT, business and professional, and industrial. In addition, Forbes once again ranked Kelly among America's Best Temporary Staffing and Professional Recruiting Companies.

These accolades are a testament to 80 years of industry leadership and our unwavering focus on meeting the evolving needs of our customers and talent. At the segment level, we delivered sequential improvements in each of our businesses. ETM capitalized on broad-based demand for professional and industrial staffing among both new and existing customers. Talent Solutions benefited from the ramp-up of recent MSP wins.

Continued growth in Talent Solutions reflects the differentiation of our technology-enabled and AI-powered offerings. Within SET, revenue grew on a sequential basis for the first time in two years. This represents an inflection point driven by improving trends across each specialty vertical and strong execution by our team following the completion of the leadership transition in the first quarter. SET's outcome-based solutions also contributed to positive momentum, with revenue increasing over the prior year and contributing 40% of SET's total revenue in the quarter, up from about one-third a year ago.

This reflects an intentional shift in our business mix as we increasingly leverage our specialized technical expertise across SET's specialty areas to deliver milestone- and SLA-based solutions to our customers. And in Education, the second quarter marked the conclusion of a strong sales cycle for our K-12 staffing business. The cycle included a 100% renewal rate in the quarter, a significant milestone underpinned by industry-leading fill rates and customer satisfaction. We also delivered a year-over-year increase in net new customer wins, which will come online beginning in the third quarter with the start of the new school year.

S. Across ETM and SET, our One Kelly Enterprise go-to-market approach continued to generate positive traction with our customers. The recent expansion of our relationship with a leading North American water technology company illustrates the potential of this model. What began as an engineering staffing engagement grew into a consultative workforce partnership through a unified effort across SET and ETM.

Our teams leveraged their combined insights into the company's contingent talent management strategy to identify additional capabilities which address their needs, positioning Kelly to capture the MSP. Through this win, we're well positioned to further expand this relationship as the customer moves forward with plans to double the size of their business by 2030. This is our One Kelly Enterprise go-to-market approach in action. By supporting our customers as a unified team and bringing the full strength of our portfolio to bear, we're better able to anticipate their needs and position Kelly as a strategic partner in their success.

As we scale our enhanced go-to-market approach, our technology modernization initiative is a key enabler. To that end, we delivered another milestone on our journey with a successful cutover onto a unified CRM platform powered by AI. This platform enables increased transparency and high-conviction forecasting while also driving cross-selling opportunities across the business. These capabilities are foundational to Kelly's integrated commercial operating framework championed by our Growth Office.

This framework is strengthening account planning to capture greater market share and accelerate profitable growth. We also accelerated the integration of AI across the enterprise to drive efficiency and enhance the talent and customer experience. Growing employee adoption of GraceBoost, our proprietary internal AI platform, is driving increased productivity at a small fraction of the utilization cost of third-party AI platforms. For talent and customers, we continue to scale our AI-enabled recruiting solution to create a more streamlined experience for both.

Our solution can operate 24/7 and connect with applicants within minutes of receiving their application, increasing the throughput of highly qualified candidates. Feedback has been positive. Talent appreciate the responsiveness of the application and screening process, while customers value the reduction in cycle time. We're actively scaling new use cases, including for Talent Care, as we pursue opportunities to reduce turnover and increase redeployment to new assignments with our customers.

As our technology modernization initiative creates a foundation for innovative AI-powered offerings, we're evolving our strategy to drive deeper alignment between these critical work streams. That's why I'm pleased that we recently welcomed Alan Sokolsky as Kelly's Chief Product and Technology Officer. Alan brings significant technology and digital leadership experience to this newly created role. His background includes more than 20 years in staffing and a track record of aligning technology and product strategy to accelerate profitable growth.

At Kelly, Alan will oversee product development, technology and digital innovation efforts across the enterprise. I'm confident he'll be able to help us scale and optimize what's working today while building new capabilities that will define the future of work, from the products our teams will use to deploy our specialized technical solutions to autonomous AI agents. As we continue to solidify our management team, in the second quarter we further strengthened our Board of Directors as well. In May, we welcomed three new directors, Ryan McCrory, Michael Wartell and George Woody Young.

Each of these directors brings extensive experience which positions them to be strong contributors to the Board as we drive progress on Kelly's strategic journey. I'm pleased with our achievements in the second quarter, which reflect disciplined execution on our growth and efficiency priorities. The meaningful progress we've delivered on our strategy has set us up on a positive trajectory entering the second half of 2026. I'll now turn the call over to Troy to talk through the quarter in more detail and our expectations for the balance of the year.

Troy Anderson, EVP & CFO Thank you, Chris, and good morning everyone. I'm pleased to report second quarter results that both exceeded our guidance and reflect clear sequential improvement across our business. We are increasingly confident with the momentum we have established and are adjusting our full year expectations favorably as a result. 8% versus the prior year quarter and measurably better than our guidance of down 7% to 9%.

The year-over-year revenue decline improved 500 basis points relative to the first quarter. 6%, an improvement of 270 basis points versus the first quarter, thus contributing more than half of the overall year-over-year improvement versus Q1. We expect to fully anniversary the year-over-year discrete impacts in the fourth quarter. Demand across the federal government and the two large ETM customers who remain active has been relatively stable the past three quarters.

1% year over year, which is an improvement of 350 basis points versus the first quarter decline. Staffing and outcome-based solutions, excluding Contact Center, returned to growth with staffing growing approximately 3% driven by strong demand across a variety of clients and industries. Talent Solutions grew for the second consecutive quarter. The growth of approximately 6% was driven by ramping new wins and increased overall demand across the RPO and MSP specialties, with both showing double-digit growth.

SET underlying revenue declined 3% year over year, an improvement of 300 basis points versus the first quarter. Each specialty area showed year-over-year improvement versus Q1, while Telecom delivered another quarter of year-over-year growth. 4%, which was a 40 basis point improvement versus the first quarter. The decline reflects the ongoing impacts of prior year delayed new contract decisions and overall reduced demand in key markets due to enrollment declines.

With year-over-year growth in our new business signings, a strong renewal cycle, and accelerating growth in therapy, we expect to return to year-over-year growth in the second half of the year. Gross profit was 212 million, down 6% versus the prior year quarter, reflecting the lower revenue volume. 4%, essentially flat to the prior year and up. 150 basis points sequentially from the first quarter, reflecting seasonality for employee-related costs and favorable business mix.

All three business units saw notable improvement in their gross profit rates relative to the first quarter. For year-over-year performance, ETM improved 50 basis points while SET and Education both reduced their year-over-year declines relative to Q1. 1%, reflecting the continued focus with our structural and volume-related cost optimization efforts along with investment in growth, technology, and other areas. Core adjusted SG&A expenses, which exclude depreciation, amortization, and incentives, continued the sequential decline trend that has been in place since Q1 of 2025.

In the quarter, adjusted SG&A expenses decreased across all three segments as we continue to drive durable and sustainable efficiencies in our operating model through technology enhancements and process efficiencies, including leveraging AI. This includes benefits from the prior-year realignments within the ETM segment and the acquisition integration within SET. For the year, we're projecting a net year-over-year decline in core SG&A expenses of approximately $25 million, or 4%.

Despite investments being made in technology, the growth office, and other areas, the structural changes we are making will allow us to scale more efficiently as we grow, thus supporting our margin expansion expectations in the second half of the year and beyond. 31 for the quarter. 54 in the prior year. The year-over-year decline reflects lower profitability and a more normalized effective tax rate for our adjusted results.

2 million of charges in the quarter, reflecting reduced integration, realignment, and restructuring costs as well as transaction costs relative to Q1. We expect to continue incurring various charges throughout 2026 as we advance our technology modernization journey and expand upon our various optimization efforts. 1 million with an adjusted EBITDA margin of 3%. 5% and represents 150 basis points of sequential improvement from the first quarter.

On a year-over-year basis, adjusted EBITDA margin declined 40 basis points, significantly narrowing the decline versus recent quarters, reflecting the improved revenue and gross profit rate trends and our continued SG&A discipline. For the segments, ETM and SET adjusted EBITDA margin improved approximately 200 and 100 basis points versus Q1, respectively, while Education was stable. Each segment was down year over year, with ETM down only 10 basis points, a notable improvement relative to the past several quarters. Our balance sheet remains strong and continues to provide ample capital allocation flexibility.

Total available liquidity as of the end of the quarter was $303 million, comprised of $24 million in cash and $279 million available on our credit facilities. 1 million at quarter end. Of note, during the quarter we amended our accounts receivable securitization facility primarily to extend the term by a year along with other ancillary benefits that increase flexibility and reduce our cost of capital. 5 cents per share during the quarter.

We remain confident in Kelly Services' cash generation and are committed to a disciplined and opportunistic approach to capital allocation in pursuit of attractive returns for shareholders. As we turn to the outlook for the remainder of 2026, our expectations have improved relative to the initial view we established in February and remain unchanged for adjusted EBITDA margin. Our expectations assume no material change in the macroeconomic environment in the coming quarters. For Q3, we expect to show measurable year-over-year improvement relative to Q2.

Before I jump into specifics, I want to remind everyone that Q3 is the lowest revenue quarter and therefore lower profit quarter for Kelly Services due to seasonality in our Education business, as a result of schools being out of session the majority of the quarter. With our volume-based revenue model, this results in notable sequential revenue and adjusted EBITDA declines from Q2 to Q3, along with lower-margin revenue, and then a strong bounce back in the fourth quarter. For the third quarter, we expect underlying revenue growth of 1% to 2% and total revenue to be flat to a decline of 2% versus the prior year.