KELLY SERVICES INC Q3 FY2026 earnings call

• Strategic Positioning & Recovery: Kelly is in the early stages of an economic recovery. ETM and SET are showing momentum, while Education faces transitional headwinds that management believes will strengthen long-term demand for outsourced workforce solutions.
• One Kelly Strategy & Brand Refresh: Launched a refreshed brand architecture in October under one "Kelly" umbrella, organized into 10 specialties. Completed integration of legacy acquisitions by launching "Kelly Digital Infrastructure" in September.
• Technology & AI Investments:
  • Migrated to Workday as the enterprise human capital management platform, modernizing back-office processes.
  • Deployed "Grace Boost," a proprietary AI platform for recruiters, to automate transactional work and enhance candidate experience.
  • Emphasis on data intelligence via "Saveo" to provide visibility into client workforces.
• Operational Execution:
  • Deepened relationships with key clients, including renewing/expanding a global program with a major semiconductor manufacturer and growing engagement with a large IT infrastructure provider.
  • Education segment: Shifting capacity to capture high demand in therapy services and targeting the 70% of school districts that still insource substitute teacher management.
• Capital Allocation: Maintained quarterly dividend of $0.075/share. No share repurchases in Q3; authorization expiring in December is being refreshed. Total liquidity was $256 million ($22M cash + $234M credit facilities). Debt stood at $122.5 million.

Revenue totaled $927 million, a decline of 0.8% year-over-year (YoY), within guidance of flat to down 2%. Underlying revenue (excluding discrete impacts) grew 2.3%, an improvement of 290 basis points (bps) versus Q2.

• ETM (Employment & Talent Management): Underlying revenue grew 7.7% YoY (improvement of 460 bps vs Q2). This was the first YoY growth since the segment's establishment. Growth was driven by Talent Solutions (up 11.6%, led by double-digit gains in MSP and RPO) and Staffing (up ~7%). Adjusted EBITDA margin was 3.1%, up 130 bps YoY. Revenue contribution is not explicitly stated as a percentage of total, but it is the primary driver of underlying growth.
• SET (Specialty Recruiting & Technology): Underlying revenue declined 0.8% YoY (improvement of >200 bps vs Q2). Sequential growth continued for the second quarter. Outcome-based solutions represented 40% of SET revenue and drove strong performance. Permanent placement revenue grew for the third consecutive quarter. Adjusted EBITDA margin was 6.6%, up 10 bps YoY.
• Education: Revenue declined 6.4% YoY, below expectations due to near-term enrollment pressures in K-12 districts and fragmented therapy market dynamics. The segment reported negative EBITDA for the quarter due to seasonality (summer break portion).

Gross profit was $194.4 million, with a gross profit rate of 21%, a 20 bps improvement YoY.

• Q4 Fiscal 2026:
  • Total Revenue: Flat to up 1% YoY. (Includes impact of an extra fiscal week boosting revenue by ~3 points).
  • Adjusted EBITDA Margin: 3.8% to 4.0%, representing an expansion of 180-200 bps YoY.
  • Note: Guidance incorporates near-term demand pressure from one discrete ETM client and a more gradual return to growth in Education.
• Full Year Fiscal 2026:
  • Total Revenue: Mid-single-digit decline YoY.
  • Adjusted EBITDA Margin: 2.6% to 2.7%, flat to up 10 bps YoY.
• SG&A Expenses: Projecting a net YoY decline in core adjusted SG&A of $25-$30 million (~4%) for the full year, despite technology investments.

• Education Segment Volatility: Near-term enrollment declines in K-12 districts leading to fewer classrooms and lower substitute teacher demand. Fragmented market dynamics in therapy services causing slower-than-expected capture of available demand.
• Client Concentration Pressure: Specific demand pressure from one large ETM client, expected to continue into Q4, though viewed as temporary.
• Federal Government Demand: While stable, reduced federal government demand contributed to prior discrete impacts.
• Integration & Restructuring Costs: Ongoing charges related to technology modernization, realignment, and restructuring, which may impact short-term profitability.
• Macro Economic Factors: Persistent talent shortages, widening skills gaps, and employer uncertainty regarding hybrid/remote work policies.

Q: Analyst Joe Gomes asked about the drivers of ETM growth, specifically the split between new business wins and increasing wallet share with existing clients. / A: CEO Chris Layden and CFO Troy Anderson explained that growth is a mix of both. In Talent Solutions (MSP/RPO), there is a blend of new logos signed late last year ramping up and general industry demand increases flowing through their platforms. On the staffing side, growth is skewed toward expansion of existing demand within established clients, including longer-term partners like the semiconductor client mentioned in remarks. The pipeline remains strong, supported by the recent launch of the Growth Office to improve market visibility.

Q: Analyst Kartik Mehta inquired about the sustainability of gross margin improvements and the trajectory for future EBITDA margins. / A: CFO Troy Anderson noted that gross profit rates normalized to 20% after downward pressure earlier in the year, aided by a higher-margin mix of outcome-based solutions in SET and therapy offerings in Education. He expects GP to be roughly flat for the full year but improving sequentially into Q4. For EBITDA, management intends to drive margin expansion over time through business mix improvements and operational efficiencies/scaling, although near-term investments in technology and growth offices mean hard dollar-per-revenue targets are difficult to pinpoint precisely right now.

Q: Analyst Kevin Stanky sought details on the sustainability of ETM/SET trends into 2027 and specifics on the discrete ETM client pressure. / A: CEO Chris Layden expressed confidence in the sustainability of ETM momentum, citing industrial reshoring, digital infrastructure build-outs, and market share gains in BPO/MSP/RPO as long-term tailwinds. The "One Kelly" strategy further supports this by cross-selling across segments. Regarding the discrete client, CFO Troy Anderson clarified that the step-down in demand is temporary, likely due to the client navigating a challenging market environment. It is a long-term partner, and they are working on new opportunities to support them. The Q4 guidance of flat to up 1% revenue already incorporates this incremental pressure.

Q: Analyst Mark Riddick asked about catalysts for gaining wallet share with large customers and any shifts in work-from-home policies. / A: CEO Chris Layden identified "flexibility" and "visibility" as the key themes driving larger engagements. Clients are seeking integrated workforce strategies that combine external, permanent, and digital workforces. Kelly’s data intelligence layer, Saveo, provides insights that help clients manage this complexity, allowing Kelly to win business based on value rather than just price. Regarding remote work, Layden stated there has been no significant change in employer policies over the last two quarters; hybrid models remain stable, and this topic rarely impacts client conversations or business dynamics.