Kelly Services Inc 2026 Q2 Earnings Call

Please go ahead. 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&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. 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.

For more information regarding non-GAAP measures and other required disclosures, please refer to our earnings press release, presentation, and once filed, Form 10-Q, all of which can be accessed through our investor relations website at ir.kellyservices.com. I'll turn the call over to Chris.

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 re-engineer 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. In Education, the second quarter marked the conclusion of a strong sales cycle for our K12 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.

These positive outcomes reflect the differentiated value we deliver and the depth of our relationships as the largest provider of education staffing solutions in the U.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 Grace Boost, 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 Stukalsky 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? Thank you, Chris. 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've established and are adjusting our full year expectations favorably as a result. For the second quarter, revenue totaled $1.04 billion, a decline of 5.8% versus the prior year quarter, and measurably better than our guidance of down 7%-9%. The year-over-year revenue decline improved 500 basis points relative to the first quarter. Underlying revenue, which excludes the previously disclosed discrete impacts driven by reduced demands from the federal government and three large ETM customers, declined approximately 0.6%, 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.