Kelly Services, Inc. Q2 FY2026 earnings call

• Overall Industry Cycle Status

  • Management believes the business has moved beyond industry stabilization and is now in the early stages of recovery, marked by two consecutive quarters of improving underlying revenue trends.
  • Key operational indicators confirm the recovery: rising consultant outbilling in SET and expanding spend under management in ETM.
  • The company's One Kelly enterprise strategy aligns with customer demand for integrated end-to-end workforce solutions, creating cross-selling opportunities across segments.

• Strategic Growth Priorities

  • Artificial Intelligence (AI) is a net tailwind for the business, driving strong demand for services supporting the data center ecosystem across SET, ETM, and the company's BPO capabilities.
  • The company holds unique domain expertise in critical infrastructure for data centers (power, cooling, commissioning, supply chain) that positions it to capture AI-driven capital investment demand.
  • Therapy services in K-12 education is a top growth priority, with a large, fragmented market opportunity that offers strong margin expansion potential.
  • SET is focused on continued upstream expansion to grow higher-margin solution-oriented work, already reaching 40% of SET segment revenue.

• Operational and Leadership Updates

  • A new Chief Product and Technology Officer was hired to align technology modernization, product development, and AI scaling initiatives to unlock customer value and drive efficiency.
  • New SET leadership has fully implemented its revised operating model, delivering the first sequential segment growth in two years.
  • Management remains actively engaged with ETM's leadership, and is pleased with the segment's progress on client centricity, accountability, and execution.
  • The company maintains strict SG&A cost discipline, with ongoing structural efficiency initiatives from prior year business realignment and integration delivering sustained margin benefits.

• Capital Allocation

  • The company maintains a balanced, opportunistic approach to capital allocation, and maintained its quarterly dividend reflecting confidence in cash generation.
  • Near-term excess cash is prioritized for debt pay down, supported by the flexible short-term structure of the company's debt portfolio.

The company operates three core business segments: Education (KE), Engineering, Technology, and Science (SET), and Executive, Talent, and Management (ETM).

1. Education: Florida enrollment declines and school choice attrition drove volume pressure in the first half of the year, which management confirmed is now behind us. The 2024-2025 selling cycle achieved a 100% renewal rate, with new wins scheduled to go live for the 26-27 school year. Therapy services, currently 8% of the Education segment revenue mix, is the fastest-growing area of the segment, with more therapy providers confirmed for September than any prior period. Management expects Education to return to growth in the second half of the full year.
2. SET: The segment reached a genuine inflection point in the quarter, with broad-based year-over-year improvement across all five specialty segments, with telecom and life sciences leading in delivering year-over-year growth. Solution-oriented revenue now accounts for 40% of the segment's total revenue, reflecting successful strategic upstream expansion. Consultant outbilling trends are positive, and the engineering sub-segment is performing strongly, with sequentially increasing average deal size and the strongest pipeline velocity seen all year coming out of June. Management expects broad-based year-over-year growth across all SET specialties in Q4, with only the government sub-segment potentially close to flat.
3. ETM: The business has built consistent momentum through the first half of the year and has returned to underlying growth, driven by broad-based demand for professional and industrial staffing supported by reshoring trends and semiconductor industry investment. Spend under management is expanding, and the segment's leadership and operational improvements have delivered positive performance that management is pleased with.

• Full year 202X revenue expectations have been improved from the outlook provided in February, driven by better-than-anticipated operational progress and improving demand trends.
• ETM is expected to maintain its current strong momentum through the second half of the year, contributing to full year results.
• The Education segment is expected to return to year-over-year growth in the second half, with new business and therapy growth progressing in line with prior expectations despite near-term volume pressure.
• Excluding the impact of the 53rd calendar week, management expects year-over-year growth across all three segments in the fourth quarter of the year.
• Full year 202X full year free cash flow is expected to be net positive overall, with seasonal cash consumption in the third quarter from Education's summer lull and working capital needs for accelerating second half growth.

• No specific material new operational or macro risks were explicitly called out by management during the call. The only historical headwind referenced, prior year contract delays and Florida Education enrollment declines, is confirmed to be behind the company, with most delayed contracts closed in the current year selling cycle.

Q: Analyst Joe asks for clarity on delayed education contracts, when delays become lost opportunities, and an update on new SET leadership and ETM leadership changes. / A: Management explains the 2023 selling cycle delays were driven by macro and Department of Education turmoil, not lost demand. Most delayed contracts have now been closed in the current 2024 selling cycle. New SET CEO Joel is in his second quarter, and has delivered broad-based improvement across all SET sub-segments, growing solution-oriented revenue to 40% of SET, with strong engineering pipeline momentum. ETM leadership changes are progressing well, with the segment delivering improving momentum and management remains engaged with the business.

Q: Analyst Karthik asks where the company stands in the industry recovery cycle and if AI is a headwind or tailwind. / A: Management confirms the company is in the early stages of recovery after exiting stabilization, with two straight quarters of improving trends across all business segments. AI is a clear tailwind: massive data center investment drives demand for the company's engineering, telecom, and BPO solutions across all segments, and the company's unique domain expertise in data center infrastructure positions it to capture this growing demand.

Q: Analyst Kevin asks what is driving improved full year guidance, and what the SET inflection means for future growth. / A: Improved guidance comes from better operational execution, stronger demand trends, and sustained cost discipline across all segments, with ETM leading the progress. The SET inflection is broad-based: every specialty segment improved quarter-over-quarter, with telecom and life sciences already delivering year-over-year growth. Demand is improving across all sub-segments, with technology growing upstream solution revenue and engineering seeing faster pipeline growth and larger deal sizes. Management expects broad-based year-over-year growth across SET specialties in Q4.

Q: Analyst Mark asks about cash allocation priorities and potential M&A opportunities. / A: Management maintains a balanced, opportunistic capital allocation strategy: it maintained the quarterly dividend, prioritizes near-term excess cash for debt pay down, and has a flexible balance sheet. Seasonal cash consumption will occur in Q3 from the Education summer slowdown and working capital for second half growth, but full year cash flow will be net positive. Management expects more attractive acquisition assets to come to market as the industry recovery progresses, and will actively evaluate opportunistic targets that align with the company's strategic focus.