Prepared remarks
Good morning, and welcome to Kelly Services First Quarter Earnings Conference Call. 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.
Good morning, and welcome to Kelly's first 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. 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. 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. With that, I'll turn the call over to Chris.
Thank you, Scott. Good morning, everyone. I'll begin with highlights from the first quarter. The macroeconomic environment remained dynamic over the first three months of 2026. Against this familiar backdrop, employers continue to take a cautious approach to hiring, contributing to a mixed labor market. That said, conditions through the quarter were stable, consistent with our expectations. This stability was reflected in our results as we executed on our strategic priorities. Total company revenue exceeded our expectations and adjusted EBITDA margin was in line with our expectations. In ETM, staffing and overall revenue trends improved sequentially from the fourth quarter, including growth in talent solutions across our technology-enabled and AI-powered MSP, RPO and PPO offerings. In SET, we delivered another quarter of year-over-year growth, our Telecom specialty and life sciences and engineering performance improved sequentially.
In Education, we continue to experience pressure from delayed contract decisions and enrollment declines and, to a lesser extent, weather-related closings. Across all three segments, we continue to align resources with demand and maintain a disciplined approach to expense management as part of our ongoing focus on efficiency. Contributing to stabilizing trends in our results, we had several new customer wins that were implemented and came online during the quarter. Among them is a significant MSP program with a leading global oil and gas company across its North American operations. Kelly was selected based on the differentiated value of our technology-enabled capabilities. This includes our Helix analytics platform and AI-enabled rate intelligence which provides the visibility, benchmarking and cost optimization large enterprise customers require of a contingent talent management program.
With the initial implementation of this new MSP program complete, we have clear line of sight to additional expansion opportunities. This win underscores where our One Kelly go-to-market approach is capable of delivering, leveraging technology and our experience serving global customers to win in the market and grow. With momentum building across the enterprise, we remain focused on returning to organic growth and margin expansion. Paving the way towards this next horizon is our newly formed growth office. Since it was established in February, the growth office has been collaborating across the enterprise to lay the foundation for an integrated commercial operating framework. This framework will serve as the foundation of a unified One Kelly enterprise strategy that brings the full breadth of our portfolio to Kelly's current customers and prospects. Central to this effort is the migration of all commercial teams onto a new unified CRM system, a key component of our modernized tech stack.
The CRM will provide enterprise-wide pipeline visibility, enable high conviction forecasting and support cross-selling across business units. We expect the migration to be complete by mid-year as part of our ongoing technology modernization initiatives. Reflecting more broadly on our technology modernization journey, we remain on track with our multi-phase approach. In the first quarter, our team was successful in ensuring a smooth transition following the cutover of our acquisitions in SET from their legacy technology stack to the modernized platform Kelly acquired through our acquisition of MRP. Armed with the key learnings we gathered from the initial cutover, we're well positioned to execute on subsequent phases and realize the benefits of deeper data and insights, AI and automation and scale and enhanced productivity. As we executed on our strategic priorities through the quarter, we continue to evolve our leadership team.
In March, we welcomed Joel Leege as President of SET. Joel is a proven industry leader with broad-based sector experience, having spent nearly three decades in staffing, talent solutions and managed services across technology, engineering and life sciences. He brings extensive experience leading complex transformations and integrations, enabling exceptional service delivery for customers and driving above-market growth. This experience is uniquely suited to further enhance SET's competitive positioning and take the business to the next level. I'm pleased to have him as part of Kelly, and I look forward to Joel leading the SET business to new heights of growth and profitability. I'm also reevaluating the leadership structure within the ETM business. This business is core to our strategy. With this in mind, I'm taking time to assess what we need longer term to ensure we deliver on our growth objectives.
In the interim, I will be closely involved in the management of ETM. I have great confidence in the team who have consistently demonstrated their commitment to customer centricity, visibility and accountability. These cultural pillars remain fundamental to how we'll achieve our ambitions and win in the market, both in ETM and across the enterprise. I was pleased to have the opportunity to see the strength of our culture on full display at our recent Impact 2026 Leadership Summit in March. This immersive experience brought together 200 of our leaders for two days of dialogue and collaboration focused on transforming Kelly into a more customer-centric, visible and accountable enterprise. Impact reflects our commitment to building on the strength of Kelly's culture from the leadership level down, positioning the company to execute more consistently as we target a return to revenue growth and margin expansion in the second half of the year. In a moment, I'll share more about our pathway toward a return to growth. First, I'll turn it over to Troy to provide more details on the results in the quarter. Troy?
Thank you, Chris, and good morning, everybody. I'm pleased to report that we started the year with solid execution and results on a number of fronts. For the first quarter of 2026, revenue totaled $1 billion, which was down 10.7% overall versus Q1 of last year, and is favorable to our guidance. Excluding the previously disclosed discrete impacts, driven by reduced demand from the federal government and three top ETM customers, revenue was down 3.3% on an underlying basis, which was improved 60 basis points versus last quarter. As a reminder, a brief update regarding these impacts. Federal government demand largely stabilized in Q3 of last year with a slight sequential increase this quarter mainly from the government shutdown and seasonal impacts in Q4. For the three top ETM customers, one stabilized at the current reduced demand levels beginning in Q3, one fully ran off in Q3, and the largest one remains one of our top customers and has stabilized across Q4 and Q1.
At the segment level, underlying ETM declined 0.4% versus the prior year quarter, which is measurably improved versus last quarter and exceeded our expectations. Each Talent Solutions specialty grew versus the prior year quarter. In staffing, we saw a net underlying decline of just 1.2% in the quarter and year-over-year growth across February and March. Overall underlying ETM revenue has been relatively stable across the last five quarters. Education decreased 4.8% year-over-year in the quarter, reflecting the prior year delayed new contract decisions, elevated weather-related school closures, and overall reduced demand in key markets due to enrollment declines. We expect education to deliver sequential year-over-year improvement throughout the remainder of 2026 and a return to growth in the second half of the year as a result of new business wins, successfully defending several key renewals and continued penetration of our therapy offering into new and existing clients.
SET's underlying revenue declined 6% in the quarter led primarily by near-term demand pressure within the technology specialty. Consistent with ETM and Education, we are confident we will see sequential year-over-year improvement each quarter in 2026 with science, engineering and technology contributing most strongly in Q2. Reported gross profit was $196.4 million, down 17% versus the prior year quarter reflecting the lower revenue volume, along with employee-related costs and business mix changes. The gross profit rate was 18.9%, a decrease of 140 basis points compared to the prior year quarter. Approximately 50 basis points of the decline is timing related, which we expect to normalize over the course of the year. Our overall gross profit rate improved 10 basis points relative to Q4 and the year-over-year decline improved similarly. Versus Q4, both ETM and SET saw improvement in their gross profit rates and year-over-year declines, while Education saw rate pressure in light of the revenue decline, cost timing and mix.
We expect to see gross profit rate improvement overall and in each business unit in Q2 and over the remainder of the year. We continue to make significant progress improving our SG&A expense profile with reported SG&A expenses of $199.3 million, a decrease of 11.7%. On an adjusted basis, SG&A expenses decreased 10.3% year-over-year, reflecting the continued momentum with our structural and volume-related cost optimization efforts. Over the last three quarters, the year-over-year decline has averaged over 10%. Additionally, core adjusted SG&A expenses, which exclude depreciation and amortization and incentives, have declined sequentially each quarter since Q1 of 2025. In the quarter, adjusted SG&A expenses decreased across all the segments as we continue to drive durable and sustainable efficiencies in our operating model, through technology enhancements and process efficiencies, including leveraging AI.
We also continue seeing benefits from realignments within the ETM segment and integration of MRP and other acquisitions within SET, all of which are progressing well. For the year, we're projecting a net year-over-year decline of approximately $25 million in core SG&A expenses despite investments being made in technology, the growth office and other areas. The structural and durable changes we are making will allow us to scale more efficiently as we pivot to growth, thus supporting our expected return to margin expansion in the second half of the year and beyond. Our reported loss per share was $0.17 for the quarter. On an adjusted basis, we delivered earnings per share of $0.03 compared to $0.39 in the prior year. For our adjusted results, in connection with our various efforts, we recognized $9.2 million of charges in the quarter. Integration, technology modernization, organizational realignment and restructuring drove $5.2 million of the charges.
The balance is related to costs associated with our controlling shareholder change, executive transitions and initial steps we have taken in our real estate rationalization efforts. We expect to continue incurring various charges throughout 2026 as we progress on our technology modernization journey, reduce our fixed cost structure, including real estate costs, and expand upon our various optimization efforts. Adjusted EBITDA was $15.8 million, with an adjusted EBITDA margin of 1.5%, which was down 150 basis points versus the prior year quarter and in line with our expectations. The year-over-year decline improved 20 basis points relative to Q4. The revenue and gross profit declines drove the decrease versus the prior year with the significant SG&A reductions partially offsetting. At a segment level, similar to the gross profit rate, both ETM and SET improved their margins and year-over-year performance versus Q4, while Education saw pressure in light of the revenue and gross profit declines.
We expect each business unit to show sequential improvement in their adjusted SG&A margins in Q2 and on a year-over-year basis as we progress through the year. Moving to the balance sheet and cash flow, we utilized $25.4 million of cash from operations this quarter due to the timing of working capital requirements. Total available liquidity as of the end of the quarter was $252 million, comprising $26 million in cash and $226 million available on our credit facilities, providing us with ample capital allocation flexibility. Total borrowings of $130.5 million increased versus the prior year-end, reflecting the working capital needs during the quarter. Our debt-to-EBITDA leverage remained near 1 at the end of the fiscal quarter. During Q1, we maintained our quarterly dividend of $0.075 per share. We remain confident in Kelly's strategy and cash flow generation capabilities and are committed to opportunistically deploying capital in pursuit of attractive returns for shareholders.
As we turn to the outlook for the remainder of 2026, our expectations are unchanged relative to the initial view we established in February. Our expectations assume no material change in the macroeconomic or industry dynamics in the coming quarters. For Q2, we expect to show year-over-year improvement relative to Q1 with an overall revenue decline of 7% to 9%, which includes at least 100 basis points of improvement in the underlying decline. For adjusted EBITDA margin, we expect at least 2.5% representing at least 100 basis points improvement relative to Q1 and a significant reduction in the year-over-year decline relative to the past two quarters. As we progress through the balance of the year, assuming no new material impacts, we expect to see relative improvement in our year-over-year performance each successive quarter for both revenue and adjusted EBITDA margin. That should translate to modest revenue growth in the second half of the year and a roughly mid-single-digit decline on a full year basis.
For adjusted EBITDA margin, we expect to see measurable year-over-year margin expansion in the second half of the year and a modest increase on a full year basis. We are excited about the momentum we are building and the opportunities that lie ahead in 2026. I'm grateful to all the Kelly team members for their unwavering commitment and resilience as we position the company for growth and enhance profitability over the long term. I'll now turn the call back to Chris for his closing remarks.
Thank you, Troy. As we look ahead, we remain firmly committed to executing on the priorities we outlined in February. Rooted in the strategic pillars I shared shortly after joining Kelly, these priorities will continue to guide our actions and progress on the pathway toward an inflection point in our results. Growth remains our top priority. The growth office is taking shape and beginning to enhance how we go to market as One Kelly enterprise. With the leadership transition in SET complete and organic growth drivers gaining traction in each of our businesses, we have a clear path to improve top line performance as we move through the year. The strength of our pipeline and the steady stream of new wins coming online reinforce our confidence that our go-to-market approach is working and that our ability to convert opportunities is accelerating. On efficiency, we'll continue to align resources with demand while reengineering our cost base to drive structural efficiencies and enhance profitability.
Our technology modernization initiative remains on track and our enterprise AI strategy continues to unlock productivity across the business. In our culture, the energy and alignment our team demonstrated at our recent Impact Leadership Summit reinforce what I've known since I joined Kelly. Our people are deeply committed to the success of our company, our clients and the talent we place. We'll continue to build on the momentum with an emphasis on customer centricity, visibility and accountability across everything that we do. We remain on track to deliver our commitments and achieve revenue growth and margin expansion in the second half of the year. There's much work ahead, but I'm confident in our plan, our team and our ability to execute. We look forward to capitalizing on the positive momentum we're building together and unlocking Kelly's full potential for the benefit of all of our stakeholders. Operator, you can now open the call to questions.
Questions and answers
Our first question is going to come from the line of Marc Riddick with Sidoti.
So I wanted to start with some of the cost improvements that you've been working on. Maybe you could talk a little bit about the $25 million in core SG&A reduction expected. Perhaps you could touch a little bit about some of those efforts and the timing that we might expect there?
Yes. Thanks, Marc. I'm really pleased with the progress that you're seeing as we look at driving expense reductions across the enterprise. This is one of the priorities that I outlined right as I joined Kelly: our focus on reengineering our cost base and matching resources with demand. You're seeing us deliver on that commitment in the first quarter through disciplined execution. We saw that in the 1.5% adjusted EBITDA margin as well, which was in line with our expectations. It improved 20 basis points year-over-year in comparison to our Q4 trajectory. As you've heard us talk about and Troy reemphasized, we're going to continue to see sequential incremental improvement on the EBITDA margin side as we go throughout the rest of the year. Troy, maybe you want to comment further on the specific $25 million impact for the rest of the year?
Yes, sure. Thanks for the question, Marc. We began taking actions, as Chris noted, throughout last year and really accelerated in the latter part of the year in response to some of the elevated revenue pressure but also with the integration efforts related to our acquisitions and the cutover to the new technology platform, where we consolidated all the acquisitions in December. So it's really the manifestation of some of the realignments that we did last year and then the integration efforts as we progress into this year. We continue looking at both durable structural changes as well as volume-related changes so that as we pivot to growth, we can scale much more efficiently and drive that EBITDA margin expansion.
Great. And then maybe picking up on that part of the commentary: can you talk a little bit about the timing and milestones that you're looking for for the remainder of the year on the technology activity as well as the timing of ERP that we might see going forward?
Yes. We have another phase expected in the beginning of the fourth quarter of this year, where we'll migrate the platform now to a broader enterprise platform. Right now, we have the acquisitions — MRP and the prior SET acquisitions — all consolidated on the platform, but that was designed really for those smaller entities. We've made some foundational changes in the platform that we'll migrate everyone onto, which we'll call the enterprise platform. We're migrating our enterprise human capital management, so all of our FTEs will now be on the platform and we have some other smaller changes, migrating some customers on a prototype sample basis just to go through some of the Kelly platform migrations. We're also going to continue working on our solutions billing capabilities, which are more complex, non-staffing related capabilities, and then work to bring the majority of the SET business onto the platform early in 2027.
And Marc, one thing to add on our CRM: the most important near-term milestone in the second quarter, which is on track, is the deployment of our HubSpot CRM. It's the consolidation of our CRMs across the business units. We're going to migrate all of our commercial sellers onto the CRM by mid-year. Having the growth office and Pat's leadership to drive that gives us enterprise-wide pipeline visibility and allows us to execute on the go-to-market and growth objectives we've been outlining.
That's very helpful. And then last one for me: maybe touch a little bit on the demand drivers you're seeing from customers, particularly the technology demands. Could you talk about how that paced through the quarter and what you're seeing overall in terms of data center impacts, AI impacts and how that's progressing versus the beginning of the year?
Sure. First, some of the near-term pressures reflect difficult year-over-year comps, particularly within SET, as we look at 2025. That's why, across the business, we continue to align resources with demand and under Joel's leadership we'll be very focused on getting back to market growth. That being said, we're seeing encouraging signals, including a net positive consultant count improvement in March. As we exited the quarter, April is tracking quite similarly, so there's positive momentum. We also saw sequential improvement in some of the businesses we mentioned in our prepared remarks. We're pleased with progress in the telecom space, driven by outsized demand in the data center space where we have differentiated capability. We'll continue to see that demand play out in the market where customers across the supply chain need total talent management solutions and the technical solution to support the investment happening in the United States and around the world.
Marc, I would just add that across the business we saw improvement as we progressed through the quarter. In Education, we had some weather-related impact largely concentrated in January; that accounted for about half the decline in the quarter specific to that. In ETM, I commented in the prepared remarks about pivoting to growth in the underlying staffing business as we exited the quarter. We feel good about the trends heading into Q2, which is reflected in our expectation of down 7% to 9% overall with at least 100 basis points improvement in the underlying decline.
Our next question will come from the line of Kartik Mehta with Northcoast Research. As the quarter progressed, in Education we experienced some weather-related impact largely concentrated in January, which accounted for about half of the quarter's decline in that segment. In ETM, as I noted in the prepared remarks, we pivoted to growth in the underlying staffing business as we exited the quarter. We feel good about the trends heading into Q2, which is reflected in our expectation of a decline of 7% to 9% overall, with at least 100 basis points of improvement in the underlying decline.
Maybe taking a bigger picture look at Kelly today versus prior downturns: can you discuss how you think structurally the company is different today than it was before? Maybe in terms of customer mix, customer relationships, and how the company has changed as you've gone more into SET and higher-margin businesses?
Sure, Kartik. As I step back and think about what differentiates Kelly in the market and how that's evolved, all of the steps we took over the last few years to get scale and capability in higher specialized areas were the right steps. We have the scale and breadth of capability to compete now in all of the end segments we're in — we didn't have that a few years ago in areas like technology. We also have a much more robust RPO offering through our acquisition of Sevenstep and we have a leading total talent management solution with the combination of the strength of our MSP and RPO offerings. Going forward, what needs to differentiate Kelly is our focus on the customer and making sure we bring all of that capability to our customer. We're doing that in large part through better execution and the operating framework we outlined, focusing on go-to-market and how we show up more holistically as One Kelly enterprise to our customers. Establishing the growth office this quarter was the next step in that journey. Driving the operating framework within account management, how we sell and how we deliver across large customers is really important. That focus is already playing out with some large customer wins and will continue to differentiate Kelly for many years to come.
Troy, you've done a good job of taking cost out and the company seems more efficient. How do you think about the incremental earnings power when the industry returns to growth?
Good question. That cost reduction, as I noted in the prepared remarks, is net even of investments we're making in the growth office and other areas. So you'll see some moderation in declines as we pivot to growth, but we'll be able to scale more efficiently. We're expecting to achieve our expectations for the year. Margins would be back above 3% in the back half of the year, which is where we were in the last half of 2024 and the first half of 2025. As we continue to grow, we would expect to expand further in an efficient and effective way.
Our next question comes from the line of Kevin Steinke with Barrington Research Associates.
Great. I wanted to follow up on the discussion about core SG&A expenses to make sure I'm understanding correctly. I believe you're equating core SG&A with adjusted SG&A. If it's down $25 million year-over-year in 2026, it appears the adjusted SG&A expense on a quarterly basis will kind of flatten out for the rest of the year at about that $192 million level you saw in the first quarter. Am I thinking about that correctly?
Yes. That's right — total adjusted SG&A roughly flattens out. $192 million is the approximate run rate. The reason we highlighted core SG&A, which we haven't discussed previously in detail, is that we had a lot of movement with incentives last year given the challenging environment. There was a reduction to performance incentives throughout the year. This year, we're expecting to perform measurably better and would expect to return to some of those incentives. If you strip that out and focus on underlying wages, facilities and other more stable items, that should flatten out as we progress through the year and we get the year-over-year benefit of actions taken last year and this year. And again, that's net of investments we'll be making as we pivot to growth.
Okay. How material is the change in incentive comp that you're expecting in 2026 versus 2025?
It's probably a $20 million to $25 million swing in total SG&A between the years, something in that ballpark. It will be subject to ultimate performance, and each business unit has incentives tied to their specific results so there can be variability based on individual business unit performance.
Right. Okay. Just following up: you commented you expect gross margin improvement throughout the year. What would be driving that? It sounds like a lot of the adjusted EBITDA margin improvement hinges on improved gross margins. Is that correct?
Yes, that's generally correct. As we pivot to growth we'll get lift on a relatively flat expense base and the gross margin improvement. There's also some timing effects — employee-related expenses and how they played out last year versus this year. We were up 10 basis points quarter-over-quarter on gross margin despite some timing pressure. As we benefit from mix, particularly growth in higher-margin areas in the back half of the year, that will help. We also saw a little bit of movement on perm fees; they're still a small portion of revenue, but we did see some benefit in SET in the first quarter, which helps gross margins and ultimately EBITDA as well.
Okay. That's helpful. You called out lower student enrollment in the Education segment. How meaningful or broad-based is that across your school district clients?
We remain confident in the Education business; it's highly differentiated and we're #1 in the market. We continue to see historic fill rates across the U.S. where we're serving 9,000 schools. Some of the factors that came together were temporary. There were weather-related closures and some budget constraints stemming from enrollment declines. The biggest impact was in Florida, where we serve some of the largest school districts; that concentration was a one-time hit and that demand has now stabilized. We're focused on the roughly 70% of the market that is not yet using outsourced K-12 substitute management with Kelly. We're selling around the country and feel good about large renewals this year. We'll also continue to penetrate therapy services into new and existing clients across the K-12 footprint. We feel very good about the opportunity in Education for the rest of the year.
Lastly, can you provide more color on the organic growth drivers? You mentioned organic drivers gaining traction and the pipeline strength — how broad-based is that across your businesses?
The growth office has been moving quickly and it's a foundational quarter as we put in an integrated commercial operating framework. We're aligning incentives, commercial teams and account planning, and adding rigor to pipeline management. Migrating our commercial teams to the new CRM will give us visibility to drive the business forward and allocate resources appropriately for closing deals and delivering excellent service. The pipeline strength is broad: demand for total talent management solutions is strong, and our MSP pipeline is robust — you saw that in the large oil and gas win in the quarter. That win was differentiation around our tech stack and reach rather than price. Telecom and engineering pipelines remain strong in SET, and we continue to drive more pipeline in technology. In K-12 staffing the pipeline is strong for net new districts, and therapy opportunities tied to larger districts are increasing. Pat and the growth office will continue to drive this momentum through the year.
Okay. That's good to hear. Thank you for the comments.
Thanks, Kevin.
Our next question is going to come from the line of Joe Gomes with NOBLE Capital.
This is George — I'm filling in for Joe Gomes this morning. First question: what have the Hunt companies brought to the table so far?
As you would have seen in our recent filings, later today we'll be in our annual meeting where the Board has nominated 11 individuals for election, with three new members joining. I'm really excited about the extensive experience the new Board members bring to help with our strategic execution and long-term value creation. I'm personally excited to work with the new Board. The Hunt family has expressed support for our management team and strategic direction. There has been no change to our business strategy, client relationships or operational approach—everyone is focused on driving shareholder value. We're excited to bring in this new slate of directors later today.
All right. And the early days of your new Chief Growth Officer, Pat McCall — how have they been?
Very good. We've been setting the foundation for a commercial operating framework. There's a lot of opportunity for Kelly to show up as one global enterprise to our large customers. We're putting in stronger account planning, more rigorous pipeline management and other elements to contribute to growth. Pat has been central to that work and we're excited about what this will mean going forward.
Thank you. I'm showing no further questions. I would like to hand the conference back over to Chris Layden for closing remarks.
Great. Thank you all. We'll see you next quarter.
This concludes today's teleconference. Thank you for participating, and you may now disconnect. Everyone, have a great day.