Kelly Services Charts Cautious Recovery After Tough Q1

Kelly Services ((KELYA)) has held its Q1 earnings call. Read on for the main highlights of the call.

Kelly Services’ latest earnings call struck a cautiously constructive tone as management balanced sharp year-over-year declines in revenue, gross profit and earnings with visible progress on cost cuts and technology upgrades. Executives acknowledged the drag from customer-specific headwinds and working capital, but emphasized sequential improvements, disciplined SG&A reductions and a clearer path to margin expansion in the back half of 2026.

Top-Line Performance Holds Above Expectations

Kelly reported Q1 2026 revenue of $1.0 billion, down 10.7% year over year but ahead of management’s internal forecast. On an underlying basis, stripping out reduced federal work and three large ETM customers, revenue fell 3.3%, improving 60 basis points from the prior quarter and signaling a gradual stabilization in demand.

ETM Shows Early Signs of Stabilization

The ETM segment posted a modest 0.4% decline in underlying revenue versus a year ago, but trends improved compared with Q4. Staffing revenue fell just 1.2% on an underlying basis, with month-over-month growth in February and March, while every Talent Solutions specialty delivered year-over-year gains, suggesting selective strength within the portfolio.

SG&A Cuts Underpin Profitability Efforts

Selling, general and administrative expenses fell sharply as Kelly intensified cost discipline, with reported SG&A down 11.7% to $199.3 million and adjusted SG&A 10.3% lower. Management expects roughly $25 million of core SG&A savings in 2026, noting that core adjusted SG&A has declined sequentially every quarter since early 2025, reinforcing confidence in structural cost improvements.

EBITDA Margins on a Gradual Recovery Path

Adjusted EBITDA reached $15.8 million, yielding a 1.5% margin that matched internal expectations and improved 20 basis points from Q4. Management guided to at least a 2.5% adjusted EBITDA margin in Q2 and signaled that most of the margin recovery will materialize in the second half of 2026, where they are targeting measurable expansion.

Technology Modernization and AI as Growth Levers

The company highlighted steady progress on its multi-phase technology overhaul, including the initial migration of SET acquisitions to a modern platform and the rollout of HubSpot CRM to commercial teams by mid-year. A broader enterprise platform migration is slated to start in Q4, with most of SET on the new system by early 2027, while analytics and AI-driven tools such as Helix and rate intelligence are already helping win new business.

Major MSP Win and Strengthening Pipeline

Kelly secured a significant managed service provider mandate with a leading global oil and gas company across North America, a deal attributed to its differentiated technology-enabled staffing solutions. Management also pointed to a healthy MSP pipeline and growing demand for total talent management in telecom, data centers, engineering and K-12 staffing, underpinning their medium-term growth narrative.

Balance Sheet Remains Flexible Despite Higher Borrowings

The company ended the quarter with $252 million of available liquidity, including $26 million in cash and $226 million of unused credit capacity, while total borrowings stood at $130.5 million and leverage hovered near 1x EBITDA. Management reaffirmed its quarterly dividend of $0.075 per share, signaling confidence in the balance sheet even as they invest in technology and restructuring.

Revenue and Gross Profit Under Pressure

Despite beating internal revenue expectations, reported sales fell 10.7% to $1.0 billion and gross profit declined 17% to $196.4 million. The gross profit rate slipped 140 basis points to 18.9%, with management noting that about 50 basis points of the decline was timing-related, while also highlighting a modest 10 basis point improvement versus Q4.

Earnings Hit by Lower Volumes and Charges

The quarter produced a reported loss per share of $0.17, with adjusted EPS dropping sharply to $0.03 from $0.39 a year ago. Management attributed the decline to lower revenue, reduced gross profit and ongoing restructuring and integration costs, underscoring the near-term earnings drag from the company’s transformation initiatives.

Segment-Level Weakness in Technology and Education

SET underlying revenue fell 6.0% as near-term demand softened in the technology specialty, reflecting a slower hiring environment in that sector. Education revenue was down 4.8%, pressured by delayed contract decisions, lower enrollments and weather-related school closures, with some of the most pronounced impacts seen in larger districts such as those in Florida.

Transformation Charges to Persist

Kelly recorded $9.2 million of charges in the quarter, including $5.2 million tied to integration, technology modernization, organizational realignment and restructuring. The remainder was associated with changes in the controlling shareholder, executive transitions and initial real estate rationalization, and management indicated that additional implementation charges will continue through 2026.

Working Capital Drives Negative Operating Cash Flow

Cash flow from operations was negative $25.4 million, a result management linked to working capital timing rather than structural liquidity issues. Even with the increase in borrowings versus year-end to $130.5 million, the company emphasized that it retains ample access to credit to support ongoing modernization investments and day-to-day operations.

Margins Compressed Despite Aggressive Cost Actions

Adjusted EBITDA margin declined 150 basis points year over year to 1.5%, highlighting how gross profit erosion outweighed the impact of SG&A cuts. Management cautioned that only modest margin improvement is expected for the full year, with a more meaningful recovery forecast for the second half of 2026 as revenue stabilizes and technology investments begin to pay off.

Customer Concentration Adds Volatility

Results were materially affected by reduced demand from the federal government and three large ETM customers, illustrating the earnings volatility associated with concentration risk. One major customer has stabilized at a lower demand level, another has fully run off, and the largest has now steadied, giving management more visibility into the baseline from which they plan to rebuild.

Guidance Points to Sequential Improvement and H2 Upside

Management guided to Q2 revenue declines of 7–9% year over year, with at least a 100 basis point improvement in the underlying decline and an adjusted EBITDA margin of at least 2.5%, implying a 100 basis point uplift from Q1. For 2026 they expect sequential year-over-year improvement each quarter, modest revenue growth in the back half, roughly mid-single-digit revenue decline for the full year and adjusted EBITDA margins above about 3% in H2 as CRM deployment finishes and platform modernization progresses.

Kelly’s earnings call underscored a company still wrestling with cyclical and customer-specific headwinds, but one that is acting aggressively on costs and leaning into technology to reset its margin profile. For investors, the near term remains challenged by weaker revenue and compressed margins, yet the combination of solid liquidity, visible cost savings and a credible H2 recovery story keeps the longer-term outlook cautiously favorable.