Kelly Services, Inc. (KELYA) Q3 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call reveals declining revenues across multiple segments, a significant drop in adjusted EBITDA, and reduced gross profit. Although there are efforts to leverage AI and operational efficiencies, the short-term impact is minimal. The Q&A highlights concerns about revenue concentration, macroeconomic challenges, and unclear management responses on certain risks, which further dampens sentiment. Despite some cash flow improvements and strategic initiatives, the overall outlook is negative, with potential stock price decline due to weak financial performance and uncertainty.
Key Financial Performance
Revenue for Q3 2025 $935 million, a decrease of 9.9% year-over-year. Reasons for the decline include lower-than-expected growth in ETM staffing specialty, education, and select other specialties, as well as reduced demand from the federal government and three top customers, which accounted for approximately 8% of the decline.
Education Segment Revenue Grew 0.9% year-over-year, driven by ongoing fill rate improvement. However, growth was relatively lower due to decision delays in the broader macro environment and a maturing customer portfolio.
SET Segment Revenue Down 9% year-over-year, or 3.5% excluding the federal government impact. Telecom and Engineering specialties showed growth, while Life Sciences and Technology saw declines.
ETM Segment Revenue Declined 13.1% year-over-year, or 1.9% excluding large customer and federal contract impacts. Staffing services revenue declined 16.4%, and outcome-based revenues decreased by 17.2%, primarily due to demand pressure from a large contact center customer.
Gross Profit $194 million, down 12.5% year-over-year. The gross profit rate was 20.8%, a decrease of 60 basis points compared to the prior year, primarily due to reduced revenue and elevated employee-related costs.
SG&A Expenses $194.4 million, a decrease of 11.2% year-over-year. Adjusted SG&A expenses decreased 9.7%, reflecting structural and volume-related cost optimization efforts.
Adjusted EBITDA $16.5 million, a decrease of 36.7% year-over-year. Adjusted EBITDA margin declined to 1.8%, primarily due to revenue and gross profit declines.
Operating Cash Flow $94 million through Q3 2025, up significantly compared to the prior year, reflecting strong cash generation.
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Operating Highlights
AI-powered offerings: Kelly's ETM segment is leveraging technology-enabled and AI-powered offerings to deliver talent solutions, business process outsourcing, and staffing services at scale.
Education business growth: Kelly has tripled the revenue of its Education business since 2020, achieving a dominant position in K-12 staffing.
Telecom specialty growth: SET's telecom specialty achieved double-digit growth in Q3 2025, continuing strong growth from the previous quarter.
Higher-margin specialties: Kelly has acquired scale in higher-margin, higher-growth specialties like technology and telecom, repositioning the company in the market.
Global workforce capabilities: Kelly's ETM segment offers unmatched global workforce capabilities, recognized as leading the market by Everest.
Cost optimization: Kelly reduced SG&A expenses by 11.2% year-over-year in Q3 2025, reflecting structural and volume-related cost optimization efforts.
Technology modernization: Kelly is accelerating its technology modernization initiative, including integrating AI and consolidating systems to improve efficiency.
Workforce reduction: Kelly implemented strategic restructuring actions, including a targeted workforce reduction, to align resources with demand and streamline operations.
Focus on growth: Kelly aims to drive organic growth by enhancing its go-to-market strategy and pursuing targeted investments in higher-margin specialties.
AI-enabled workforce: Kelly is positioning itself as a partner of choice for employers transitioning to an AI-enabled workforce, addressing unmet demand for AI-related skills.
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Risk or Challenges
Macroeconomic Landscape: The company is facing challenges due to a dynamic macroeconomic environment, including a sluggish labor market and global and domestic policy shifts, which are impacting its operations and financial performance.
Revenue Decline: Revenue for the third quarter of 2025 decreased by 9.9% year-over-year, driven by reduced demand from the federal government and three top customers, as well as broader macroeconomic pressures.
Segment-Specific Challenges: The ETM segment experienced a 13.1% revenue decline, with staffing services and outcome-based solutions facing significant pressure. The SET segment saw a 9% revenue decline, with life sciences and technology specialties underperforming.
Goodwill Impairment and Tax Valuation Allowance: The company recorded a $102 million noncash goodwill impairment and a $70 million tax valuation allowance due to declines in business performance and macroeconomic conditions, impacting financial stability.
Structural and Operational Inefficiencies: The company is addressing inefficiencies in its structure and processes, including consolidating systems and integrating acquisitions, but these efforts are ongoing and critical to future performance.
Customer Demand and Decision Delays: Education segment growth was limited by decision delays from customers and a maturing customer portfolio, reflecting challenges in capturing new business opportunities.
Workforce Reductions: Strategic restructuring actions, including workforce reductions, were implemented to address excess capacity and streamline operations, indicating challenges in aligning resources with demand.
Technology Modernization: Efforts to modernize technology and integrate AI are underway but are still in progress, posing risks to operational efficiency and innovation if not executed effectively.
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Guidance & Outlook
Revenue Expectations: Revenue for the fourth quarter is expected to decline by 12% to 14%, including an 8% negative impact from reduced demand from large customers and federal contractors. Excluding these impacts, the underlying revenue decline is projected to be 4% to 6%.
Margin Projections: Adjusted EBITDA margin for the fourth quarter is expected to be approximately 3%, representing a sequential increase of 120 basis points but a year-over-year decline of 70 basis points.
Future Revenue and Margin Pressure: Continued revenue and margin pressure is anticipated at least through the first half of 2026 due to residual impacts from reduced demand for federal contractors and large customers.
Growth Expectations: The company plans to drive organic growth by enhancing its go-to-market strategy, particularly with large enterprise customers, and pursuing targeted investments in higher-margin specialties. There is also a focus on evolving the product mix to address changing buyer preferences and capitalize on the AI boom.
Operational Changes: Efforts are underway to align resources with current demand trends, streamline the organizational structure, and modernize technology systems to unlock growth and efficiency opportunities. This includes integrating legacy acquisitions and accelerating technology modernization initiatives.
Market Trends: The company is positioning itself to capitalize on unmet demand for AI-related skills, as nearly half of executives surveyed struggle to find talent with the right operational and technical skills in AI.
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Shareholder Return Plan
Quarterly Dividend: Maintained at $0.075 per share.
Share Repurchase Authorization: $40 million remaining on the current Class A share repurchase authorization.
Repurchase Activity: Anticipated to be active in the repurchase program during the remainder of the year.
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Key Q&A
Q:Can you break out the discrete impacts between the federal government and large customers?
A:The impacts are roughly equal, with approximately 2 points each, plus/minus a little bit.
Q:How are you addressing the issue of revenue concentration among large customers to avoid future impacts?
A:The company is focusing on optimizing execution gaps, leveraging the breadth and depth of its portfolio, and strengthening customer relationships. They aim to make it easier for customers to work with them and bring all capabilities to the table. The recent impacts were unique and unrelated, influenced by macro environment, policy decisions, and industry challenges.
Q:What needs to occur in the macro environment to reverse the downward revenue trends?
A:SET has shown consistent performance in telecom and engineering, while education faces decision delays due to policy changes. ETM is competitive with growth in MSP and consistent staffing performance. The company is addressing macro softness and focusing on initiatives to drive growth.
Q:What is the impact of AI on demand for your business, and how are you leveraging it?
A:AI presents a long-term growth opportunity, with 50% of employers struggling to find the right skills for an AI-enabled workforce. The company is integrating AI tools into recruiting processes and client portals, and leveraging AI to provide scalable solutions in SET, ETM, and Education segments. There is no significant short-term impact on demand, but AI is creating opportunities for solutions and staffing.
Q:Why are customers in the K-12 education space delaying decisions?
A:Decision delays are due to macro factors, including a $6 billion Department of Education grant being withheld. The company has achieved a 90% fill rate in K-12 substitute teaching and expects to win delayed decisions in the future.
Q:What is the timeline for integrating the SET segment and its impact on growth?
A:The company is accelerating the integration of the SET segment into a unified tech stack acquired with MRP. Key milestones include a major cutover at the end of the year and full integration by 2026. This will improve collaboration, efficiency, and go-to-market capabilities.
Q:What is the potential impact of a prolonged government shutdown on your business?
A:The direct impact is less than a point of revenue, but indirect impacts, such as disruptions in industries like aviation, are harder to measure. The company has accounted for this in its Q4 outlook.
Q:What is the current approach to cash usage and acquisitions?
A:Year-to-date CapEx is about $7 million, expected to reach $10 million for the year. The company is prioritizing debt paydown, share repurchases, and potential small tuck-in acquisitions, primarily in SET and Education. Larger acquisitions are unlikely in the near term.
Q:How would you characterize the sales cycle and pricing environment across segments?
A:The sales cycle is robust, with strong retail pickup in SET and a 90% fill rate in Education. Pricing is stable in Education and SET, with some pressure in ETM due to cost structure adjustments for large enterprise clients.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the indirect impacts of a prolonged government shutdown, stating that it is a wildcard and hard to measure. Additionally, they did not elaborate on the exact nature of the unique challenges faced by the three large customers that impacted revenue.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Contact Center
ETM outcome
SET basis
SET market
ability market
allocation flexibility
allowance
asset
career
confidence
core strength
decrease basis
dynamic
education
employer workforce
engineering specialty
expectation decline
goodwill impairment
government shutdown
head opportunity
impact demand
meeting
need
opportunity field
optimization effort
position
progress SGA
recoverability
remainder
scale margin
seasonality
tax
volume
world
KELYA Transcript
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Kelly Services, Inc. (KELYA) Q3 2025 Earnings Call Transcript
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The earnings call reveals declining revenues across multiple segments, a significant drop in adjusted EBITDA, and reduced gross profit. Although there are efforts to leverage AI and operational efficiencies, the short-term impact is minimal. The Q&A highlights concerns about revenue concentration, macroeconomic challenges, and unclear management responses on certain risks, which further dampens sentiment. Despite some cash flow improvements and strategic initiatives, the overall outlook is negative, with potential stock price decline due to weak financial performance and uncertainty.
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The earnings call presents mixed signals. Revenue growth and improved gross profit rate are positive, but the EPS drop and lack of shareholder return plans are concerning. The Q&A reveals some uncertainties, particularly with federal business impacts and integration charges. Despite improvements in education and SET segments, macroeconomic uncertainties and mixed pricing trends temper optimism. The lack of a clear shareholder return plan and the cautious M&A outlook further balance the positives, resulting in a neutral sentiment.
KELYA Slides
KELYA Report
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