Kelly Services (KELYA) Teleconferência de Resultados do 3T 2026: Receita Subjacente Volta a Crescer

Principais Destaques

• A Kelly Services reportou receita de US$ 927 milhões no 3T 2026, queda de 0,8% na comparação anual. A receita subjacente aumentou 2,3%, marcando um retorno ao crescimento.
• O EBITDA ajustado subiu 29%, para US$ 21,3 milhões, enquanto a margem EBITDA ajustada expandiu 50 pontos-base, para 2,3%, atingindo o teto do guidance da administração.
• A receita subjacente do segmento ETM cresceu 7,7%, sustentada por uma alta de aproximadamente 7% em staffing e por um aumento de 11,6% na receita de Talent Solutions.
• A receita subjacente do segmento SET recuou 0,8%, mas apresentou melhora de mais de 200 pontos-base em relação ao 2T. Soluções com margens mais elevadas representaram 40% da receita do segmento.
• A receita de Educação caiu 6,4%, uma vez que a redução nas matrículas diminuiu a demanda por professores substitutos. A administração espera um retorno ao crescimento mais gradual do que o previsto anteriormente.
• Para o 4T 2026, a administração projeta receita entre estabilidade e alta de 1%, e margem EBITDA ajustada de 3,8% a 4,0%, incluindo os efeitos de uma semana fiscal adicional.

Principais Dados Financeiros

A empresa consumiu US$ 55 milhões em caixa durante o trimestre, principalmente devido à sazonalidade normal e a investimentos em capital de giro associados ao crescimento subjacente. A Kelly manteve seu dividendo trimestral de US$ 0,075 por ação e não recomprou ações.

Desempenho Operacional e dos Negócios

O segmento ETM registrou crescimento anual de receita positivo pela primeira vez desde sua criação. A receita subjacente aumentou 7,7%, uma melhora de 460 pontos-base em relação ao 2T. O Talent Solutions cresceu pelo terceiro trimestre consecutivo, com alta de 11,6% na receita, impulsionado pelo crescimento de dois dígitos em MSP e RPO. A receita subjacente de staffing subiu cerca de 7%, enquanto o BPO recuou moderadamente devido ao cronograma de projetos e de novos negócios.

A receita subjacente do SET caiu 0,8%, uma melhora de mais de 200 pontos-base em relação ao trimestre anterior. Soluções baseadas em resultados apresentaram forte crescimento, e a receita de colocações permanentes aumentou pelo terceiro trimestre consecutivo. Tecnologia se fortaleceu por meio de soluções, Life Sciences cresceu e Engenharia voltou a crescer. A margem EBITDA ajustada do SET subiu 10 pontos-base, para 6,6%.

A receita de Educação recuou 6,4%. A queda de matrículas em alguns distritos escolares K-12 resultou em menos salas de aula e menor demanda por professores substitutos. A administração está redirecionando recursos para a área de terapia, onde a demanda por profissionais de fisioterapia/terapia ocupacional e fonoaudiologia permanece sólida, mas a conversão tem sido mais lenta do que o esperado.

A Kelly continuou implementando sua estratégia One Kelly, incluindo uma arquitetura de marca renovada e organizada em torno de 10 especialidades. A empresa também implementou o Workday como sua plataforma corporativa de gestão de capital humano e migrou uma parcela expressiva dos processos de back-office para uma única instância. Sua plataforma de IA Grace Boost AI permanece focada na automação de tarefas transacionais de recrutamento, mantendo as decisões de contratação com os funcionários da Kelly.

Guidance da Administração

Para o 4T 2026, a administração projeta:

• Crescimento da receita total entre 0% e 1% na comparação anual.
• Expansão de 180 a 200 pontos-base na margem EBITDA ajustada.
• Margem EBITDA ajustada de 3,8% a 4,0%.

A projeção para o 4T inclui uma semana fiscal adicional que, segundo a administração, deve acrescentar cerca de três pontos percentuais ao crescimento da receita, mas reduzir o EBITDA ajustado em vários milhões de dólares.

Para o ano fiscal de 2026, a administração continua projetando uma queda de dígito único médio na receita total e uma margem EBITDA ajustada de 2,6% a 2,7%, representando estabilidade ou melhora de até 10 pontos-base na comparação anual.

A Kelly projeta agora uma redução anual de US$ 25 milhões a US$ 30 milhões no SG&A ajustado recorrente para o ano fiscal de 2026, equivalente a cerca de 4%, apesar dos investimentos contínuos em tecnologia e no escritório de crescimento (growth office).

Riscos e Pontos de Atenção

O segmento de Educação enfrenta pressões no curto prazo com a queda nas matrículas, consolidação de distritos e fechamento de escolas. Esses fatores estão reduzindo o número de salas de aula e alterando o mix de profissionais necessários.

Um grande cliente do ETM registrou nova redução de demanda no final do 3T. A administração prevê pressão adicional no 4T, mas considera a retração temporária.

A Kelly espera continuar registrando encargos de integração, realinhamento e reestruturação à medida que avança em iniciativas de modernização tecnológica e otimização. A depreciação e amortização também aumentou de US$ 12,6 milhões para US$ 15,2 milhões, devido a investimentos em tecnologia e à amortização acelerada de certas marcas comerciais.

Destaques da Sessão de Perguntas e Respostas com Analistas

A administração afirmou que o crescimento do ETM reflete uma combinação de novos clientes de MSP, programas contratados em períodos anteriores que ainda estão em fase de maturação e maior demanda de clientes existentes de staffing. A empresa também vê oportunidades de expandir serviços em contas globais de longa data.

Sobre o ciclo de staffing, o CEO Chris Layden descreveu o mercado como estando nos “estágios iniciais de uma recuperação”. A administração citou a melhora na demanda nos setores industrial, logística, farmacêutico, mobilidade avançada e infraestrutura digital, observando também que as contratações permanentes continuam abaixo de níveis robustos.

A confiança da Kelly em Educação apoia-se em parte no espaço inexplorado do mercado: a administração afirmou que 70% dos distritos escolares ainda gerenciam a contratação de professores substitutos internamente. A empresa também está expandindo sua capacidade de atendimento em terapia, embora esse mercado continue fragmentado.

A administração espera uma expansão adicional da margem EBITDA por meio de um mix de negócios com margens mais altas, eficiências operacionais e maior escala. Não foi fornecida uma meta específica de margem EBITDA incremental.

Transcrição Completa da Teleconferência de Resultados

Transcrição completa da teleconferência de resultados

Comentários da administração

Operator

Good morning, and welcome to Kelly Services Third Quarter 2026 Earnings Conference Call. [Operator Instructions] 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 Vice President of Corporate Affairs. Please go ahead.

Scott Thomas

Good morning, and welcome to Kelly's third 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.

Chris Layden

Thank you, Scott, and good morning, everyone. It's great to be with all of you. In the third quarter, we delivered another solid performance while advancing our strategic initiatives and positioning the company for the future. Revenue came in above the midpoint of our guidance and adjusted EBITDA margin was at the top end of our expected range. Our overall performance was driven by continued momentum in ETM and SET, reflecting our ongoing focus on improving our execution and the progress we've made positioning the business to capitalize as the early stages of recovery take shape. This was somewhat offset by near-term demand dynamics in Education, which I'll discuss shortly.

Let me first start with ETM, which delivered positive year-over-year revenue growth for the first time since the segment was established. Staffing performed well in the period, capitalizing on increasing demand for industrial talent. Growth in Talent Solutions was also strong, led by double-digit gains in MSP and RPO as new programs continue to ramp. Across ETM, we continue to drive new business wins as we capitalize on demand from enterprise clients across pharmaceuticals, energy and logistics.

Our technology-enabled and AI-powered capabilities remain a clear differentiator in these pursuits. This is among the reasons why Kelly was once again recognized by Everest Group as a global leader in its 2026 PEAK Matrix for both MSP and RPO and by HRO Today as the #1 global provider of total workforce solutions. We also continue to deepen our relationships within existing accounts as our growth office champions our One Kelly approach to meeting the evolving needs of our clients. Notably, we recently renewed and expanded our global MSP program with one of our largest clients, a leading semiconductor manufacturer that has partnered with Kelly for nearly 40 years.

Our relationship has continued to grow globally across our lines of business as they capitalize on the digital infrastructure build-out. The depth of this relationship reflects the trust our largest clients place in Kelly to support their workforce needs wherever they operate and the confidence they have in our technology-enabled and AI-powered offerings. Turning to SET. We maintained our momentum as revenue grew on a sequential basis for the second consecutive quarter. This improvement was led by our higher-margin solutions business, which outperformed in the period, representing 40% of SET's revenue. Within the specialties, we saw growing demand for outcome-based solutions in engineering among aerospace, pharmaceutical manufacturing and advanced mobility clients.

And in Life Sciences, we delivered another quarter of year-over-year revenue growth as we continue to capture demand for our differentiated functional service provider solution. Industrial reshoring drove activity across key technology and advanced manufacturing verticals as well this quarter, leading to the addition of new clients and the expansion of existing business. Another example of how our One Kelly approach positions us to grow with our existing clients is our relationship with one of the world's largest IT infrastructure services providers. What began as a small number of specialized IT staffing placements to our technology business has grown into a multinational solutions-based engagement spanning staffing and statement of work delivery.

The scope now includes advanced software development and cloud architecture projects as well as support of the clients' expansion into new offerings, including the build-out of a cutting-edge AI innovation center, which launched last month. Today, this relationship spans our technology, digital infrastructure and industrial specialties with KellyOCG's global capabilities extending our support outside of the U.S. From 1 line of business to 4, from domestic to multinational, this is our One Kelly strategy in action. Finally, in Education, our results reflect 2 distinct dynamics.

First is near-term enrollment pressure in some K-12 districts, which became more visible as we began a new school year in the quarter. In districts where enrollment has declined, schools are consolidating into fewer larger classrooms or in some cases, closing altogether. Fewer classrooms have contributed to lower-than-expected demand for substitute teachers despite the strong selling cycle we concluded in the second quarter. Second is a highly fragmented market in therapy, where demand for PT/OT and speech therapy professionals remain solid, but we have not yet captured it at the pace we expect.

To better position Kelly to capitalize on this opportunity, we're taking swift action to align resources with our growth priorities. This includes shifting capacity to where demand is strongest, ensuring the right team structure is in place to best identify and convert those opportunities to wins and optimizing our processes to accelerate fulfillment. Together, these dynamics are contributing to a more gradual pivot back to growth within Education, but we expect they'll strengthen the case for Kelly over the long term as districts facing persistent talent shortages and larger class sizes increasingly turn to a partner who can bring new sources of talent into the classroom.

As the largest provider of education workforce solutions in the U.S. and with industry-leading fill rates, we remain well positioned to capture that opportunity. Our conviction in this market remains strong as we execute through this transitional period. As we focus on delivering near-term results in the quarter, we also drove meaningful progress on our strategic priorities, which are positioning Kelly for the future. Across each of our segments, we continue to transform how we go to market to raise our visibility and to make it easier to do business with Kelly. In October, we launched a refreshed brand architecture, a direct response to what we've heard from our clients about how they want to engage with us.

We're bringing all of our brands together under One Kelly organized into 10 specialties and offering a full suite of differentiated capabilities for individual placements, outsourcing, consulting and talent solutions. We've included a supplement in today's presentation that illustrates how the 10 specialties map to our existing segment structure. We announced one of those specialties, Kelly Digital Infrastructure in September, bringing together Kelly Telecom, NextGen-GTA and Motion Telco under a single brand. This builds on our 20 years of experience in the space to serve growing demand from AI and the broader digital infrastructure build-out. It's the final stage of integrating our legacy acquisitions.

We've already brought these teams together organizationally and now the way they go to market reflects it as well. We're backing all of this with ongoing investment in technology. Last month marked another significant milestone in our technology modernization journey. We established Workday as our enterprise human capital management platform and cut over a significant portion of our back-office processes onto a single enterprise scale instance. Later phases of this key initiative will modernize our remaining back office and ancillary systems across the rest of the business, positioning us to operate with greater efficiency and better data as we scale our One Kelly strategy.

Our AI initiatives are also becoming more deeply integrated across the organization and helping our team move faster while improving the client and talent experience. For recruiters, we remain focused on automating transactional work through our proprietary internal AI platform, Grace Boost, so they can spend more of their time on the parts of the job only a person can do. This is important because job seekers are looking for a more personalized experience. They want an advocate who can offer tailored guidance to help them navigate a rapidly changing and increasingly unfamiliar job market.

Our approach to AI enables that experience, matching job seekers to the right opportunity faster, while the recruiter with specialized domain expertise guides their job search from start to finish. Simply put, humans lead the process and AI elevates it. No matter how a candidate reaches us through a branch, an MSP program or our AI recruiting agent, every hiring decision is made by a member of our team. Overall, I'm pleased with the progress we delivered in the third quarter.

Our momentum within ETM and SET is growing. We're accelerating conversion of our new business pipeline while building deeper relationships with our largest clients. And the investments we're making in our brand, technology and AI are positioning Kelly for the future. With that, I'll turn the call over to Troy to talk through the quarter in more detail and our expectations for the balance of the year. Troy?

Troy Anderson

Thank you, Chris, and good morning, everyone. Our third quarter results reflect continued sequential improvements, and we're on the favorable end of the commitments we outlined last quarter. Underlying revenue returned to growth and adjusted EBITDA margin expanded year-over-year, both for the first time in at least 4 quarters. For the quarter, revenue totaled $927 million, a decline of 0.8% versus the prior year quarter and solidly within our guidance of flat to down 2%. The year-over-year revenue decline improved 500 basis points relative to the second quarter.

Underlying revenue, which excludes the previously disclosed discrete impacts driven by reduced demand from the federal government and 3 large ETM clients, grew 2.3%, ahead of our guidance of 1% to 2%. This represents an improvement of 290 basis points versus the second quarter, thus contributing more than half of the overall year-over-year improvement in the quarter. As a brief update, demand with the federal government continues to be stable, while we have seen more recent demand pressure within the larger ETM customer who remains active. We expect this pressure to continue into the fourth quarter.

At the segment level, ETM underlying revenue grew 7.7% year-over-year, an improvement of 460 basis points versus the second quarter. Talent Solutions grew for the third consecutive quarter with revenue up 11.6% versus the prior year quarter, driven by strong demand in all of our service offerings, including double-digit growth in MSP and RPO. Underlying staffing revenue grew approximately 7%, driven by strong demand and improved fill rates across our client base, while BPO showed a modest decline due to project and new business timing.

SET underlying revenue declined 0.8%, an improvement of more than 200 basis points versus the second quarter. Outcome-based revenue showed strong growth in the quarter, while permanent placement revenue grew for the third straight quarter. Across the specialties, technology revenue continued to strengthen driven by solutions, while Life Sciences had another quarter of growth and engineering pivoted to growth as they convert their strong pipeline to revenue. Education revenue declined 6.4%, which was below our expectations.

For reference, at the beginning of each school year, we established a new baseline for each customer as far as the number of enrolled students, their full-time staffing levels, number of classes and class sizes and multiple other factors. With the enrollment declines in some of our key markets and the impact on our customer staffing needs, our demand is pressured more than we anticipated, both overall and for the mix of resource types, which is outweighing our new business and renewal momentum in the near term. With our leading K-12 and therapy offerings and market share and the white space opportunities available to us, we continue to expect Education to pivot to growth in the coming quarters.

Gross profit was $194.4 million, up slightly versus the prior year quarter despite lower revenue, resulting in a 20 basis point improvement in our gross profit rate to 21%. Education seasonality and continued growth in talent solutions and SET outcome-based solutions, along with higher permanent placement fees, all contributed to the increase. At the segment level, ETM's gross profit rate improved 40 basis points year-over-year, while SET and Education had modest declines. Reported SG&A expenses were $193.6 million, down slightly versus the prior year quarter, and adjusted SG&A expenses were $188.3 million, down approximately 1%.

Excluding depreciation and amortization, adjusted SG&A expenses decreased 2.5%, driven by 3% declines in both ETM and SET. Depreciation and amortization increased to $15.2 million from $12.6 million in the prior year quarter, reflecting our continued technology modernization investments and accelerated amortization on certain trade names as a result of our branding initiative. We recognized $5.3 million of charges and reported SG&A in the quarter, primarily integration, realignment and restructuring costs, including severance. We expect to continue incurring various charges as we advance our technology modernization journey and expand upon our various optimization efforts.

For the year, we are now projecting a net year-over-year decline in core adjusted SG&A expenses of $25 million to $30 million or approximately 4% despite investments being made in technology, the growth office and other areas. The structural changes we are making will allow us to scale more efficiently as we grow, thus supporting our margin expansion expectations. Our reported diluted loss per share was $0.05 compared to a loss of $4.26 in the prior year quarter, which included a noncash goodwill impairment charge and a valuation allowance on deferred tax assets. On an adjusted basis, we delivered earnings per share of $0.07 compared to $0.17 in the prior year, reflecting impacts from discrete tax items.

Adjusted EBITDA was $21.3 million, an increase of 29% despite lower revenue. Adjusted EBITDA margin was 2.3%, which represents 50 basis points of year-over-year improvement, the top end of our guidance and a return to year-over-year margin expansion. As I've noted previously, Q3 is our lowest revenue and a lower profit quarter given the Education segment seasonality. For the segment, ETM adjusted EBITDA margin was 3.1%, up 130 basis points year-over-year, reflecting the improved gross profit rate and lower SG&A. SET adjusted EBITDA margin was 6.6%, up 10 basis points, while Education is negative EBITDA in the quarter due to schools being on summer break, a portion of the quarter.

Throughout the quarter, we maintained a strong balance sheet, which provides ample capital allocation flexibility. Total available liquidity as of the end of the quarter was $256 million, comprised of $22 million in cash and $234 million available on our credit facilities. We used $55 million of cash in the quarter, resulting in total debt of $122.5 million at the end of the quarter. The use of cash was primarily driven by normal seasonality, along with the working capital investment to support our return to underlying growth.

During the quarter, we maintained the quarterly dividend of $0.075 per share, and there were no share repurchases. Due to our current share repurchase authorization expiring in December, we are refreshing and extending it to maintain shareholder return optionality. Overall, from a capital allocation perspective, our near-term focus continues to skew towards organic investments supporting profitable growth, maintaining the dividend and managing leverage. We also expect inorganic activity to increase over time. We remain confident in Kelly's cash generation and are committed to a disciplined and opportunistic approach to capital allocation in pursuit of attractive returns for shareholders.

Turning to the outlook for Q4 and fiscal 2026. In February, we set an expectation for the fiscal year as we felt it was important given where we were from a business perspective to provide visibility into the year versus the established practice of 1 quarter of guidance. I'm pleased to report we continue to expect to deliver in line with that full year expectation. For our current view of Q4, we are revising our most recent expectations, largely driven by the more gradual return to growth in our education business and the near-term incremental demand pressure from the one discrete ETM client.

For Q4, we expect total revenue to be flat to up 1% on a year-over-year basis and adjusted EBITDA margin expansion of 180 to 200 basis points, resulting in adjusted EBITDA margin of 3.8% to 4%. These include the impact of an extra fiscal week in the fourth quarter, which benefits revenue growth by approximately 3 points relative to the prior year and negatively impacts adjusted EBITDA by several million dollars. On a fiscal year basis, we expect a mid-single-digit total revenue decline and adjusted EBITDA margin of 2.6% to 2.7%, which will be flat to 10 basis points of year-over-year improvement.

We are encouraged by the trajectory of our business across multiple dimensions, including returning to underlying revenue growth and year-over-year margin expansion in the quarter. I'm thankful for all the Kelly team members and their commitment and resilience as we focus on delivering sustained growth and enhanced profitability over the long term. I'll now turn the call back over to Chris for his closing remarks.

Chris Layden

Thank you, Troy. Let me close with a few thoughts on where we're headed. This quarter marks 1 year since I joined Kelly as CEO, and it coincides with Kelly's 80th year as a company. Since our founding, a lot has changed from the scale and complexity of the workforce challenges employers face to the breadth of capabilities we offer to solve them. What hasn't changed is the commitment of our Kelly team. I'm proud of the meaningful progress we delivered in just a short time while keeping client centricity, visibility and accountability at the center of everything we do. These priorities are visible throughout our achievements in the third quarter.

They also show up in how we're engaging with both current and prospective clients. This includes Talent Leadership in Action, our growing thought leadership forum, which brings together employers with Kelly leaders for candid conversations about the future of work. At our most recent events last month in Detroit, London and Kuala Lumpur, we were pleased to host leaders from many of the largest companies across consumer goods, financial services, advanced mobility and pharmaceuticals, a majority of whom were new prospects. Reflecting on our conversations, one thing is clear. We're at an inflection point in the world of work. AI is reshaping how work gets done.

Skills gaps are widening, and both talent and employers are seeking greater flexibility. Kelly has navigated significant change at many points throughout its history. At every turn, our clients kept discovering, kept innovating and kept gaining, and we kept evolving right alongside them. That's what the work this past year has been about, building on 80 years of impact while making clear we're just getting started. It's also what employers demand, whether it's flexibility in how they source and deploy talent, putting AI to work or gaining a full view of their total workforce. Employers want a partner who can meet them where they are.

That demand is showing up in our pipeline, which is growing alongside the new business we're winning in ETM and SET and further strengthened by events like Talent Leadership in Action. The trend is clear. More clients are engaging with us and engaging in more of what we offer. We have more work to do, but our trajectory is positive, and I remain confident in the growth potential of every part of our business. I'm grateful to our team for their efforts to position Kelly for the next 80 years and to our shareholders, clients and talent for their continued trust. Operator, you can now open the call to questions.

Operator

[Operator Instructions] For our first question, we'll go to Joe Gomes from NOBLE Capital.

Perguntas e respostas

Joseph Gomes

I wanted to start off on the ETM. Chris, you talked about new clients and getting increased share of wallet helping to drive revenue there. Can you break out or give us any kind of indication what percent of it is due to new clients and what percent of the growth is due to increasing share of wallet at existing clients?

Chris Layden

Yes. Thanks, Joe. And I'll, let me talk to the segment at a high level, then I'll have Troy provide a little color, too. First, we feel really good about the progress we're making in ETM, the first time that we've seen year-over-year growth since the segment was established, that's 7 quarters out. So making progress. From a new business standpoint, we feel really good about the work in the talent solutions space. Our MSP and RPO business continues to take share. And some of that, some of those wins we highlighted in the first quarter continue to gain momentum. We also saw really strong perm growth in the quarter across talent solutions, actually across the whole business as well in SET.

And we believe that continues to be us picking up some market share. The P&I business, industrial staffing, that demand continued, and we continue to believe that, that's a differentiator for us, both our Professional & Industrial business and the BPO business overall. And so we feel really good about what we've established. And keep in mind, right, this is now the second quarter since establishing the growth office and really making sure that we're changing the visibility in the market, how we're talking to new clients.

And I would just say, lastly, I just returned from Europe where I spent the last week meeting with customers across ETM, also talking to a number of new customers that were at the final stages of opportunities. And it is as clear as ever that the opportunity that we have in the ETM space is present, and we really feel good about the way the pipeline has been building.

Troy Anderson

Yes, Joe, I'll just add. The, I would say in the, and Chris hit on this a little bit, in the talent solutions space, it's a bit of a mix of new business, right, some new logos that we signed, particularly in MSP latter part of last year that have been ramping this year, but also just the overall demand increases that we're seeing across the industry, of course, flows through our MSP platforms for those clients. So it's a bit of a mix. And then on the ETM, really on the staffing side, I'd say it's more skewed toward expansion of existing demand within existing clients, but some of those are newer clients, say, in the last 2 years that are ramping rapidly, but also some longer-term clients. Chris referenced the one renewal, a very large client of ours, where we have multiple services there and continue to grow, for example. So a bit of a blend.

Joseph Gomes

Okay. And on the Education segment, I understand what you said. I just, what kind of gives you confidence that we will see the rebound there as opposed to just the continuation of the current trends there?

Chris Layden

Well, really 2 things, I would say, Joe. I mean, first, the kind of well-documented enrollment declines are things that are going to take shape now over this coming school year. Keep in mind, we still have the full breadth to be able to support school districts beyond just substitute teachers. And so we're seeing some of that volume continue to come in. It obviously resets our mix a little bit. And we believe that over the long term, as classrooms get larger and the persistent talent shortages continue for teachers, that's only going to drive more demand for the breadth of our offering first.

The second is we still have 70% of school districts that are in-sourcing their substitute teacher management. That continues to be the white space we're focused on every single day. And then finally, therapy. Therapy demand continues to be high. We talked about some of the capacity we're shifting to meet that demand. We've got to continue to take advantage of the opportunity. It is a fragmented market, but we continue to sell into the districts that we're supporting today and to capture new business wins in the therapy space. So that gives us some confidence as we move into the new year.

Operator

Our next question or comment comes from the line of Kartik Mehta from Northcoast Research.

Kartik Mehta

Chris, maybe just a bigger picture question. We've now had almost every temporary staffing company report. It seems like things are on the mend and the fundamentals in the industry are improving. Maybe there's a weakness here or there, but overall, it seems like things are improving and moving in the right direction. And I'm wondering from your perspective and your conversations with customers and what you're seeing in the pipeline, where do you think we are in the recovery process?

Chris Layden

Kartik, thank you. We continue to see that we're at the early stages of a recovery. I mean demand trends are increasing constructively. We talked a little bit about that in the prepared remarks. And as I think about each part of our business, we continue to see strength across the industrial space and industrial reshoring, certainly the broader digital infrastructure boom helping drive that. But it's actually more widespread across other sectors as well that we've highlighted, logistics, pharmaceuticals, advanced mobility.

We feel good about the demand in ETM and maybe a positive sign in terms of some of that maybe client confidence and constructive trends around perm. Perm continues to be at a lower starting point. We're not seeing robust permanent hiring across the markets we operate, but we're likely taking share there, and it is a positive sign that perm hiring has been up now 3 consecutive quarters. We feel good about the demand we're seeing across our tech business. We're still focused on converting more of that demand to revenue and to profit, but we feel good about those exit rates.

And from an education standpoint, we've rebaselined with the enrollment declines, but we feel really good about that business overall. And we know there's more therapy demand out there that we can go and capture. So that's how we're kind of thinking about seeing the market right now, and that shows up in client conversations we're having as I'm on the road almost every week with customers who are looking for more flexibility. And we're really thinking and helping them think through that as they take advantage of opportunities to grow their own businesses in the market we're in.

Kartik Mehta

And Troy, you had gross margin improved sequentially. EBITDA margins improved year-over-year. And I'm wondering, as you look at that gross margin improvement, how much of that is sustainable in terms of price? How much do you think is mix and efficiency? And as we move forward, what do you think the incremental EBITDA margins are for the business?

Troy Anderson

Yes. Thanks, Kartik. The GP rates, we had some downward pressure exiting last year, first part of this year. We've normalized that. We've captured that now in our burdens and worked that back through the system. And so we're seeing some of that normalization of where that pressure came out. So back at 20% and then we expect to, of course, we get the seasonal impact in Q3 because of education, right? It has a lower GP rate and lower revenue in the third quarter and then bounces back up in the fourth quarter. So you'll see some flip between Q3 and Q4, but still strong year-over-year performance in Q4.

So I think we're on the right track with GP as we continue to drive the higher margin mix of some of our outcome-based solutions across SET, the therapy offering, as Chris was just describing in the prior question. So I think we'll be roughly flat on a full year basis on GP, just a different trajectory this year versus last year. And I think we would expect to continue driving that margin expansion as we go forward. As far as EBITDA, look, we're, we feel strongly about driving EBITDA margin expansion over time. We've now returned back to expansion this quarter. We expect further expansion next quarter.

And certainly, it is our intent as we pivot into next year to continue driving that expansion, both through business mix as well as continue to drive efficiencies and scale across our business. Hard to really translate that down to dollar per revenue just because we are still investing and we're pivoting to growth. And, but we certainly expect to see some margin expansion as we continue forward.

Operator

Our next question or comment comes from the line of Kevin Steinke from Barrington Research Associates.

Kevin Steinke

I wanted to continue talking about ETM and as well SET. You saw the continued improvement in revenue trends there. How are you feeling about kind of the sustainability of improvement? It seems like there are some legs there with your growth initiatives taking hold and the overall market demand environment improving. So as kind of you look out and plan for the 2027, what are you thinking about the sustainability of continued demand trends in those segments?

Chris Layden

Yes. No, thank you, Kevin. We feel really good about the underlying performance across ETM and really the momentum we've been building all year. We exited September with year-over-year growth for the first time across the whole business, certainly ETM driving it. And we really see it across all of the segments of ETM. The industrial business is certainly continuing to benefit from the demand increases that we're seeing more broadly across multiple sectors. Our BPO business continues to take market share. We feel good about the opportunity to continue to sell and win new business in that space.

And then finally, we've got the leading MSP RPO offering in the world. And that business continues to win new and renew large clients. And so we feel really good about what that means for us for the long term. And look, we're building on our One Kelly strategy, which is having the entire business work better together. And that includes more work that we're going to be doing with shared clients like the couple of clients we highlighted in our prepared remarks that are working not only in ETM but across ETM and SET. And so we're going to continue to see that momentum as we move into next year.

Kevin Steinke

Great. And specifically on technology and SET, you noted some continued improvement there. Is the market kind of bouncing back? Or do you feel like you're getting to a position where you can kind of grow more in line with the market as you've discussed? Just any comments on how that specialty is progressing?

Chris Layden

Yes. We feel good about the progress we're making in SET. We continue to stack sequential improvement quarter-on-quarter across the business. As we look at demand, again, that continues to build in our exit rates as well. And look, this is demand that's coming from staffing and solutions. I'm really pleased with the progress we're making on the solutions side of that business. That continues to be a place of real differentiation. That's in the science space and engineering and digital infrastructure, certainly in technology as well, where our offering continues to drive value in the market, and we got to go win more market share. And so that's where we're focused, but I'm pleased with the progress we're making.

Kevin Steinke

Okay. Great. With some of the enrollment pressures you talked about in education, you talked about specific districts, but it seems like it's more widespread across the country from what I've been reading. But it sounds like the pipeline of new opportunities is still good despite those enrollment pressures. I mean there's still a need for school districts to outsource this function and you said 70% still not doing it. So just can you talk about the pipeline? Is there still kind of the demand for this solution out in the market?

Chris Layden

Yes. No, thank you. We feel very good about the pipeline. And let me talk a little bit about kind of how that takes shape. I mean, first, we continue to have a strong pipeline with some of the largest school districts in the U.S. As you indicated, some of the enrollment declines are pretty well documented of what schools are facing, not only with enrollment declines, but rising fuel and food prices that are driving some short-term headwinds. But as classrooms get filled with more kids, that is going to continue to drive more demand even in the districts, honestly, that we have today. And so while we continue to be focused on selling into some of the largest districts in the U.S., we also have a lot of strength building around smaller, more rural districts where we know we're also gaining share.

And so it's multifold there. And then finally, everywhere we're selling also now includes therapy. And we have our therapy business fully integrated. We feel good about the selling that's happening in therapy. We know there's a lot of demand out there. And so as we indicated, this is as much about how we're putting more capacity on the delivery side of what we're doing to take advantage of that demand in a market that is a little bit more fragmented than the traditional K-12 space. So it's still a great market, and we feel really good about our leading position, our industry-leading fill rates and what the opportunity looks like as we pivot back to growth.

Kevin Steinke

Okay. Great. Maybe just on the discrete impact. You mentioned a little more pressure from one particular ETM customer. Maybe just a little more insight into what's going on there. I think you termed it as being near term or shorter term, but, and then related to that, I don't know if I missed it, but did you call out what you expect the impact from the discrete impact to be in the fourth quarter overall?

Troy Anderson

Yes. Thanks, Kevin. The, on the latter point, again, we had said we were going to really just focus on total revenue growth in the fourth quarter. So the guide of 0, flat to 1% incorporates a little bit of that incremental pressure we talked about in total. But other than that, there's really no difference between the underlying and the total reported number. So our Q4 guide captures that. As far as the, what we saw there, we had seen pretty steady demand over the first few quarters here, saw a little bit of a step down in the latter part of this quarter and are expecting some more step down in the fourth quarter. We do view that as temporary.

We're working, and they're still navigating a bit of a challenging market environment, and we've continued to work with them throughout the year and also work with them on new opportunities where we can support them in a more fulsome way and help them on their recovery as well. So that's why we view it as a little bit unexpected step down, but we don't view it as a sustained item. It's a long-term client, a very large client and somebody we worked closely with for many years.

Operator

Our next question or comment comes from the line of Marc Riddick from Sidoti.

Marc Riddick

So I was wondering if you could talk a little bit about some of the things that you're seeing in the meetings that you've had, Chris, with some of the larger customers in particular. And you've talked about approaching larger customers, gaining greater wallet share there. Maybe talk a little bit about some of those touch points and some of the catalysts that you're seeing from those customers that are kind of leading your expectations for gaining greater wallet share and expanding breadth with those customers.

Chris Layden

Yes. Great. Well, yes, we've been very busy meeting with customers around the world, and the key theme is flexibility. As we kind of enter into this era, flexibility and really an integrated workforce strategy more broadly as people think about their external workforce, their permanent workforce, their digital workforce increasingly and how that all works together. And our real benefit working with some of the largest global employers around the world gives us a lot of data and insight to be able to help companies navigate this, take advantage of opportunity. And so as they think about flexibility, the other key theme is also visibility into where that workforce sits and how to flex it up and down.

And so we're seeing a lot of benefit from Sevayo, our data intelligence layer that sits across all of our large MSP customers, allowing us to drive more workforce insights than oftentimes some of our customers or even prospects are getting on their own from their HCM system. And so there's a lot of need right now there. We also continue to capture demand based on the value we provide, not just on price.

We've referenced this a couple of times with some of our more recent MSP wins, people seeing the value of our tech-enabled and AI-powered offerings. And that's also showing up in really the strength of our gross profit that you saw in the quarter, up 20 basis points. We feel good about the way the value is being sold and understood in the market, and we see that continue to be able to hold as we move into next year.

Marc Riddick

And that's helpful. And then I was wondering if you're seeing much in the way of differentiation in engagement levels, whether that's from a client industry vertical perspective or a geographic perspective? Are you seeing any particular standouts that kind of jumped out at you over the last 3 to 6 months?

Chris Layden

It's really the sector diversity right now for us maybe is as strong as I've seen it. And we've talked a little bit about some of the ways that has come together with the digital infrastructure build-out, certainly industrial reshoring more broadly and the impact it has across a lot of different sectors. And I was just traveling last week down in El Paso on the borderplex and smaller town, but another example of a lot of import/export activity, a lot of manufacturing, investments in digital infrastructure.

And so as I think about where that's taking shape in more rural communities in maybe more emerging Borderplex parts of the U.S. and then more broadly across a lot of our larger clients, it's more really about how you manage your entire footprint, the complexity of your workforce model and the flexibility you need overall to take advantage of the demand in the market. And so it's maybe less location-based. And in some ways, that plays right into our value proposition and our specialization strategy. So we're excited about what that means for the future.

Marc Riddick

And then last one for me. Can you sort of maybe give an update as to sort of how you're seeing things and/or the feedback that you're getting from folks regarding the work from home versus return to office dynamic and kind of maybe how that has shifted or if it shifted over the last, maybe say, half a year or so. I mean has that evolved as we go into next year in any way that's sort of different than maybe what you're expecting? Or how should we think about that?

Chris Layden

No, I wouldn't say that there's really been any change over the last couple of quarters on more broadly work-from-home policy. I think employers, I think we all learned there's new ways we can work in the way we're connected more globally. We haven't seen an increase in employers making new decisions on hybrid or full-time in-office work this year. And I suspect that, that will continue as we move into next year and likely also vary a little bit by sector and by country. But I do think that, yes, there's stability there, and I don't see that more broadly impacting our business. It is honestly not really often coming up in client conversations.

Operator

[Operator Instructions] I'm showing no additional questions in the queue at this time. I would like to turn the conference back over to management for any closing remarks.

Chris Layden

Thanks so much for joining us. We look forward to talking to everyone next quarter.

Troy Anderson

Thank you, everybody.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.