Post Call Commentary and Updated Model

First Look at 1Q24

Announces Largest Acquisition in Company History

Transformation Continued in the Fourth Quarter; Raising PT to $27

Joe Gomes

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Business Services

Kelly Services Inc. Class A Common Stock

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Operating Results
Kelly announced revenue from services for the second quarter of 2022 of $1.3 billion, a 0.7% increase, or 2.7% in constant currency, over the previous year. The improvement was driven by increased customer demand in Education, Science, Engineering &amp; Technology, and Outsourcing &amp; Consulting segments compared to the previous year that was impacted by COVID-19, offset by declines in Professional &amp; Industrial and International segments, as well as the impact of the RocketPower and Pediatric Therapeutic Services (PTS) acquisitions. The acquisitions added approximately 150bp to the revenue growth rate.&nbsp;Compared to the second quarter of 2021, revenue from staffing services decreased 2.8% and revenue from outcome-based services increased 5.9%, while permanent placement revenue, which is included in revenue from services, increased 33.2% from the prior year.
In regards to the Company&#8217;s revenue segments, Professional &amp; Industrial revenue decreased 10.9% from the previous year, or from $466.5 million to $415.8 million. The decrease was driven by a 14.0% decline in revenue from staffing services resulting from lower hours volume, partially offset by higher bill rates. Within the decline in hours was the impact from a shift of a large staffing customer to a direct hire model, which resulted in the lower staffing volume. Outcome-based services revenue decreased by 2.7% due to lower demand for call center specialty, offset by growth in other specialties.
For Science, Engineering, &amp; Technology, services increased 8.7%, or from $298.2 million to $324.3 million, as the growth was driven by increases in the Company&#8217;s outcome-based product as well as increases in bill rates and permanent placement income in staffing specialties.&nbsp;
Education revenue from services increased 46.8%, or $155.5 million from $105.9 million, as the segment is having increased demand for services compared to a year ago, as well as the impact from the acquisition of PTS, which added 680bp to the year-over-year growth. In this increased demand is the reflection of the return to in-school instruction compared to last year along with new customer wins and an increased fill rate of the demand of existing customers.
The Outsourcing &amp; Consulting segment increased to $124.4 million from $107.3 million, or 16.0%, which includes the revenue from the acquisitions. On an organic basis, revenue growth was 5.3% due to strong demand for RPO services coupled with revenue growth in MSP, partially offset by PPO revenue declines.
Lastly, International revenue decreased from $280.4 million to $247.6 million, or 11.7% on a reported basis or 4.3% on constant currency, driven by revenue declines in Mexico due to the impact of legislation enacted in the third quarter of 2021. Mexico&#8217;s revenue declined to $11.2 million from $33.1 million as a result of the legislation. Revenue in Europe decreased 4.4% on a reported basis, or from $254.7 million to $246.5 million, and increased 4.0% in constant currency with constant currency growth in most geographies.&nbsp;
Gross profit for the quarter increased from $231.0 million to $262.4 million, or by 13.6% on a reported basis and 15.6% on a constant currency basis, driven by higher revenue volume, combined with an increase in gross profit rate, which increased by 230bp from 18.4% to 20.7% due to&nbsp;favorable product mix and lower employee-related costs, coupled with the impact of higher permanent placement income and the acquisitions of RocketPower and PTS which generate higher margins. Notably, every segment reported higher gross profit margin.
SG&amp;A expenses were up 10.6% on a reported basis and 12.3% on a constant currency basis, as expenses related to RocketPower and PTS, including amortization and other operating expenses, accounted for 240bp of the increase. The increase is also driven by higher salary and related costs, as well as increases in performance-based incentive compensation expenses.
Earnings from operations decreased to $8.2 million compared to $13.7 million in the second quarter last year, as the decrease was by an asset impairment charge related to the transition of KELYA&#8217;s business in Russia as well as a gain on sale of assets related to the disposition of under-utilized real property located in the United States. Excluding those items, adjusted earnings from operations was $22.3 million compared to $13.7 million, with the increase primarily due to revenue growth combined with structural improvement in gross profit rate and expense leverage.
Net income for the quarter totaled $2.2 million, or $0.06 per diluted share, compared to $24.0 million or $0.60 per share in the previous year due to the asset impairment charge, the transition of the business in Russia, and the disposition of under-utilized property. Last year&#8217;s EPS included the gain of $0.11 per share in relation to the gain on the Persol Holding investment. Adjusted net income was $17.4 million, or $0.45 per share,&nbsp; compared to $19.6 million, or $0.49 per share, the previous year as a result of higher tax expense.
Asset Monetization, Balance Sheet and Liquidity 
 
As of the end of the second quarter, Kelly had $133.9 million of cash, with no debt and approximately $300 million of availability under its credit facilities. Kelly continues to have ample capital available to pursue additional accretive transactions, in our view. The acquisition of high-margin, high-growth businesses can drive additional quantitative and qualitative improvements in Kelly&#8217;s operating businesses, at the same time the Company continues to make long-term structural improvements to the existing business. 
 
At the end of the quarter, accounts receivable was $1.5 billion and increased 5.2% sequentially, reflecting the year-over-year increase in revenue as well as an increase in DSOs. Global DSO was 63 days, an increase of 3 days over year-end 2021 and one day over the first quarter of 2022. In the second quarter of 2022, the Company used $3 million of free cash flow, reflecting increasing investment in working capital. In the first six months of the year, the Company used $107.3 million of net cash from operating activities, as compared to generating $47.6 million of cash in the same period last year.
Operating Environment 
 
The demand supply imbalance remains. Labor participation continues to fluctuate, as seen in the following chart, with a small downturn recently, and still off pre-pandemic highs. According to the Labor Department&#8217;s most recent JOLT survey, the number of job openings decreased to 10.7 million on the last business day of June. Hires and total separations were little changed at 6.4 million and 5.9 million, respectively. Within separations, quits also remained level at 4.2 million. The labor force participation rate was slightly down in July at 62.1% from March&#8217;s 62.4%, according to the St. Louis Fed.
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/KELYALaborpar822.png" style="width: 594px;height: 468px" /> 
 
The Manpower Q3 2022 Employment Outlook Survey noted that 36 out of 40 countries report positive employment outlooks for the third quarter. This is down from 39 countries in the second quarter report. According to the report, employers around the world are still expecting to hire more workers in the third quarter of 2022, reporting a seasonally adjusted Net Employment Outlook of +33%, up 18 percentage points from the year ago period and up 4 percentage points sequentially. Hiring intentions considerably increased year-over-year with strong outlooks across the regions. The report also noted, however, hiring optimism is being tempered by the highest levels of global talent shortages in 16 years. Three in four employers report difficulty in finding necessary talent.
Updated Projections 
 
Demand for contingent workers remains near all-time highs, according to the American Staffing Association numbers in terms of the penetration rate. The ASA Staffing Index four-week moving average edged up marginally from the prior week but held at a rounded value of 105, as temporary and contract staffing employment for the four weeks ending July 17 was 9.2% higher than the same period in 2021. &#8220;Staffing employment is still holding strong despite a brief decline over the Fourth of July,â€ said Tim Hulley, ASA assistant director of research. â€œThe ASA Staffing Index continues to measure above last yearâ€™s levels and is at an all-time high for the month of July.â€
And COVID impacted clients are realizing the benefits to their business models of the flexibility that contingent labor provides. Kelly&#8217;s recent acquisitions are providing meaningful revenue growth, higher GP operating rates, and revenue synergies. All of which will benefit Kelly going forward. The Company pulled in its guidance for the full year, with full year revenue now expected to rise 3.5%-4.0% from a prior 6.0%-7.0%. This puts the full year expectation back to where they were at the beginning of the year. Gross profit rate is expected to increase around 180 basis points, up from a previous 100 basis points projection, to 20.7%, due to continued structural improvement from higher fee-based business, a continued shift to higher margin specialties, and a more gradual pace of growth of lower margin specialties. SG&amp;A expenses are projected to rise 10%-11%, and up 8%-9% organically, reflecting increased compensation expenses to attract and retain talent and the impact of the acquisitions.
Given the first half performance and management&#8217;s expectations, we revised our model. While overall business is trending positively, there are some headwinds, including economic uncertainty around the globe, the transition of the Russian operations, Mexico, and stronger forex headwinds. On the positive side, acquisitions will add to revenue and gross profit. We are taking a more conservative stance on the third quarter than previously. For the quarter, we are projecting revenue of $1.23 billion, compared to our prior $1.29 billion, and last year&#8217;s $1.19 billion. Gross profit rate is projected to continue to improve, due to the factors cited above, to 20.9%, compared to 19.1% last year. We are projecting operating income of $12 million in the third quarter, or an operating margin of 1.0%, versus $9 million and 0.8% in the same quarter of 2021. Adjusted net income is projected to come in at $9.2 million, or $0.24 per share. In the same period last year, Kelly reported adjusted net income of $10.1 million, or $0.26 per share.
We think the fourth quarter will be stronger than the third quarter. For the full year, we are projecting revenue of $5.09 billion and adjusted net income of $65.7 million, or $1.71 per share. We previously were at $5.22 billion of revenue and adjusted net income of $79 million, or $2.06 per share. In 2021, Kelly reported revenue of $4.9 billion and adjusted net income of $60.4 million, or $1.53 per share.

Kelly Services Inc. Class A Common Stock (KELYA)

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Fundamental Analysis:

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Post Call Commentary and Updated Model (KELYA)

First Look at 1Q24 (KELYA)

Announces Largest Acquisition in Company History (KELYA)

Transformation Continued in the Fourth Quarter; Raising PT to $27 (KELYA)

Inbox Intel from Channelchek.