Kelly Q2 2026 earnings: Underlying revenue decline narrows to 0.6%

Kelly Services (Nasdaq: KELYA, KELYB) reported fiscal Q2 2026 revenue of $1.038 billion, down 5.8% from $1.102 billion, while diluted EPS fell to $0.31 from $0.52. Excluding disclosed federal-contractor and large-customer effects, underlying revenue declined only about 0.6%; adjusted EBITDA margin recovered 110 basis points sequentially to 3.0%, although it remained below 3.4% a year earlier.

Core earnings data

Revenue and gross profit declined at similar rates, leaving gross margin nearly unchanged at 20.4%. SG&A expenses fell 5.5% to $195.9 million, reflecting volume-related and structural cost actions, including acquisition integration and technology modernization benefits.

Those savings did not fully offset lower gross profit and the absence of a $4.0 million gain on the sale of EMEA staffing operations recorded in the prior-year quarter. Income tax expense also rose to $3.0 million from $0.9 million despite lower pretax earnings, contributing to the sharper decline in net income.

Adjusted EPS and adjusted EBITDA are non-GAAP measures. Kelly excluded items including integration, realignment, restructuring and executive transition costs when calculating adjusted results.

Business and segment performance

All three segments reported lower revenue, but their underlying trends improved from the first quarter. Enterprise Talent Management, or ETM, benefited from improved demand and new business across staffing and its talent-solutions specialties. Science, Engineering & Technology, or SET, recorded sequential revenue growth for the first time in more than two years, supported by Telecom growth and smaller declines across its other specialties.

ETM’s gross margin increased 50 basis points to 20.5%, but its adjusted EBITDA declined to $10.8 million from $11.7 million. Its adjusted EBITDA margin was nearly stable at 2.2%, versus 2.3% a year earlier.

SET remained the highest-margin segment, but its gross margin fell 40 basis points and adjusted EBITDA decreased to $18.4 million from $20.7 million. Education had the smallest revenue decline but the largest profitability deterioration: adjusted EBITDA fell 21.9% to $10.7 million, and its margin contracted by 100 basis points to 4.2%. Kelly attributed Education’s revenue pressure to delayed prior-year contract decisions and lower student enrollment in key markets.

Underlying demand improved before profitability fully recovered

Previously disclosed reductions in demand from U.S. federal government contractors in SET and three large ETM commercial customers accounted for approximately 5.2 percentage points of the reported 5.8% revenue decline. Excluding those discrete effects, underlying revenue was down approximately 0.6%, improving 270 basis points from the first quarter.

This indicates that broader demand trends were materially better than the headline revenue figure suggests. However, the improvement had not yet produced year-over-year earnings growth: adjusted EBITDA remained 15.9% lower, and adjusted EBITDA margins declined in SET and Education. Expense discipline helped the consolidated margin recover sequentially, but lower volume and segment-level gross margin pressure continued to limit year-over-year profitability.

Profitability, cash flow and balance sheet

Cash-flow figures were disclosed for the first 26 weeks rather than the quarter alone. Operating cash flow decreased to $23.8 million from $119.3 million, while free cash flow fell to $21.2 million from $114.8 million. A $43.6 million use of cash from accounts receivable was a major factor, compared with a $91.9 million source of cash in the prior-year period; a $36.7 million contribution from accounts payable provided a partial offset.

Cash and equivalents stood at $24.2 million on June 28, 2026, down from $33.0 million at the end of fiscal 2025. Long-term debt declined to $78.1 million from $101.9 million over the same period, reducing debt-to-capital to 7.4% from 9.4%. The current ratio remained unchanged at 1.5.

Kelly also declared a quarterly dividend of $0.075 per share, payable September 2, 2026, to shareholders of record on August 19.

Earnings guidance

Kelly raised its fiscal 2026 revenue outlook while leaving its adjusted EBITDA margin expectation unchanged from its initial view. Management expects underlying revenue growth to turn positive in the third quarter and accelerate in the fourth quarter, assuming no material change in the macroeconomic environment.

The fourth quarter is expected to account for the largest year-over-year improvement. Part of its projected revenue growth comes from the extra fiscal week, while management expects operating efficiencies and accelerating underlying growth to support margin expansion.

Risks investors should monitor

• Customer-specific demand remains significant: Reduced activity from federal contractors and three large commercial customers caused approximately 5.2 percentage points of the second-quarter revenue decline.
• Segment margins remain below last year: SET and Education reported lower gross and adjusted EBITDA margins, while ETM’s adjusted EBITDA margin was approximately flat despite a higher gross margin.
• Education faces demand and seasonality pressures: Delayed contract decisions, lower enrollment in key markets and the normal summer school schedule may constrain near-term revenue and profitability.
• Cash conversion weakened: First-half free cash flow fell to $21.2 million as accounts receivable absorbed cash, even though Kelly reduced long-term debt.
• The outlook depends on second-half acceleration: Full-year margin improvement relies on positive underlying revenue growth, operating efficiencies and a substantial fourth-quarter improvement under a stable macroeconomic environment.

Summary

Kelly’s fiscal Q2 2026 results showed a meaningful stabilization in underlying revenue and a sequential recovery in adjusted EBITDA margin, but reported revenue, earnings and segment profitability remained below the prior year. ETM and SET supplied the clearest evidence of improving demand, while Education and weaker cash conversion remained areas of pressure. The main question for the second half is whether positive underlying growth and cost efficiencies can produce the margin expansion embedded in Kelly’s updated outlook.