Kelly (KELYA) Q2 2026 earnings review
Inflection Point Reached: Margins Rebound as Headwinds Fade
Kelly Services is turning the corner. The company handily beat its own revenue guidance in Q2, posting a 5.8% decline versus the forecasted 7-9% drop. More importantly, when stripping out the discrete client losses that haunted 2025, underlying revenue was nearly flat (-0.6%). This volume stabilization, paired with ruthless SG&A discipline, drove a powerful sequential reversal in Adjusted EBITDA margin, doubling from 1.5% in Q1 to 3.0% in Q2. Management upgraded its full-year top-line outlook and projects a return to solid growth by Q4.
🐂 Bull Case
The massive drag from lost U.S. federal and large commercial contracts is fading. Excluding these discrete items, Enterprise Talent Management (ETM) underlying revenue actually grew 3.1% YoY in Q2, proving the core business is competitive.
The company's structural cost reductions are paying off. SG&A was down 5.5% YoY, allowing Kelly to post a 3.0% Adjusted EBITDA margin despite lower revenues. As growth returns in H2, operating leverage should drive outsized profit gains.
🐻 Bear Case
Once Kelly's most reliable growth driver, the Education segment posted a 4.4% revenue decline, continuing a string of weak quarters driven by lower enrollment and delayed district contract decisions.
First-half free cash flow collapsed by 81% YoY to $21.2M, driven primarily by a $43.6M drain from Accounts Receivable. Working capital timing is severely pressuring near-term liquidity generation.
⚖️ Verdict: 🟢
Bullish. Kelly has clearly passed the trough. The combination of stabilizing top-line trends, upgraded full-year guidance, and structural cost efficiencies sets up a compelling margin expansion narrative for the second half of 2026.
Key Themes
ETM and SET Segments Accelerating
The core staffing businesses are showing clear signs of an accelerating recovery. ETM improved its YoY decline from -13.2% in Q1 to -6.0% in Q2, and SET improved from -11.6% to -6.1%. Crucially, SET revenue grew sequentially for the first time in over two years, fueled by strength in the Telecom specialty and data center demand.
Structural SG&A Reductions Protect Margins
Management's aggressive cost-reengineering program continues to deliver. Total SG&A expenses fell 5.5% YoY ($11.4M) in the quarter. This disciplined expense management allowed Adjusted EBITDA margin to expand 110 bps sequentially from Q1, shielding profitability while the top line recovers.
Technology Modernization Milestone Reached
Kelly hit a major operational milestone in Q2 by launching its enterprise-wide HubSpot Customer Relationship Management (CRM) system. Alongside the ongoing integration of the MRP technology stack and expanded AI use cases, this unified platform is expected to unlock cross-selling across the '1 Kelly' portfolio and drive further operating efficiencies.
Education Segment Remains a Laggard
Despite management's optimism on execution, the Education segment—historically a reliable growth engine—is visibly decelerating. Revenue fell 4.4% YoY in Q2, closely matching Q1's 4.8% drop. Management cited delayed contract decisions and lower student enrollments in key markets. This breaks the positive enterprise narrative and requires monitoring.
Macro Environment Remains Cautious
While discrete customer headwinds are fading, the broader macroeconomic backdrop remains challenging. Management noted that employers are maintaining a cautious approach to hiring, and the company's upgraded 2026 outlook explicitly assumes 'no material change' in this sluggish macroeconomic environment.
Accounts Receivable Spikes, Crushing Free Cash Flow
Contradicting the positive EBITDA narrative, Kelly's cash generation sharply deteriorated. Year-to-date Free Cash Flow plunged to $21.2M from $114.8M in the prior year. This was driven by a massive swing in working capital: Accounts Receivable consumed $43.6M in cash, compared to generating $91.9M in the same period last year. If collections do not normalize, balance sheet flexibility will be constrained.
Q4 Growth Guidance Aided by Extra Week
Management is projecting a substantial return to growth in Q4 (mid-to-upper single digits). However, investors should note this includes the impact of an extra fiscal week, which artificially inflates revenue growth by approximately 4 percentage points. While the underlying trend is still accelerating, the headline number will look stronger than reality.
Other KPIs
Stable sequentially but slightly decelerating on a YoY basis, down 10 bps from 20.5% in 25Q2. The compression reflects near-term margin pressure in ETM and SET due to lower volumes and business mix, though management anticipates an inflection in the second half of the year.
Reversing sharply from $114.8M in the first half of 2025. The 81% decline highlights working capital challenges, specifically an increase in Accounts Receivable, overshadowing the operational margin improvements.
Guidance
Accelerating significantly from the 5.8% decline in Q2. Underlying revenue growth is expected to flip positive to +1% to +2%, marking the structural end of the heavy discrete headwinds experienced over the last year.
Decelerating sequentially from 3.0% in Q2, but accelerating YoY by 40 to 50 basis points. The sequential dip is purely seasonal, reflecting the Education segment's summer break when schools are out of session.
Accelerating trajectory into the end of the year. This includes a 4-point benefit from an extra fiscal week, but even adjusting for this, it implies a clear return to underlying organic expansion.
Accelerating relative to prior internal expectations, reflecting the strong Q2 beat and improved visibility into H2. Adjusted EBITDA margin for the full year is also affirmed to grow 10 to 20 bps YoY.
Key Questions
Education Turnaround Timing
The Education segment posted another mid-single-digit decline this quarter. What specific leading indicators are you seeing in the upcoming fall contracting cycle that give you confidence this segment will return to growth in H2?
Accounts Receivable Drain
YTD Free Cash Flow was heavily impacted by a $43.6M cash use from Accounts Receivable. Is this driven by delayed payments from specific large clients, or structural changes in billing terms, and when do you expect collections to normalize?
CRM Cross-Selling Tangible Impact
With the HubSpot CRM now rolled out enterprise-wide, how quickly do you expect this to translate into measurable cross-selling revenue, and are there specific KPIs you are tracking to judge its success?