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KELLY SERVICES INC (KELYA)·Q3 2025 Earnings Summary

Executive Summary

  • Q3 2025 revenue was $0.935B (-9.9% YoY) and adjusted EPS was $0.18; results missed Wall Street consensus of $1.022B revenue and $0.42 EPS, driven by an ~8% discrete impact from reduced U.S. federal contractor demand and three large customers; underlying revenue declined ~2% YoY . Consensus: revenue $1.022B*, EPS $0.415* [Values retrieved from S&P Global].
  • GAAP EPS was -$4.26, including non-cash goodwill impairment ($102.0M; $2.37 per share, net of tax) and a $69.7M deferred tax valuation allowance ($1.98 per share); adjusted EBITDA was $16.5M (1.8% margin, -70 bps YoY) .
  • Q4 2025 outlook: revenue decline of 12–14% YoY (including ~8% discrete impact), underlying decline of 4–6%, and adjusted EBITDA margin ~3%; management expects to be active with Class A share repurchases in Q4 and maintained a $0.075 dividend .
  • Stock reaction: shares fell ~16% intraday on the miss and outlook; coverage highlighted revenue (-9.9% YoY) and adjusted EPS $0.18 below expectations .

What Went Well and What Went Wrong

What Went Well

  • Education segment grew 0.9% YoY in Q3 (revenue $143.3M) and maintained gross profit rate at 14.1% (+20 bps YoY), showing resilience amid broader demand pressure .
  • Adjusted SG&A fell 9.7% YoY in Q3 via integration, technology modernization, and process efficiencies; adjusted operating income was $4.3M despite macro headwinds .
  • CEO emphasized focus on execution and agility, positioning for profitable growth and value creation, and signaled confidence via buybacks: “The Company expects to be active with Class A share repurchases in Q4” .

What Went Wrong

  • Revenue missed by ~$87M vs consensus and adjusted EPS missed by ~$0.24; SET and ETM experienced lower demand and margin pressure, with underlying revenue down ~2% after discrete impacts . Consensus: revenue $1.022B*, EPS $0.415* [Values retrieved from S&P Global].
  • Non-cash goodwill impairment ($102.0M) in SET tied to reduced demand and integration/realignment of MRP and Softworld, plus a $69.7M deferred tax valuation allowance, drove GAAP loss (-$4.26 EPS) .
  • Adjusted EBITDA margin dropped to 1.8% (-70 bps YoY) due to near-term margin pressure in SET and ETM from lower gross margins and timing of revenue trends vs expense actions .

Financial Results

MetricQ1 2025Q2 2025Q3 2025
Revenue ($USD Billions)$1.165 $1.102 $0.935
GAAP Diluted EPS ($)$0.16 $0.52 -$4.26
Adjusted EPS ($)$0.39 $0.54 $0.18
Adjusted EBITDA ($USD Millions)$34.9 $37.0 $16.5
Gross Profit Rate (%)20.3% 20.5% 20.8%
Adjusted EBITDA Margin (%)3.0% 3.4% 1.8%
Q3 2025 vs ConsensusConsensusActual
Revenue ($USD Billions)$1.022*$0.935
Primary EPS ($)$0.415*$0.18
# of Estimates (EPS/Revenue)4* / 4*—

Values with asterisks retrieved from S&P Global.

Segment Revenue ($USD Millions)Q3 2024Q3 2025
Enterprise Talent Management (ETM)$561.6 $487.9
Science, Engineering & Technology (SET)$335.0 $304.9
Education$142.1 $143.3
Total$1,038.1 $935.0
KPIsQ3 2024Q3 2025
Permanent Placement Revenue ($USD Millions, Q3)$13.5 $11.7
YTD Free Cash Flow ($USD Millions, Sept YTD)$2.8 $87.2
Global DSO (Days)64 66
Debt-to-Capital (%)15.1% 9.1%
Working Capital ($USD Millions)$516.5 $473.3
Dividend per share (Declared)—$0.075 (payable 12/3/25)

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue YoYQ3 2025Decline 5%–7% (discrete federal and large customer demand) Actual: -9.9% YoY; underlying ~-2% Miss vs prior guide
Adjusted EBITDA MarginQ3 2025+80–90 bps YoY expansion expected Actual: 1.8% (-70 bps YoY) Lower than guided
Revenue YoYQ4 2025 Outlook—Decline 12%–14%; ~8% discrete impact; underlying -4% to -6% New outlook introduced
Adjusted EBITDA MarginQ4 2025 Outlook—~3% New outlook introduced
Share RepurchasesQ4 2025—Expect active Class A repurchases New action
DividendQ4 2025—$0.075 per share declared Maintained payout level

Earnings Call Themes & Trends

TopicPrevious Mentions (Q-2 and Q-1)Current Period (Q3 2025)Trend
AI/Technology initiativesIntegration/realignment programs; tech modernization noted in non-GAAP adjustments CEO highlights evolving environment and AI boom; survey later underscores AI adoption gap Increasing focus on AI enablement
Macro and demand (federal contractors, large customers)Q2: guided Q3 decline 5–7% driven by reduced federal contractor demand and certain large customers Actual ~8% discrete impact; underlying -2% YoY Macro pressure more visible
Margin management (SET/ETM)Q1/Q2 near-term margin pressure, timing of revenue vs expense actions Adjusted EBITDA margin 1.8% (-70 bps YoY); SET and ETM lower gross margins Continued pressure
Capital allocation (buybacks/dividend)Regular $0.075 dividend; no explicit buyback activity noted in Q1/Q2 Expect active Q4 repurchases; dividend maintained More assertive buybacks
MRP/Softworld integrationOngoing integration and realignment costs across periods Goodwill impairment in SET tied to reduced demand and integration/realignment Reset in SET post-integration

Management Commentary

  • CEO: “As I step into this role… the operating environment is evolving… While Kelly continued to capture growth in more resilient markets… these dynamics became more visible in our results in the third quarter. Our team knows that Kelly can achieve more… leading Kelly to drive profitable growth and lasting value” .
  • Outlook and capital returns: “Adjusted EBITDA margin of approximately 3% [Q4]… we anticipate being active in our repurchase program during the remainder of the year… we also maintained our quarterly dividend of $0.075 per share” .
  • Impairment rationale: Goodwill impairment “driven by reduced demand, integration of MRP and Softworld acquisitions and realignment of reporting units in the SET segment” .

Q&A Highlights

  • Analysts probed discrete demand impacts (federal contractor and large customers) and their persistence into Q4; management guided a 12–14% YoY revenue decline with ~8% discrete impact, and underlying -4% to -6% .
  • Questions on capital allocation and valuation; management noted $40M remaining on Class A buyback authorization and intent to be active in Q4, citing undervaluation and flexibility .
  • Clarifications on margin trajectory: despite revenue pressure, Q4 adjusted EBITDA margin expected ~3% with sequential improvement from Q3 .
  • Discussion of tax valuation allowance and non-GAAP adjustments; adjusted tax was a benefit in Q3 (-$3.8M) versus GAAP expense $46.4M due to allowance and impairment .

Estimates Context

  • Q3 2025 results missed S&P Global consensus: revenue $1.022B* vs actual $0.935B, EPS $0.415* vs actual $0.18. 4 estimates for each metric*. Values retrieved from S&P Global.
  • Given the discrete demand headwinds (~8%), SET impairment, and Q4 guide (12–14% decline, ~3% adjusted EBITDA margin), estimates for Q4 and FY may need downward revisions to revenue and margin assumptions to reflect continued pressure in SET/ETM and federal contractor exposure .

Key Takeaways for Investors

  • The miss was driven by discrete customer/federal contractor headwinds and margin pressure in SET/ETM; underlying demand declined ~2% YoY—watch for stabilization of these discrete impacts into H1 2026 per commentary .
  • Non-cash SET goodwill impairment and tax valuation allowance materially distorted GAAP EPS; adjusted metrics better reflect run-rate but still show margin compression (-70 bps YoY) .
  • Management is signaling confidence through buybacks and maintaining the dividend; monitor repurchase execution vs liquidity/FCF (YTD FCF improved to $87.2M) .
  • Q4 guide implies continued top-line pressure; focus on Education resilience and ETM/SET expense actions to support sequential margin improvement (~3% adjusted EBITDA margin target) .
  • Integration/realignment remains a key lever—track progress on SG&A optimization and SET portfolio adjustments post impairment to re-accelerate profitable growth .
  • AI/technology modernization is a narrative tailwind; KellyOCG recognitions and AI survey suggest strategic investment focus—evaluate monetization and client adoption over 2026 .
  • Near-term trading: caution on revenue/margin prints vs guide; potential technical support via buybacks; medium-term thesis hinges on reducing discrete exposure, improving SET mix/margins, and leveraging Education growth .