Kelly Services' Q2 Earnings: Navigating a Shifting Staffing Landscape

Kelly Services' Q2 2025 earnings report, released on August 7, 2025, paints a mixed picture of resilience and vulnerability in a rapidly evolving staffing market. While the company's total revenue rose 4.2% year-over-year to $1.1 billion, driven by the May 2024 acquisition of Motion Recruitment Partners (MRP), organic growth—excluding MRP—declined by 3.3%. This divergence underscores the dual forces at play: strategic expansion in high-growth areas and headwinds in traditional federal government contracting. For investors, the key question is whether Kelly can leverage its strengths in education and technology staffing to offset these challenges and maintain long-term value.

Earnings Highlights and Operational Pressures

Kelly's Q2 operating earnings surged to $22.2 million from $12.2 million in Q2 2024, a 73.8% increase. However, adjusted EBITDA fell 8.7% to $37.0 million, with the adjusted EBITDA margin contracting 40 basis points to 3.4%. This margin pressure was concentrated in the Science, Engineering & Technology (SET) and Enterprise Talent Management (ETM) segments, where near-term revenue timing and cost management issues weighed heavily. The Education segment, however, bucked the trend, growing 5.6% year-over-year, reflecting robust demand for K-12 staffing and educational technology solutions.

The company's guidance for Q3 2025 is equally telling. Kelly anticipates a 5% to 7% year-over-year revenue decline in the third quarter, primarily due to reduced federal government contract demand and attrition among large clients. Yet, it expects adjusted EBITDA margin expansion of 80 to 90 basis points, signaling confidence in cost discipline and operational efficiency. This dichotomy—revenue contraction but margin improvement—highlights Kelly's strategic pivot toward higher-margin, more resilient markets.

Market Context: Federal Uncertainty and SLED Opportunities

The broader staffing industry is grappling with the fallout from the Trump Administration's 2025 policy shifts, which have disrupted federal contracting. While “contract stops” in defense and immigration sectors have created uncertainty, new priorities in technology modernization and border security are opening niche opportunities. Kelly's CEO, Peter Quigley, emphasized the company's focus on “resilient markets” such as K-12 staffing, telecom, and engineering solutions, aligning with industry trends that favor diversification.

A critical trend is the growing importance of the SLED (State, Local, and Educational) market, which offers $2 trillion in potential. Kelly's Education segment, already a 51% market leader in U.S. education staffing, is well-positioned to capitalize on this shift. The segment's 6.6% revenue growth in Q2 2025 and 5% projected growth for 2025 suggest strong tailwinds, particularly as state and local governments ramp up investments in education infrastructure and digital transformation.

Segment Performance: Strengths and Weaknesses

Kelly's three core segments reveal divergent trajectories:
1. Education: Dominates with 51% market share in U.S. education staffing, driven by K-12 demand and margin improvement (15.0% gross profit rate in Q1 2025).
2. SET: Grew 39.2% in Q1 2025 due to the MRP acquisition but faces margin compression (adjusted EBITDA margin fell to 4.5%).
3. ETM: Struggles with organic revenue declines (-3.9% in Q2 2025) due to federal contract attrition and customer losses, though adjusted EBITDA margin stabilized at 1.8%.

The Education segment's resilience is a standout, with gross profit rates improving and market share expanding. However, the SET segment's margin pressures—stemming from competitive pricing and inorganic growth—pose risks. Meanwhile, the ETM segment's reliance on volatile federal contracts makes it a liability in the current climate.

Investment Implications

Kelly's Q2 results suggest a company in transition. While the Education segment offers a stable, high-margin growth engine, the ETM and SET segments remain exposed to macroeconomic and political volatility. For investors, the key is to assess whether Kelly's strategic reallocation of resources—such as its focus on SLED markets and outcome-based solutions—can offset these risks.

The company's guidance for Q3 margin expansion is encouraging, but the projected revenue decline (5–7%) raises concerns about short-term earnings volatility. A cautious approach is warranted, particularly given the uncertainty around federal contracting. However, long-term investors may find value in Kelly's Education and SET segments, which align with broader industry trends toward education and technology.

Conclusion

Kelly Services' Q2 earnings reflect a company navigating a complex landscape of challenges and opportunities. While federal contract declines and margin pressures in key segments are concerning, the Education segment's strength and the company's pivot toward SLED markets offer a path to resilience. For investors, the decision to invest hinges on confidence in Kelly's ability to execute its strategic priorities and weather near-term headwinds. Those willing to bet on the long-term potential of education and technology staffing may find Kelly's stock compelling, but patience and a diversified approach are essential in this volatile sector.