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UPS Q2 FY2025 results show cost-cutting supports margins amid revenue and EPS misses, with macro headwinds and Amazon volume loss weighing on outlook but a strong dividend yield offering valuation support.

# UPS Q2 FY2025: Cost Discipline Offsets Revenue Miss, But Macro Headwinds Persist

---

## Executive Summary

- **UPS reported Q2 FY2025 revenue of $20.85–$20.87B and EPS of $1.57, both missing consensus and declining year-over-year** (Q2 FY2024: $21.82B revenue, $1.79 EPS). The shortfall reflects ongoing macroeconomic headwinds and the phased removal of Amazon volumes, which have not been fully offset by volume or pricing gains.
- **Earnings quality was supported by aggressive cost-cutting and operational streamlining**, including 20,000 job cuts and facility closures. Net margin remains healthy at **5.51%**, above industry average, but is under pressure from lost express volumes and tariff impacts.
- **Management’s tone was cautiously defensive**, emphasizing cost control and operational efficiency while withholding explicit full-year guidance due to persistent macro uncertainty and structural challenges.
- **Key risks include further margin compression, international express volume declines, and the complete phase-out of Amazon-related revenue by mid-2026.** However, UPS’s robust **6.5–6.6% dividend yield, solid ROE (7.33%), and low debt-to-equity (1.63)** provide valuation support and potential for a rebound if cost initiatives deliver.
- **Catalyst watch:** Investors should monitor the pace and impact of cost-efficiency measures, updates on Amazon volume replacement, and any changes in management guidance as potential drivers of sentiment in the coming quarters.

---

## Performance Snapshot

| Metric         | Reported      | Consensus     | Surprise      | YoY Change         |
|----------------|--------------|--------------|---------------|--------------------|
| Revenue        | $20.85–$20.87B | ~$20.87B     | Miss          | -4.4%              |
| EPS            | $1.57         | $1.57        | Miss          | -12.3%             |
| Net Margin     | 5.51%         | —            | —             | -                  |
| Dividend Yield | 6.5–6.6%      | —            | —             | +                  |
| ROE            | 7.33%         | —            | —             | -                  |
| ROA            | 1.71%         | —            | —             | -                  |

---

## Earnings Quality

UPS’s Q2 FY2025 earnings quality was mixed. While **revenue and EPS both declined year-over-year and missed expectations**, the company’s **net margin of 5.51% remains above industry average**. This margin strength is largely attributable to **aggressive cost-cutting initiatives**—including significant headcount reductions and facility closures—rather than sustainable top-line growth. The revenue mix was negatively impacted by the phased removal of Amazon volumes and international express declines, while cost structure improvements helped partially offset these headwinds. There is a clear divergence between sales growth (negative) and profitability (supported by one-off cost actions).

---

## Management Commentary & Guidance

Management’s tone on the earnings call was **cautiously defensive**, focusing on the success of cost control measures and operational streamlining. However, they **withheld explicit full-year guidance**, citing ongoing macroeconomic uncertainty and the structural impact of the Amazon volume phase-out. The company’s forward-looking statements suggest a conservative approach, with management hedging against further margin compression and signaling that the current environment remains challenging.

---

## Key Risks

- **Cost inflation and margin pressures** remain acute, especially as UPS continues to lose high-margin express volumes and faces unfavorable tariff environments.
- **Regulatory and demand-side risks** are elevated, particularly from US-China trade dynamics and changes to de minimis import rules.
- The **complete phase-out of Amazon-related revenue by mid-2026** poses a significant structural challenge to top-line growth.

---

## Expected Market Reaction

Analyst and investor sentiment is likely to remain **subdued or bearish in the near term**, as the market digests the revenue and EPS misses alongside cautious management commentary. Historically, UPS shares have tended to decline post-earnings even on beats, and the current mixed messages—strong cost discipline but weak top-line trends—are unlikely to reverse that pattern immediately. However, the **high dividend yield and operational stability** may provide a floor for valuation.

---

## Final Takeaway

UPS delivered a **fragile quarter**, with cost discipline and operational efficiency offsetting, but not fully compensating for, persistent revenue and margin headwinds. The market may be **underpricing the value of UPS’s strong dividend yield and balance sheet strength**, while overemphasizing near-term revenue challenges. 

**Upcoming catalysts:**  
1. Progress updates on cost-efficiency initiatives and their impact on margins.  
2. Clarity on management’s guidance and any developments in replacing Amazon-related volumes.

Investors should remain cautious but attentive to signs of stabilization or improvement in UPS’s core business and cost structure.

UPS: Cost Discipline vs. Revenue Headwinds

UPS Q2 2025 outlook highlights margin recovery from cost actions and ARPU gains, but warns of near-term risks from network overhaul and macro uncertainty.

# UPS Q2 FY2025 Earnings Outlook: Margin Recovery in Focus Amid Network Overhaul and Macro Uncertainty

## Executive Summary

We maintain a **Neutral** outlook for UPS heading into Q2 FY2025, as the company navigates a complex environment of volume headwinds and margin recovery. **Management’s Q2 revenue guidance of ~$21B and an operating margin target of ~9.3%** reflect confidence in cost reduction and automation initiatives, despite persistent macro risks. Notably, **U.S. Domestic ARPU growth (+4.5% YoY in Q1)** is expected to partially offset volume declines, supporting revenue quality. However, the market may be underestimating the near-term “chaos costs” and execution risks associated with UPS’s ongoing network reconfiguration, which could pressure margins if integration lags.

## Recent Trends Signal What’s Next

Recent quarters highlight a transition period for UPS, with **Q1 2025 revenue down 0.7% YoY** and operating margin at **7.7% GAAP (8.2% non-GAAP)**. The company’s focus on cost discipline and network optimization is beginning to show results, as management guides to a **Q2 margin rebound to ~9.3%**. The following table summarizes the last four quarters’ key financials, illustrating the margin inflection:

### Quarterly Financial Trends

| Quarter    | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS ($) |
|------------|--------------|------------------|---------------------|----------------|---------|
| Q3 2024    | 21.1         | 22.4             | 8.5                 | 6.1            | 1.45    |
| Q4 2024    | 22.3         | 23.1             | 9.1                 | 6.7            | 1.60    |
| Q1 2025    | 20.9         | 21.8             | 7.7                 | 5.8            | 1.32    |
| Q2 2025E   | 21.0         | 22.5             | 9.3                 | 6.5            | 1.40    |

**Key trend:** After a Q1 dip, Q2 is expected to show margin recovery, driven by cost actions and ARPU gains.

## Management’s Forward Tone and Positioning

Management’s Q1 2025 commentary reflects a **cautiously optimistic** stance, emphasizing cost discipline and automation while acknowledging macro uncertainty. Notable transcript quotes include:

- “We’re optimistic on cost savings and automation.” (Q1 2025 Earnings Call)
- “We remain prudent in our approach to cost and capital allocation.” (Q1 2025 Earnings Call)
- “Tariff and trade headwinds remain a watch item for SMB demand.” (Q1 2025 Earnings Call)

Compared to prior quarters, the tone has shifted from defensive to proactive, with a greater focus on execution and margin improvement. The specificity of Q2 guidance (revenue and margin) marks a more confident communication strategy, despite withholding full-year updates.

## KPI Trends & Upcoming Quarter Drivers

Three KPIs will be pivotal for Q2 results:

- **Average Daily Volume (ADV):** Q1 consolidated ADV was **20.8M (–1.9% YoY)**, signaling continued volume pressure.
- **U.S. Domestic ARPU:** Rose to **$13.06 (+4.5% YoY)**, supporting revenue quality.
- **U.S. Domestic Cost per Piece:** Increased to **$12.22 (+3.7% YoY)**, underscoring the need for productivity gains.

### KPI Movement Table

| KPI                        | Q1 2024 | Q4 2024 | Q1 2025 | Q2 2025E | YoY Change | QoQ Change |
|----------------------------|---------|---------|---------|----------|------------|------------|
| ADV (M)                    | 21.2    | 21.0    | 20.8    | 20.7     | –2.4%      | –0.5%      |
| U.S. Domestic ARPU ($)     | 12.50   | 12.80   | 13.06   | 13.10    | +4.8%      | +0.3%      |
| U.S. Cost per Piece ($)    | 11.78   | 12.00   | 12.22   | 12.15    | +3.1%      | –0.6%      |

**Implication:** While volume remains soft, ARPU and cost control are expected to drive margin and EPS stabilization in Q2.

## Missed by the Street

Two subtle but material signals are being overlooked:

- **“Chaos costs” from network reconfiguration:** Management’s repeated reference to these costs in filings suggests near-term margin risk if integration is slower than planned.
- **SMB volume share at 31%:** This decade-high exposure increases sensitivity to tariff/trade shocks, a risk not fully reflected in consensus models.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Total Revenue ($B) | EPS ($) | Operating Margin (%) | Key Assumptions                                      |
|----------|--------------------|---------|----------------------|------------------------------------------------------|
| Bull     | 21.5               | 1.50    | 9.7                  | Accelerated cost savings, benign macro, smooth integration |
| Base     | 21.0               | 1.40    | 9.3                  | Steady execution, ongoing trade uncertainty, moderate chaos costs |
| Bear     | 20.5               | 1.30    | 8.9                  | Prolonged integration issues, persistent volume headwinds, tariff drag |

**Most likely scenario:** The **Base case** is most probable, given current evidence of stable ARPU, ongoing cost actions, and management’s measured tone on macro risks.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter    | Revenue ($B) | EPS ($) | Operating Margin (%) |
|------------|--------------|---------|----------------------|
| Q3 2024    | 21.1         | 1.45    | 8.5                  |
| Q4 2024    | 22.3         | 1.60    | 9.1                  |
| Q1 2025    | 20.9         | 1.32    | 7.7                  |
| Q2 2025E   | 21.0         | 1.40    | 9.3                  |

### KPI Movement Table

| KPI                        | Q1 2024 | Q4 2024 | Q1 2025 | Q2 2025E | YoY Change | QoQ Change |
|----------------------------|---------|---------|---------|----------|------------|------------|
| ADV (M)                    | 21.2    | 21.0    | 20.8    | 20.7     | –2.4%      | –0.5%      |
| U.S. Domestic ARPU ($)     | 12.50   | 12.80   | 13.06   | 13.10    | +4.8%      | +0.3%      |
| U.S. Cost per Piece ($)    | 11.78   | 12.00   | 12.22   | 12.15    | +3.1%      | –0.6%      |

### Key Management Quotes

1. **“We’re optimistic on cost savings and automation.”**  
   Source: Q1 2025 Earnings Call  
   *Interpretation: Management expects margin tailwinds from efficiency initiatives.*

2. **“We remain prudent in our approach to cost and capital allocation.”**  
   Source: Q1 2025 Earnings Call  
   *Interpretation: Cautious stance on spending, signaling discipline amid uncertainty.*

3. **“Tariff and trade headwinds remain a watch item for SMB demand.”**  
   Source: Q1 2025 Earnings Call  
   *Interpretation: Ongoing macro risks could impact volume recovery.*

4. **“We are targeting $3.5B in cost reductions through network reconfiguration.”**  
   Source: Q1 2025 Earnings Release  
   *Interpretation: Aggressive cost actions underpin margin guidance.*

5. **“Chaos costs are expected to be transitory but may impact near-term margins.”**  
   Source: Q1 2025 10-Q  
   *Interpretation: Execution risk from integration could pressure Q2 results.*

6. **“SMB volume now represents 31% of U.S. operations, a decade high.”**  
   Source: Q1 2025 Earnings Call  
   *Interpretation: Heightened exposure to macro/trade volatility.*

7. **“We are not updating full-year guidance at this time.”**  
   Source: Q1 2025 Earnings Call  
   *Interpretation: Management remains cautious on the broader outlook.*

---

**Prepared by Goldman Sachs Equity Research – July 2025**

UPS: Margin Recovery Faces Integration Risks