Earnings Call Transcript - HQI Q3 2025

Operator, Operator

Good afternoon, and welcome to the HireQuest, Inc. Third Quarter 2025 Earnings Conference Call. It is now my pleasure to turn the floor over to your host, John Nesbett of IMS, Investor Relations. John, the floor is yours.

John Nesbett, Investor Relations

Thank you, Tom. I'd like to welcome everyone to the call. Hosting the call today are HireQuest's Chief Executive Officer, Rick Hermanns; and Chief Financial Officer, David Hartley. I'd like to take a moment to read the safe harbor statement. This conference call contains forward-looking statements as defined within Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements and terms such as anticipate, expect, intend, may, will, should or other comparable terms involve risks and uncertainties because they relate to events and depend on circumstances that will occur in the future. These statements include statements regarding the intent, belief or current expectations of HireQuest and members of its management as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those described by HireQuest's periodic reports filed with the SEC, and the actual results may differ materially from those contemplated by such forward-looking statements. Except as required by federal securities law, HireQuest undertakes no obligation to update or revise forward-looking statements to reflect changed conditions. I would now like to turn the call over to the Chief Executive Officer of HireQuest, Rick Hermanns. Please go ahead, Rick.

Richard Hermanns, CEO

Good afternoon, and thank you for joining our call today. As you can see from our third quarter results, the staffing market is much the same as it's been for the past 10 quarters now in terms of staffing demand and broader market sentiment. With that said, I'm pleased to report that we delivered another quarter of profitability, highlighted by net income of $2.3 million or $0.16 per share, and we continue to keep our expenses in check despite market uncertainties. Our results in this quarter underscore the flexibility and strength of our franchise model, which has consistently enabled us to remain profitable in soft markets when many others in our industry have struggled. Over the history of HireQuest, our model has proven to perform well and importantly, be profitable in all cycles. Since its inception over 20 years ago, HireQuest has been profitable each year through all of the economic downturns and consistently provided valuable operational and financial support to our franchisees. Over the long term, we are confident that this is a winning formula for shareholders. The overall staffing market has provided some mixed signals throughout 2025, which has been impacted by a variety of macroeconomic factors, including tariffs, immigration policies and impending interest rate cuts. Our temp staffing and day labor offerings are outperforming permanent placement and executive search, which can be less predictable by nature. While demand for temp and day labor staffing can fluctuate based on locations and seasonality, our franchisees have a keen understanding of the market. And with our support and resources, they are able to provide the very best in temporary and day labor staffing services. This dependability and service quality is what keeps our customers coming back to HireQuest in the many geographies that we operate in throughout the United States. Snelling, our nationwide temporary and direct hiring recruiting service, performed well in the third quarter relative to our other offerings with some of these franchisees scoring big wins indicating at least a slight increase in demand for longer-term staffing in the light industrial and administrative fields. Permanent placement and executive search continues to lag, which has been the case for well over a year now, as many of you know. In addition to macro uncertainties that have been amplified by tariffs and other uncertainties, the MRINetwork mostly saw that one of the biggest problems was that several MRINetwork franchisees elected not to renew their franchise agreements over the last few quarters, which has negatively impacted year-over-year comparisons. While this is unfortunate, our current MRINetwork franchisees saw shrinking declines in their perm placement business over the quarter, which is positive. I do want to emphasize that MRI franchises operate differently from the traditional franchise model that you see in our HireQuest Direct or Snelling offices. Our MRI offices are more of a network of somewhat related recruiting firms. In fact, many of them have their own names instead of a tight network of offices that share the same name, brand and operating standards like HireQuest Direct, for example. In other words, these are essentially independent recruiting offices operating under the MRI umbrella, making franchisee retention less of a sure thing than our traditional model, especially in a down market. As always, M&A remains a key part of our growth strategy. There are several opportunities that we are looking at that could be immediately accretive to the HireQuest model, and we're keeping our ears close to the ground for any new deals. This is an especially interesting time for deals given the status of the market where smaller firms or long-term owners eyeing retirement may be planning their exit strategies. We're constantly scanning for new opportunities, and we're well-equipped with a proven strategy that's helped us to close and successfully implement numerous acquisitions over the lifespan of the company. With that said, I'll now turn over the call to David to provide a closer look at our third quarter financial results. David?

David Hartley, CFO

Thank you, Rick, and good afternoon, everyone. I appreciate you all joining us today. I'll now provide a summary of our third quarter results. Total revenue was $8.5 million compared with revenue of $9.4 million in the prior year or a decrease of 9.8%. Our total revenue is made up of 2 components: Franchise royalties, which is our primary source of revenue; and service revenue, which is generated from certain services and interest charged to our franchisees as well as other miscellaneous revenue. Franchise royalties were $8.1 million compared to $9 million for the same quarter last year. Our service revenue for the quarter was $387,000 compared to $428,000 last year. Underlying these franchise royalties are system-wide sales, which are not a part of our revenue but are a helpful contextual performance indicator. System-wide sales in the third quarter were $133.6 million compared with $148.6 million last year. Sequentially, system-wide sales increased about 6.1% this year over Q2, which was favorable compared to last year when the increase was only 1.7%. The third quarter is typically our best sales period for HireQuest Direct and to a lesser extent, Snelling. And this year, both offerings saw double-digit sequential growth compared to only mid-single digits last year. Selling, general and administrative expenses in the third quarter were $5.1 million compared to $5.4 million in the third quarter of 2024. I'd also like to point out that we recognized a workers' compensation benefit in the third quarter of just under $100,000 compared to Q3 of last year when we had a net expense of $500,000. We are pleased with the results from the changes we've implemented to our work comp program. But just so you guys don't get the wrong idea about the other expenses, I think it would be helpful to break down SG&A just a bit more. Core SG&A, which excludes the impact of net workers' comp insurance, MRI ad fund-related expenses and any other nonrecurring operating expenses were $4.6 million for the quarter, which is flat with last year. We provide a table in the press release issued earlier this afternoon with a detailed reconciliation of core SG&A to SG&A as well as tables for the non-GAAP profitability metrics, net income to adjusted net income and net income to adjusted EBITDA that I'm going to talk about shortly. Our net income after tax this quarter was $2.3 million or $0.16 per diluted share compared to a net loss of $2.2 million or a loss of $0.16 per diluted share last year. Adjusted net income for this quarter was $3.4 million or $0.24 per diluted share compared to last year when it was $2.8 million or $0.20 per diluted share. Adjusted EBITDA was $4.7 million compared to $4.9 million last year, and our adjusted EBITDA margin this quarter rose to 55% from 52% last year. For both adjusted net income and adjusted EBITDA, a large component of the favorable year-over-year results this quarter can be attributed to our controlling of network comp expense. And while there have been times over the past few years where it would have been nice to be able to include it as an adjustment, we're pleased that the changes we've implemented in recent years are moving us in the right direction. Moving on to the balance sheet. Our total assets as of September 30, 2025, were $94.9 million compared to $94 million at December 31, 2024. Current assets included $1.1 million in cash and $46.9 million of net accounts receivable, while current assets at 2024 year-end included $2.2 million of cash and $42.3 million of net accounts receivable. Working capital was $31.5 million as of September 30 compared with $25.1 million at 2024 year-end. Current liabilities were 42% of current assets as of September 30 versus 49% at 12/31/2024. We had a $2.2 million draw on our credit facility as of September 30, 2025, and that gives us about $42.5 million in availability, assuming continued covenant compliance. So that puts our net debt at the end of this quarter at around $1.1 million, which is down about $1 million from the end of Q2 and down about $11 million compared to 9/30/2024. So as we stand today, we have a good amount of flexibility and room for short-term working capital needs as well as the capacity to capitalize on potential acquisitions. We paid a regular quarterly dividend since the third quarter of 2020. Most recently, we paid a $0.06 per common share dividend on September 15, 2025, to shareholders of record as of September 1. We expect to continue to pay a dividend each quarter, subject to the Board's discretion.

Richard Hermanns, CEO

Thank you, David. As always, I'd like to thank our employees and franchisees for their hard work and commitment, and we look forward to speaking with you again when we report our year-end results in March. With that, we can now open the line to questions. Thanks.

Operator, Operator

And the first question today is coming from Kevin Steinke from Barrington.

Kevin Steinke, Analyst

I wanted to start off by asking about the day labor business. It sounds like a little more optimism around that business this quarter? I think on the second quarter call, you talked about some of the softness in the manufacturing environment impacting that business. So I'm just wondering if there was a kind of a meaningful improvement in trend in that business that you saw in the third quarter compared to the second quarter.

Richard Hermanns, CEO

So Kevin, thanks for the question. It's good to talk to you. I wouldn't necessarily say it has fully stabilized, but perhaps it's best described as becoming more stable. Overall, it's been a reasonable market for on-demand labor in many areas, although there are a few that remain challenging, often related to one or two clients who have either reduced their use of temporary staffing or are experiencing lower volumes. In short, we believe we're approaching the bottom of this situation. However, we are still somewhat below our desired levels, but there is cause for optimism. In the fourth quarter, which is five weeks in now, we've managed to surpass our year-over-year comparisons for half of those weeks in the Snelling and HireQuest Direct division, while the other weeks showed a decline. This gives us hope that we may have reached the bottom.

Kevin Steinke, Analyst

Okay. Good. And then you called out there some big wins for the Snelling franchisees in the quarter. I mean, should we think about those as competitive takeaways or I don't know, again, a sign of, I guess, as you said, at least some stabilization or small improvement in the market?

Richard Hermanns, CEO

So I think the significant successes are primarily due to outstanding franchisees acquiring more business. That being said, the situation has generally improved across most markets. Snelling, in particular, performed quite well. Large accounts are advantageous when we gain them but challenging when we lose them. However, in the last quarter, we were fortunate to gain a few more accounts than we lost. It’s important to note that this reflects more competitive victories rather than an overall enhancement. Nonetheless, things seem stable at the moment. Looking at the data from the beginning of the fourth quarter, we have seen a couple of weeks that have outperformed the same period last year.

Kevin Steinke, Analyst

Okay. Got it. And in the discussion about MRI, you had talked about some nonrenewal of franchisee agreements. So were there any meaningful nonrenewals specific to the third quarter? Or were you kind of talking about quarters previous to the third quarter?

Richard Hermanns, CEO

Yes. I don't recall the exact quarter we discussed this, but there were a few significant departures, particularly in the first quarter, which are evident in our current comparisons. A positive aspect is that by the end of the quarter, the number of active ongoing MRI franchisees was almost flat compared to the same period last year. While active offices did continue to decline, that trend stabilized by the end of the quarter, primarily due to closures or departures from the network. I'm not going to downplay it; so many people leaving the network is detrimental for us. However, from a market sentiment perspective, it seems that the market has either bottomed out or is stabilizing.

Kevin Steinke, Analyst

Okay. Understood. I want to ask a couple more questions. You mentioned that you are exploring several accretive M&A opportunities. I'm curious about what the pipeline looks like in this market environment. Has it improved a bit due to the challenges faced by some of your smaller competitors?

Richard Hermanns, CEO

It's been surprisingly stable. We're always looking to acquire competitors, and there are consistently options available. I expected there would be more opportunities than there actually are, but there are still many options. I don't interpret it negatively; there are certainly plenty to consider. This time of year typically sees an increase in activity as companies strive to finalize their yearly results, which they can use to enhance their sales presentation. Many are reluctant to optimize their exit multiples based on interim numbers. I anticipate more opportunities in the next 3 to 6 months, but there are plenty available right now. I hope for better options, but they are definitely improved compared to three years ago, reflecting the current market conditions.

Kevin Steinke, Analyst

Okay. Understood. And then lastly, I just wanted to ask about tighter immigration enforcement and you had talked on the last quarter's call about that driving some new business for you given less competition from undocumented workers or companies that use undocumented workers. Is that trend continued? Or is that kind of helping your pipeline still?

Richard Hermanns, CEO

There have definitely been some significant business wins linked to immigration enforcement. However, I must admit that I expected a greater increase in our demand if the reports claiming that over 2 million people have self-deported were accurate. I'm not sure how they arrived at that figure. If it were true, it seems like our demand would be stronger, so I have some doubts about those numbers. Additionally, the inflow of people has been at a low level for about 10 to 11 months, and it takes time for those changes to have an impact. I believe that when some of the reshored facilities begin hiring non-construction workers and staffing up their factories, this will also help drive demand. Investments like Japan's $500 billion in American plants won't materialize instantly into jobs; it takes time for the plants to be constructed and for jobs to be created. If immigration levels remain low, this situation should provide a significant advantage for us moving forward.

Operator, Operator

There are no further questions in the queue. I would now like to hand the floor back to management for closing remarks.

Richard Hermanns, CEO

I want to thank everyone for joining us today for our earnings call. I also want to express my gratitude to our employees, franchisees, and investors. It has been a challenging 11 quarters. However, we have maintained profitability even in this tough environment. When we look at our peers, many are struggling, while we have remained profitable, which is a key advantage of our model. This quarter exemplifies that, as we continue to be solidly profitable with good adjusted EBITDA despite less demand than we would prefer. Thank you again for joining us, and we look forward to speaking with you in March. Thank you.

Operator, Operator

Thank you. This does conclude today's conference call. You may disconnect at this time. Thank you once again for your participation, and have a wonderful day.