Transcript
Hello, and welcome to the GEE Group fiscal 2025 third quarter and year-to-date ended June 30, 2025 earnings and update webcast conference call. I’m Derek Dewan, Chairman and Chief Executive Officer of GEE Group. I will be hosting today’s call. Joining me as a co-presenter is Kim Thorpe, our Senior Vice President and Chief Financial Officer. Thank you for joining us today. It is our pleasure to share with you GEE Group’s results for the fiscal 2025 third quarter and year-to-date ended June 30, 2025 results and provide you with our outlook for the remainder of 2025 and the foreseeable future. Some comments Kim and I will make may be considered forward-looking, including predictions, estimates, expectations and other statements about our future performance. These represent our current judgments of what the future holds and are subject to risks and uncertainties that actual results may differ materially from our forward-looking statements. These risks and uncertainties are described below under the caption, Forward-Looking Statements Safe Harbor and in Wednesday's earnings press release and our most recent Form 10-Q, 10-K and other SEC filings under the captions, Cautionary Statement Regarding Forward Looking Statements and Forward-Looking Statements Safe Harbor. We assume no obligation to update statements made on today’s call. Throughout this presentation, we will refer to the periods being presented as this quarter or the quarter or this-year-to-date or the year-to-date, which refers to the 3-month or 9-month periods ending June 30, 2025, respectively. Likewise, when we refer to the prior year quarter or prior year-to-date, we are referring to the comparable prior 3-month or 9-month periods ended June 30, 2024, respectively. During this presentation, we also will talk about some non-GAAP financial measures. Reconciliations and explanations of the non-GAAP measures we will address today are included in the earnings press release. Our presentation of financial amounts and related items, including growth rates, margins and trend metrics are rounded and based upon rounded amounts. For purposes of this call, and all amounts, percentages and related items presented are approximations accordingly. For your convenience, our prepared remarks for today's call are available in the Investor Center of our website, www.geegroup.com. Now on to today's prepared remarks. Beginning in the second half of 2023 throughout 2024 and so far in 2025, we have encountered and continue to face very difficult and challenging conditions in the hiring environment for our staffing services. These have stemmed from various factors, including the overhiring that took place in '21 and '22 in the immediate aftermath of the pandemic and the macroeconomic uncertainty, interest rate volatility and inflation that followed. These conditions have produced a near-universal cooling effect on U.S. employment, including businesses use of contingent labor and the hiring of full-time personnel. Since 2023, many client initiatives such as IT projects and corporate expansion activities requiring additional labor in general, have been put on hold. Instead, many of these businesses we serve have implemented and proceeded with layoffs and hiring freezes and in many cases, have focused on retaining their existing employees rather than adding new employees. Companies and businesses are cautiously assessing the potential for interest rate cuts and changing market conditions to ensure their investments in technology and human capital are strategic and sustainable. Artificial intelligence, or AI, is gaining ground at an accelerated pace and is further complicating the demand for and use of human resources for certain tasks and is influencing project planning and capital expenditures. Collectively, these conditions have had a killing effect on our business and resulted in fewer job orders for both contract personnel and direct hire placements. Our financial results for the fiscal 2025 third quarter and year-to-date ended June 30, 2025, have been impacted by these conditions as well. The company's contract and direct hire placement services are currently provided under its Professional Staffing Services operating division or segment. On June 2, 2025, we entered into an agreement for the sale of certain operating assets of the Industrial segment, including those of BMCH Inc., Triad Logistics, Inc. and our Triad Staffing brand. These results of the Industrial segment have been classified as discontinued operations and are excluded from the results of continuing operations reported below as well as in the unaudited consolidated condensed financial statements included in our quarterly report on Form 10-Q for this quarter, unless otherwise stated. Consolidated revenues were $24.5 million for the quarter and $73 million year-to-date. Gross profits and gross margins were $8.7 million and 35.4%, respectively, for the quarter and $25 million and 34.2% respectively, year-to-date. Consolidated non-GAAP adjusted EBITDA was negative $25,000 for the quarter and negative $918,000 year-to-date. We reported a net loss from continuing operations of $400,000 or $0.00 per diluted share for the quarter and a net loss from continuing operations of $34 million or $0.31 per diluted share year-to-date. We are aggressively taking actions to adapt to the current business climate and refine our strategic focus, growth plans to improve operating performance and financial results. These include streamlining our core operations and improving and adjusting our productivity to match our current business volume, which helped us improve our results in terms of non-GAAP adjusted EBITDA and EBITDA. In addition to our ongoing cost reduction and system and business integration initiatives, we have a renewed focus on VMS and MSP sourced business, including the use of special recruiting resources and acceleration of the integration and use of AI technology into our recruiting, sales and other processes. Importantly, we anticipate continuing improvements in our productivity, aiding in restoring meaningful profitability as soon as practically possible. In addition to the aforementioned near-term initiatives, we are working closely with our frontline leaders in the field across all of our verticals to support them as we all continue to aggressively pursue new business as well as opportunities to grow and expand existing client revenues. We are seeing some positive results, particularly in the direct hire placement business as the volatility and macroeconomic uncertainty currently gripping our economy and labor markets begin to subside, I am very confident we are well-positioned to meet the increased demand from existing customers and win significant new business. As you also know, we paused share repurchases on December 31, 2023, having repurchased just over 5% of our outstanding shares as of the beginning of the program. Share repurchases will always be considered as an alternative component of our capital allocation strategy and a bona fide alternative use of excess capital in the future if and when considered prudent. We fully intend to successfully navigate through the challenges outlined previously and are laser-focused on revenue growth, expense reduction and profitability. GEE Group has a strong balance sheet with substantial liquidity in the form of cash and borrowing capacity. The company is well positioned to grow organically and to be acquisitive. We believe that our stock price will improve and that there is a good opportunity for upward movement once we are able to operate again in a more optimal economic environment with improved labor conditions. Before I turn the call over to Kim, I wish to thank our dedicated employees and associates who work extremely hard every day to ensure that our clients get the very best service. They are a key ingredient in driving our company's success. At this time, I'll turn the call over to our Senior Vice President and Chief Financial Officer, Kim Thorpe, who will further elaborate on our fiscal 2025 third quarter and year-to-date results. Kim?
Thank you, Derek, and good morning, everyone. As Derek mentioned earlier, the results from our former Industrial segment are no longer part of our continuing operations, so I will focus on those for the quarter and year-to-date. Consolidated revenues from continuing operations were $24.5 million for the quarter and $73 million year-to-date, reflecting a decline of 9% and 10% compared to the same periods last year. Revenue from professional contract staffing services for the quarter was $21.3 million and $64.3 million year-to-date, down 10% and 11%, respectively, from the previous year. Direct hire revenues were $3.2 million for the quarter and $8.7 million year-to-date, which are close to breakeven compared to last year’s figures. Our revenue performance this fiscal third quarter and year-to-date continues to be adversely affected by the current challenging macroeconomic and labor market conditions that the staffing industry is facing, as Derek highlighted earlier. For gross profit and margin for the quarter, we reported $8.7 million and 35.4% and for year-to-date, $25 million and 34.2%, compared to $9.2 million and 34.1% and $27 million and 33.4% from the prior year. The decline in gross profit dollars is primarily due to reduced volumes in our professional contract staffing services. However, the improvement in our gross margin is primarily due to an increase in the proportion of direct hire placement revenues, which have a 100% gross margin, as our direct hire volume has remained near breakeven in both current and prior periods. Although revenue from professional contract staffing services was lower, selling, general, and administrative expenses for the quarter and year-to-date were $9 million and $26.7 million, which is down 8% and 9% compared to the last year. Given the current environment, we are focused on reducing costs and streamlining our core operations to enhance productivity. These efforts have contributed to improvements in our non-GAAP adjusted EBITDA and non-GAAP EBITDA for both the current quarter and year-to-date compared to prior periods. Alongside our ongoing cost reduction initiatives, we have also renewed our focus on VMS and MSP sourced business, utilizing special recruiting resources and accelerating the integration of AI technology in our recruiting, sales, and other processes. I want to emphasize that our plans aim to restore and enhance profitability as quickly as possible. Our net loss from continuing operations for the quarter was $400,000, or just under $0.01 per share, compared to a loss of $18.1 million, or around $0.17 per diluted share, in the same quarter last year. Year-to-date, the loss from continuing operations was $34 million, or $0.31 per diluted share, compared to a net loss of $20.5 million, or $0.19 per diluted share, in the prior year. The larger net losses I previously mentioned were influenced by non-cash write-offs of intangibles and goodwill. Our EBITDA, a non-GAAP financial metric, improved to negative $270,000 for the quarter and negative $1.7 million year-to-date, compared to negative $524,000 and negative $2.5 million for the same periods last year. Adjusted EBITDA, another non-GAAP measure, was a negative $25,000 for the quarter, nearly breakeven, and negative $918,000 for the year-to-date, versus negative $329,000 and negative $1 million for the same prior periods, largely due to our cost reduction efforts and improved gross margin. Our current working capital ratio as of June 30 was 4.2:1. We had negative free cash flow of $1.9 million for the nine months, compared to negative cash flow of $1.2 million last year. Our liquidity position as of June 30, 2025, remained strong, with $18.6 million in cash, an undrawn ABL credit facility with $6.6 million available, overall net working capital of $24.1 million, and no outstanding debt. Our net book value and net tangible book value per share were $0.46 and $0.23, respectively, as of June 30, 2025. In closing, as Derek noted, we are cautiously optimistic as we prepare for the long term, making modernization improvements and integrating AI across all our businesses. Before handing it back to Derek, please refer to the reconciliations of GEE Group's non-GAAP financial measures discussed today with their GAAP counterparts in the supplemental schedules included in our earnings press release. Now, I will turn the call back over to Derek.
Thank you, Kim. Despite the macroeconomic headwinds and staffing industry challenges impacting the demand for our services, we are aggressively managing and preparing our business to mitigate them and be prepared for an anticipated recovery. What we hope to take away from our earnings press release and our remarks today is that we are focused on growing revenues and streamlining our operations to reduce costs and gaining efficiencies by implementing AI and other technology while preparing for a more conducive and growth-oriented labor market. We will continue to work hard for the benefit of our shareholders including consistently evaluating strategic uses of GEE Group's capital to maximize shareholder returns. Now Kim and I would be happy to answer your questions. Thank you. The first question is about updating the website concerning the sale of Triad. We will prioritize that and refresh the website with information on our current activities. The second question pertains to capital allocation, specifically regarding the choice between acquiring a company and share repurchases, along with the associated risks of each. We are optimistic about both options when the timing is right. I would like you to hear from Kim, our CFO, who shares our belief in this strategy. Kim?
Yes. Thanks. The first part of the question is how do we decide whether to either buy shares back or do acquisitions or invest in other growth initiatives. And the answer is that we do financial measurement on all these things. And where we come down to currently is that once we get our positive cash flow back, which we expect to happen in the next 6 months, at least, then at that point, as we're generating positive cash flow, we'll then again take a look at share repurchases. We don't look at it in terms of share repurchases or M&A or other things one versus the other. We believe the appropriate approach is a blend to continue to get good yielding acquisitive look for value-adding acquisitions, which are accretive that will help grow the company. Doing share repurchases alone sounds good and it's very good for the shareholders who remain in the company for temporarily, but it does not grow the company and it requires cash and other resources to do it. So it's a balance.
And let me add, there's a second question that talks about M&A. What's the status of our target list and how many do we have? What's the expectation and timing of closing deals? We have several deals that we've considered, done diligence on and, in fact, had letters of intent, nonbinding. We pulled back on most of those because as you know, the industry is in what I call a stagnant to down mode right now and their results have trailed downward. So what we don't want to do is purchase a company with declining revenue, and we're looking for stabilization. So the relationships are hot still, we keep those going. And when we see stabilization, we'll be able to move forward on the deals. So that's our strategic focus. And the other aspect of this is price expectation. So selling off of prior year or prior 2 years' results doesn't cut it with us. We're focused on what's your current run rate, what's your current earnings rate and so forth and what kind of synergies can we get on the deal as well. So keeping all that in mind, discipline is very important here. And as Kim said, our first and main objective is to restore positive cash flow from operations, and we're getting very close on that. And when we do that, that gives us the opportunity to also pursue share repurchases and other activities, but most importantly, it allows us to focus on acquisitions that are on the upswing or at least flat lined and not declining in terms of revenue growth and profitability. So it takes a lot of discipline and analysis to do the right deal. And we're very, very focused on looking deep down to make sure that whatever performance we look at today is sustainable and on the upward swing. Do you want to add anything, Kim?
I would just like to mention that AI is a prominent topic in discussions today. It's prevalent in everything we read and a subject in every conversation. Therefore, we've incorporated that aspect into our evaluation criteria. When considering other businesses, we are not indicating that they must be leaders in AI at this moment, but we do take into account the potential for AI applications in our future joint ventures. This includes exploring companies that are developing AI tools for the staffing industry, and we have specific targets in mind.
Yes, in our cost streamlining efforts, AI plays a significant role. We have also expanded our offshore recruiting component, which will continue to grow in order to reduce our costs and improve our production efficiency for less money. I can provide more information about AI, and I believe it's important to update everyone after this call as we advance with our AI initiatives and share our plans publicly. AI is here to stay and has already changed some positions we would typically fill with human personnel across various verticals. In accounting, for instance, it's impacting entry-level programming tasks in IT. Nonetheless, there is still plenty of work to be done, and we are focusing on high-demand skill sets such as machine learning specialists and software data scientists. On the accounting side, we're witnessing strong movement for roles like CFOs, controllers, and tax personnel at the higher end, while lower-level tasks such as payables and payroll are increasingly being automated by AI. This situation presents both opportunities and challenges, and we are committed to addressing them. We recognize that AI can enhance our efficiency, but we need to target the necessary skill sets in the market to support this transformation, and that is our aim. Next, we have another question...
I think you've covered these 3. I think this is the next one...
Kim, do you want to take that one?
Could you provide more details on the planned uses of the cash allocated for mergers and acquisitions, as well as stock buybacks? As I mentioned earlier, our strategy, particularly in the current environment, is to become cash flow positive again. We are making substantial progress towards that goal. Once we achieve positive cash flow, we will consider reinstating stock buybacks as one possible use for the additional cash generated. However, we also plan to maintain a significant cash reserve for potential acquisitions. It's difficult to precisely budget for this since the M&A opportunities that may arise in the next six months are uncertain, but this is our approach.
One of the questions in connection with M&A is what are you targeting? And also what staffing or non-staffing activities are you approaching? So we're moving up the food chain toward the consultancy type businesses and thinking on of the box on what type of activities will grow in today's economy that are complementary to staffing, but not necessarily directly in the staffing/human resources business. So that was an excellent question, and that's absolutely a focus of our efforts on the M&A front.
Let me add one more thing regarding that question. The question also asks how we should approach additional cash draws to support working capital needs. Our business operates very efficiently, with a cash correlation to operations of about 95% to 97%. Over the long term, especially now, this is the case because we have net operating losses, which means we are not in a high taxpaying position. Our EBITDA serves as a good indicator of our cash flow, so that's a useful way to think about it.
Here's a very good question that I get often. Can you explain how other staffing companies are doing so much better than GEE Group? So we look at peer group analysis constantly to see what they're doing, how they're doing and so forth. A case in point is Robert Half, a very blue-chip staffing company, and that has a lot of the verticals that we have. So I analyze Robert Half's results. And if you dig in, you'll see that their permanent placement/direct hire business and contract staffing business both declined in the 10% to 12% range. However, their aggregate revenue decline was much less because of their Protiviti high-end consulting division. So that bears out that as a hedge against the downturn in the traditional staffing roles that we fill that the higher-end consultancy will offset that. So the decline is very similar to ours, unfortunately, but it's the reality. Some of the other staffing companies are down somewhere between 6% and 12%. Interestingly, those that have international focus like Manpower, Adecco Group, Randstad, and so forth and to a lesser degree, Kelly and I'm using those because they are the behemoths that have a lot of foreign business or international business. The international segment outperformed the U.S. segment. So that buffered some of the results. But when they report, they segment down to the U.S. versus international, and their U.S. decline is almost a mirror image of ours. That's not an excuse, though, for lack of performance because our share of the market can be increased irrespective of whether the growth in the industry takes place. So that's our approach. And I think being nimble and quick and good at what we're doing and provide the best resources to the customers, priced right is very important. But I hope that answers the question, and I do peer group analysis all the time. I hate to say misery does not love company. I can tell you that. And we're not satisfied in any respect to the decline in revenue. However, we're turning the corner on the profit side and with a boost in the revenue side, we should be able to produce some good results. So that's our approach, and we take it very seriously. And we're not burning through cash. If you notice the cash position has been fairly constant despite a little bit of negative cash flow, but we've been tightening the belt across the board. So look at the cash position, it hasn't moved much quarter-to-quarter. Next question. There's another inquiry about buybacks. Why not implement a strategy similar to Berkshire Hathaway? Kim's point about improving cash flow to be positive and sustainable will help us consider more aggressive actions, including share buybacks. Can you explain simply how AI affects demand for staffing? I touched on this previously and mentioned its disruption to staffing. In contrast to Robert Half, which stated in its July call that AI hasn't significantly impacted their revenue, it’s interesting because although I reviewed their press release and report, Robert Half doesn’t focus on some of the high-end IT projects that we handle, which AI has impacted regarding talent demand. There’s a distinction between the types of businesses. Conversely, they may not benefit as much from a recovery. That may be their stance, but if you observe media outlets like CNBC or Fox Business, they are all discussing AI's overall impact on employment, not just within staffing firms. AI is beneficial, it's here to stay, and we must adapt to it instead of using it as an excuse for underperformance.
AI has its maximum yield so far in recruiting. It's a valuable tool because it can analyze a lot of data quickly, send numerous messages promptly, and make calls efficiently.
And using AI agents on the sales side, we're all over that and on the recruiting side. And so to be able to grow without adding headcount and internal cost is the key and to streamline the existing business that we already have. So we've embraced AI, and we will make an announcement with the tools that we're using to talk more. I'll give you an example. We're doing away with phone systems. That's on the agenda replaced by traditional phone systems. And requiring more or relying more on cellular activities and outreach with AI.
We're updating our applicant tracking systems and embedding AI into our app.
In a very big way. So we're actually very excited about how AI will transform the industry. And also from an acquisition standpoint, the potential and possibility of acquiring a company that's bent toward AI. And I don't want to get too far ahead of it on that one. But those are the things we're doing right now. And we're embracing AI, not using it as a crutch for lack of performance. So what do we want to do? Will you be offering AI as a service or just from internal automate. That's an excellent question. The answer is offering AI as a service is on the agenda as well. You have mentioned AI tech for a few quarters, what products have you implemented? What are the results cost savings? That's a great one. And we'll come out publicly and talk about our cost savings and how AI is being used to help drive that. I think based on what we have. And it takes a little while to implement. So that's what we're in the process of right now. Do you regret buying Hornet? No, Hornet actually has helped us tremendously because there's cross utilization of the recruiting resources overseas. So that's been a good pickup. And the gentlemen that joined us leading the charts, Larry Bruce has embraced the entire organization and has helped the sales team in multiple engagements.
Yes, we have more than doubled the international resource platform that we have for recruiting, and it's now being utilized in two of our other businesses, and it's growing. So that's going to be a good source for us going forward.
Here's a good question. Just to be clear, are you developing your own AI staffing tools and/or are you using and implementing readily available AI tools? The answer is yes. So we have some internal development and then we have some shelf packages that we will be implementing as well. So it's a combination of both. How large is the offshore IT segment? Is this mainly used for cost cutting or solution-based work? It's mainly used for recruiting across the board.
Our goal is to grow that platform significantly. Like I said, it's more than doubled in size since January. So it's growing, and it's being embraced more and more by other counterparts in the business. So in fact, we'll talk about one project we recently did where we were able to recruit and onboard 80 individuals for a single project within a matter of days because of the additional resources we had through Hornet.
Yes, another question. This is a good one. How are your competitors responding to a tough market? Are they lowering prices to increase volume? Are they leaving the industry because they can't turn a profit? Well, the answer is they are not leaving the industry. This is significant for our performance. Our gross margins actually improved this quarter compared to last year, and they are substantial, in the mid-30s. So, compared to our peers, we are performing very well in terms of gross margin, alongside Robert Half, and we may actually be slightly higher this quarter, at least on par with them. We're managing pricing effectively; however, we need to increase our volume. We are not majorly discounting our prices. Our competitors may be, but they are not at the upper end of the market. Many competitors are focusing on consulting services like Protiviti, RHI, and statement of work. Do you see a shift towards that SOW, and how are we addressing it? The answer is absolutely yes. That is a great question. I mentioned Robert Half's results and how the consulting side helped support the staffing side. We are actively moving towards that. This is why we are not pursuing basic staffing acquisitions. I refer to them as basic because that’s what they are. I believe in shifting towards SOW and specialized consulting services, similar to what I experienced in my previous role. When we refer to it as the bench, it means we have consultants akin to a Big Four firm or Protiviti, similar to what Robert Half has.
One question is whether GEE would consider merging with a larger company. GEE aims to do what benefits the entire shareholder group. This is my responsibility as a public company as well as the Board's. We must always keep this in mind to maximize shareholder value. If we find that a combination with synergies is beneficial, we will pursue it. Similarly, we can take any actions that support the overall business and look after our employees. We are excited about that potential. Would you have consulting the question probably, we just not authorized buybacks even if you're not ready to repurchase? Let me address that question. It only requires one board action and a quick call to our broker who is on standby. The reason we haven't authorized it and have left it out there is that we think that's a little...
I don't want to be misleading, but I want to clarify that we have an account set up with funds available for a potential buyback. It's just a matter of a few days to activate it if it's deemed appropriate. That's a great question, and it implies you don't have to make an announcement. However, as a public company, we are required to make an announcement, and that's what is appropriate. When it comes to leveraging after cash is exhausted, typically, our borrowing would be based on accounts receivable if and when we utilize the credit facility. I would aim to keep it under 2.5 times EBITDA, assuming we have positive EBITDA, which is the standard for cash flow lending. Are we investing in sales to position ourselves for future growth? Absolutely.
Hornet is a perfect example of that, relatively low cost. We got an outstanding sales professional in the...
And we're going after high-volume MSP business, and we now have the recruiting resources to be able to deliver that on a profitable and economical basis. Are there any other questions?
No, that's it.
Okay. At this point, that concludes our call. We sincerely appreciate you joining us today, and we are very bullish on the future, and we'll navigate through troubled waters. Thanks again for joining us.