Earnings Call Transcript - JOB Q2 2024

Derek Dewan, Chairman and CEO

Hello, and welcome to the GEE Group Fiscal 2024 Second Quarter and first half ended March 31, 2024, 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 2024 second quarter and first half ended March 31, 2024, and provide you with our outlook for the remainder of the 2024 fiscal year 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. We assume no obligation to update statements made on today's call. 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, or 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. We have faced very difficult and challenging conditions so far in the fiscal 2024 first half, mainly stemming from ongoing macroeconomic and labor market instability, volatility, and uncertainty, particularly as they have affected businesses' use of contingent labor and the hiring of full-time personnel. As we reported in the past, the demand environment for us and our industry peers began to soften in the middle part of calendar 2023, following a robust hiring of both contract labor and permanent employees in calendar 2021 and 2022, much of which was attributable to a post-COVID-19 bounce in employment. Many IT projects and corporate expansion activities requiring additional labor have been put on hold with some layoffs implemented in conjunction with a hiring freeze. These conditions have continued to negatively impact job orders so far in the first half of calendar 2024. Consolidated revenues were $28 million for the fiscal 2024 second quarter and $58.7 million for the first half of fiscal 2024. Gross profit and gross margin were $8.7 million and 31.3% respectively for the fiscal 2024 second quarter, and $18.5 million and 31.5% for the first half of fiscal 2024. Consolidated non-GAAP adjusted EBITDA was negative at $600,000 for the fiscal 2024 second quarter and negative $800,000 for the first half of fiscal 2024. We reported a net loss of $1 million or $0.01 per diluted share for the fiscal 2024 second quarter and a net loss of $2.6 million or $0.02 per diluted share for the first half of fiscal 2024. The prior fiscal 2023 second quarter and first half results were solid, although lower when compared to 2022's best-ever results, which included record high demand for direct hire placement services and many special projects on the contract side driven by a post-COVID recovery, resulting in an upward bounce in hiring at that time. The pullback in demand for direct hire placement services, in particular, which began in the middle part of calendar 2023 has continued into the first half of 2024 so far and contributed to the lower fiscal 2024 second quarter and first half results. Performance is also down nearly universally among our industry peers as we all are facing similar challenges and the industry observers have labeled our current situation the Big Stay. Employers are holding tight on to their good, reliable employees; turnover and replacement hiring of full-time personnel are down accordingly. On the contract side, our clients continue to postpone projects in many areas, including IT software implementation, systems upgrades, accounting and finance special work, and manufacturing production and facilities expansion, resulting in fewer contractor assignments. The good news in this is that our client retention itself remains outstanding, even though orders are down from normal levels across nearly all verticals. Additionally, we are beginning to see signs of improvement in some of the leading indicators we have been tracking. These positive trends have been mentioned in recent reports covering the staffing industry and by other peer group companies in their press releases and public filings. It remains unclear at this juncture, however, whether it's sustainable. And as to when exactly the challenges faced by us in the U.S. staffing industry overall may be expected to meaningfully subside. So, as indicated in our earnings press release, we do remain cautiously optimistic in our outlook. Before I turn it over to Kim, I would like to touch on some other recent important developments. Less than a month ago, we announced the completion of the company's review of strategic alternatives undertaken by our Board of Directors in conjunction with its M&A committee with the assistance of the investment banking firm, DC Advisory. We are now well underway formulating our plans and budgets with which to execute on the M&A committee's and DC Advisory's recommendations, which include making prudent investments to grow both organically and through mergers and acquisitions. Without going into details for now, armed with considerable excess cash and potential available financing, we already have begun both adding and training new revenue producers and revving up sales initiatives in key markets and also revisiting our M&A targets, and socializing with several targets at this stage. We paused share repurchases on December 31, 2023, having purchased 6.1 million shares of GEE Group stock or just over 5% of our outstanding shares at the beginning of the program. For now, our Board and Management agree that it is judicious to discontinue share repurchases for the time being, at least until we gain more clarity on when market conditions may improve. And until then, how much of our excess cash should be held in reserve. Share repurchases always will be a part of our capital allocation strategy and a bona fide alternative use of our excess capital and implemented if and when prudent. However, in the context of our overall growth strategy, it is not by itself a bona fide long-term course of action to maximize enterprise value and increase shareholder value. Also, there are some other bright spots in our outlook. It is still too early to predict when a definitive upward turn in our existing down cycle will occur. However, we are seeing some positive results from our recent investments to accelerate growth. Price and spread improvements in our professional verticals are beginning to take hold, and job orders were up in April. Our revenues for April and revenues per billing day are coming in higher than both the month of March 2024 and the average monthly revenues for the entire quarter. We also have continued to achieve excellent client retention, most notably among our largest clients throughout the current cycle. We view continued good client retention to be a positive sign for things to come as the cycle begins to improve. I want to assure everyone, once again, that our sole focus is to manage through the downturn and to restore growth as quickly as possible. We have a strong balance sheet with substantial liquidity in the form of cash and borrowing capacity and are well prepared to do both. We also continue to assert that our stock is undervalued and especially so based on recent trading at levels very near and even slightly below tangible book value. Also, while our stock price has been down since the last earnings release, only a small portion of our float is actually trading at this low level. Further evidence that it is undervalued and has substantial room to grow, especially from here. And finally, before I turn it over to Kim, I once again wish to thank our wonderful, dedicated employees and associates. They work extremely hard every day to ensure that our clients get the very best services. They are a key factor in our prior achievements and the most important driver of our company's future success. At this time, I'll turn it over to our Senior Vice President and Chief Financial Officer, Kim Thorpe, who will further elaborate on our fiscal 2024 second quarter and year-to-date results.

Kim Thorpe, Senior Vice President and CFO

Thank you, Derek, and good morning. As Derek mentioned, consolidated revenues for the three and six-month periods ending March 31, 2024, were $28 million and $58.7 million, reflecting decreases of 28% and 27%, respectively, compared to the same periods in fiscal 2023. Revenues from professional and industrial contract staffing services for the second quarter of fiscal 2024 were $25.6 million, down 25% from the second quarter of fiscal 2023. For the first half of fiscal 2024, this revenue totaled $53.2 million, a 23% decline compared to the same period in fiscal 2023. Professional contract services revenue, which makes up 90% of all contract services revenue and 82% of total revenue, fell by $7.6 million or 25% from the previous quarter. In the first half of fiscal 2024, professional contract services revenue accounted for 91% of all contract services revenue and 82% of total revenue, decreasing by $14.3 million or 23% from the first half of fiscal 2023. Industrial contract services revenue, which constitutes 10% of all contract services revenue and 9% of total revenue, decreased by $800,000 or 24% from the prior quarter. For the first half of fiscal 2024, industrial contract services revenue made up 9% of all contract services revenue and 8% of total revenue, down by $1.9 million or 28% compared to the first half of fiscal 2023. Direct revenues for the second quarter of fiscal 2024 were $2.4 million, a 50% decline from the second quarter of fiscal 2023, and for the first half of fiscal 2024, they totaled $5.5 million, down 48% from the first half of 2023. The economic and labor conditions mentioned by Derek have led to a decrease in job orders for both temporary and direct hire personnel, affecting revenues across nearly all our professional sectors. The phenomenon known as The Big Stay has been widely reported in the staffing industry and has contributed to the overall drop in demand for permanent hires. Gross profit for the second quarter of fiscal 2024 was $8.7 million, a 34% decrease compared to the second quarter of fiscal 2023. For the first half of 2024, gross profit was $18.5 million, down 33% compared to the first half of fiscal 2023. Our overall gross margins were 31.3% and 34% for the second quarters of fiscal 2024 and 2023, respectively. The variance in gross profit and margin primarily stems from the reduced percentage of direct hire revenue, which boasts a 100% gross margin, relative to total revenue. The gross margin for professional contract services was 25.7% in the second quarter of fiscal 2024, slightly up from 25.4% in the same quarter of fiscal 2023, signifying an improvement of 30 basis points. For the first half of fiscal 2024, the professional contract services margin stood at 25.3%, a slight dip from 25.4% compared to the same timeframe in fiscal 2023. Our gross margin for industrial contract services was 15.2% in the fiscal 2024 second quarter, compared to 16.5% in the second quarter of fiscal 2023, marking a decrease of 130 basis points. Besides fewer job orders, we continue to encounter challenges in our industrial business, such as sourcing and recruiting qualified candidates alongside heightened competition in those markets. Although we have seen lower overall gross profit and margin so far in 2024, our current margins remain relatively high when measured against our competitors. Selling, general, and administrative expenses for the second quarter of fiscal 2024 were $10 million, a 15% reduction compared to the second quarter of fiscal 2023. For the first half, SG&A expenses totaled $20.6 million, a 16% decrease from the first half of fiscal 2023. SG&A expenses represented 35.7% of revenues for the second quarter of fiscal 2024, compared to 30.1% for the second quarter of fiscal 2023. The increase in SG&A relative to revenue is largely due to fixed costs, including personnel-related expenses, occupancy costs, and software subscriptions for applicant tracking and sourcing systems, which grew proportionally higher given the declining revenues, particularly in this quarter. Management is actively working to lower SG&A expenses while ensuring this does not impede revenue growth as market conditions improve. We have also begun to strategically add and train new revenue-generating personnel and have launched sales initiatives in key markets to boost our capacity for attracting new clients, new job orders, and increased market share. Our management team is skilled at navigating cyclical challenges like those we are currently facing, and these investments are being made in anticipation of future recovery. We reported a net loss for the second quarter of fiscal 2024 amounting to $1 million or $0.01 per share, a change of $1.7 million compared to a net income of $700,000 or $0.01 per diluted share in the second quarter of fiscal 2023. Our net loss for the first half of fiscal 2024 was $2.6 million, translating to a negative $0.02 per diluted share, down $3.9 million compared to a net income of $1.3 million or $0.01 per share in the same period of fiscal 2023. The adjusted net loss for the second quarter of fiscal 2024 was approximately $400,000, a decrease of $1.2 million from an adjusted net income of $800,000 in the second quarter of fiscal 2023. Our adjusted net loss for the first half of 2024 reached $1.3 million, down $3.2 million compared to an adjusted net income of $1.9 million for the first half of fiscal 2023. EBITDA for the second quarter of fiscal 2024 was negative $1.2 million, a decrease of $2.7 million compared to positive $1.5 million for fiscal 2023's second quarter. For the first half of fiscal 2024, EBITDA was negative $2.1 million, down $5.2 million from positive $3.1 million during the first half of fiscal 2023. Adjusted EBITDA for the second quarter of fiscal 2024 was negative $600,000, down $2.3 million from adjusted EBITDA of $1.7 million in the second quarter of fiscal 2023. The adjusted EBITDA for the first half of 2024 was negative $800,000, a decrease of $4.5 million from $3.7 million for the first half of fiscal 2023. Our current working capital ratio as of March 31, 2024, was 3.9:1, improved from 3.6:1 as of September 30, 2023. We reported positive cash flow from operating activities and free cash flow of about $400,000 for the fiscal 2024 second half ended March 31, 2024. Our liquidity position remains very robust, with an undrawn ABL credit facility and no debt. Our net book value per share and net tangible book value per share stood at $0.92 and $0.32, respectively, as of March 31, 2024. In conclusion, while we are disappointed with our results for the second quarter and first half of fiscal 2024, we remain cautiously optimistic about our long-term outlook and have shown our ability to generate substantial earnings consistently under more favorable economic conditions, as we have successfully done in the past. Before I hand 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 pass it back to Derek.

Derek Dewan, Chairman and CEO

Thank you, Kim. At March 31, 2024, the company had $21.2 million in cash and another $8.2 million in availability under its bank ABL credit facility. Despite economic headwinds and staffing industry-specific challenges impacting demand for our services, we are aggressively managing and preparing our business for an inevitable recovery. As I mentioned in our earnings press release and again in my opening remarks, we are moving aggressively not only to prepare for an eventual recovery but also to restore growth sooner to be driven by both organic and M&A growth plans and other initiatives. 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. Before we pause to take your questions, I want to again say a special thank you to all of our wonderful people for their professionalism, hard work, and dedication. Now Kim and I would be happy to answer your questions. Please ask just one question and rejoin the queue with a follow-up as needed. If there's time, we'll come back to you for additional questions. And at this point, that concludes our formal remarks, and we'll move to Q&A. Thank you.

Kim Thorpe, Senior Vice President and CFO

Sure, Derek. The first question is why you seem to be losing market share. Your results are significantly weaker than your peers and reflect a serious recession. In response, we know that our results are lower compared to some larger companies, but I believe the main reason our performance appears worse than other larger public companies is due to our larger proportion of small and medium-sized enterprise clients. As Derek pointed out, we have maintained good retention, particularly with our larger clients and also among our smaller clients, but orders have decreased. Some of the impacts on our margins and profits can be attributed to our size. Overall, I wouldn't say we're significantly weaker than our peers; in fact, our orders are solid, and our trends are consistent. Everything considered, I would not characterize our performance as considerably weaker than that of our peers.

Derek Dewan, Chairman and CEO

Another question. Are you concerned that discontinuing share repurchases when your book value is $0.92 is sending a bad message to prospective shareholders? Kim, do you want to take that one as well?

Kim Thorpe, Senior Vice President and CFO

Sure. We are not worried about share repurchases for several reasons. We haven't completely ruled out share repurchases in the future. However, they are not the main strategy for achieving our long-term growth objectives. I understand why individual investors feel strongly about share buybacks, but our responsibility is to manage our capital effectively for all our shareholders. We believe the actions we are currently taking, alongside the recent strategic alternative study we conducted, are the right path for the company. I hope this doesn't send a negative message. The intention is to communicate that we firmly believe there are better uses for our capital that will enhance shareholder returns even more than share repurchases would. Those are my thoughts on that.

Derek Dewan, Chairman and CEO

Thank you, Kim. The next question is about acquisitions. I want to highlight that an IT staffing company called TSR, Inc., traded on NASDAQ under the ticker TSRI, was agreed to be acquired at a 71% premium over its trading price. TSRI's gross margins are around 17.5% to 18%. Our gross margins were 31.5% this quarter, down from our usual highs of 34% to 37%. Additionally, our contract gross margin, excluding the influence of permanent placements, is in the mid to upper 20s. From a performance metric standpoint, our company appears undervalued, which is indicative of the entire group. The announcement of the acquisition was made yesterday as an all-cash deal. Regarding the question of suitable acquisitions in niche staffing, the answer is definitely yes. We have a healthcare component dealing with medical scribes and are involved in IT, accounting, and finance verticals. We are open to acquiring a niche business that aligns well with our existing verticals. As for the multiples we might pay for acquisitions, they range from 5 to 8 times, depending on the type of business and potential synergies, as well as various other factors like growth rates and margins. We would only consider using GEE Group stock if it is highly valued. For instance, if our peer was acquired at a 71% premium, that could make it appealing to use some equity in a deal, especially if the target wants to enhance their equity value with us. We would not consider using stock at the depressed levels we have seen recently. Another question is in the December call, we saw some signs of improvement in January better than December, but March was a low report in terms of revenue. The March quarter is typically our lowest quarter in the fiscal year. There's a lot of peaks and valleys in the contract staffing side and also on the direct hire side. However, we do look at trend lines. And Kim, you can comment on our trends. We also have on the call after you comment, Kim, I'd like Alex Stuckey, our Chief Operating Officer, to comment too, because he has been on top of the trending, and I'd like to hear his commentary and share it with you and the Street. Kim?

Kim Thorpe, Senior Vice President and CFO

Yes. First of all, let me on the question. April revenues are up. The detailed question part is we thought we saw improvement in January, but now the quarter is lower than December. And now we're saying April is better than March. April is better than March. April is better than the average of January through March, and May so far is looking very promising. So that's the answer to that. Alex, do you want to comment?

Alexander Stuckey, Chief Operating Officer

Sure. To go a little further and a little deeper on that. We see green shoots across all of our verticals and across all of our brands in order flow and in placements. And we feel like the summer is going to produce a substantially different result than we've seen in the past. We believe that we have hit the bottom. You asked when we hit the bottom; we feel like the bottom has been hit. And like I said, we see green shoots across all verticals and all brands in order flow. So we feel very positive about the coming summer.

Derek Dewan, Chairman and CEO

Thank you, Alex. Another question is business is getting more competitive. Is there overcapacity in the industry at this time? How do you see this being rationalized? I've been in the industry since the '90s, and the industry, if you look at its growth rate has been solidly upward with a few dips for recessionary periods along the way. What we're finding is because of the robust nature of technology in the verticals we're in, of the demand environment when people are confident in the economic aspects of the economy growing, for example, or at lower rates, things that right now aren't happening. When those turn, the demand usually exceeds the supply and staffing companies have more job orders than they can fill. We anticipate we'll get there again soon, but we're tracking it very tightly to make sure that our cost structure is appropriate for the revenue that we have. And we believe we'll get there. We don't believe there's an overcapacity. There's been a lot of consolidation in the industry. And if you look at the larger companies and what market share they have relative to all the other companies, it's still minuscule when compared to the totality of the entire staffing industry. What are industry indicators for the recovery? You heard some of those today; job orders coming in, across each of the verticals are up. Those are the things we look at. Here's another question. Is there a plan to look offshore to save recruiting costs in the U.S. with demand being low? Adding an offshore component to recruiting has been done successfully by several companies. And we are looking into that and would likely move forward with that, as our IT leader and his group agree that that's a viable option to enhance our recruiting capability at a lower cost. So the answer is yes. Total cash in hand was $21.2 million. That's what it was as of March 31. What do you attribute your higher than industry average gross margin on professional contract services? Alex, why don't you cover that since you're on top of the professional division as well?

Alexander Stuckey, Chief Operating Officer

As Kim noted earlier, we have a very distinct group of customers that are in the mid-market range, which are able and willing to pay a slightly higher spread than the much, much larger VMS and MSP type agreements and companies. So I believe that because of the type of customer we have and our marketing strategy that's attributable to our higher gross margin and higher strength.

Derek Dewan, Chairman and CEO

Thank you. Another question relates to turnover and retention of top producers. We have been very successful in retaining top producers. Our average tenure is very high, particularly with top producers. We just had our top producers on our annual sales award trip and received excellent feedback from them. We really try to take care of our people across the board, and we have been aggressively hiring additional top producers with experience. So we're doing well on retention, and we will continue to do the right things to keep our valuable staff. There are concerns about using stock at a cheap valuation, but I assure you that will not happen. Next question. Do you see investments in M&A that provide more returns than buying back your stock? That analysis was done by DC Advisory and made available to our Board of Directors and Management team. We studied it and concurred that at this time, that's the most optimal way to enhance shareholder value. As Kim said, in our capital allocation strategy, stock buybacks are still there. And at the appropriate time, we would initiate that if it was felt that the M&A side of the equation and organic growth weren't getting to the answer, but we do believe we will get there and we could, in fact, add both at the same time, and that's a possibility. Have you seen signs of distress in your customers' ability to pay? Alex, on the receivable side, our DSOs run about 43, 44 days, correct?

Alexander Stuckey, Chief Operating Officer

That's correct. Receivables are holding at the same consistent level they have in the mid-40 range. We've had very good success with our receivables, and we don't have any signs of our particular customers having an inability to pay nor asking for extended terms.

Derek Dewan, Chairman and CEO

Another question is whether they've been receiving acquisition offers. If so, what are the premiums being offered? Are these offers from competitors or private equity? It's important to note that good companies are often approached to explore merging opportunities or being acquired. I can confidently say that one recent premium was 71% above the trading price of a public IT staffing company, which is significant. Yes, we continually receive these opportunities, and if they align with enhancing shareholder value, we will consider them. However, we're focused on building this company for long-term growth and increasing shareholder value. All three of us are major shareholders, and we want our equity value to grow as much as our shareholders do. So, good companies will always attract offers. The best ones strive to maximize shareholder value, and we will take appropriate actions when the timing is right if opportunities arise. However, at current depressed prices, even a 70% premium only returns us to a reasonable trading range. Nevertheless, we are very confident we will reach our shareholder value goals. We appreciate all of you who have supported us over time, including new shareholders. We are diligently working to stimulate growth and return earnings to our desired levels, which we believe will positively impact shareholder value, alongside strategies for acquisition growth and capital allocation as we progress. That wraps up our call today. Someone also inquired about a 13G filing. We did have a 13G filing from an existing shareholder who is a long-term investor with whom we regularly communicate, so there were no surprises. Therefore, the answer is no, there are no surprises. We have strong shareholders, including one of our directors who owns a major percentage of the company, about 9%. We value our shareholders and appreciate your investment, and we are working hard to deliver. Thank you for joining us today.