Earnings Call Transcript - JOB Q4 2025

Derek Dewan, Chairman and CEO

Hello, and welcome to the GEE Group Fiscal Fourth Quarter and Fiscal Year Ended September 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 full year and fourth quarter ended September 30, 2025, and provide you with our outlook for the fiscal year 2026 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 periods being presented as of this quarter or the quarter or this fiscal year or the fiscal year, which refers to the 3-month or 12-month periods ended September 30, 2025, respectively. Likewise, when we refer to the prior year quarter or prior year, we are referring to the comparable prior 3-month or 12-month periods ended September 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 or based upon rounded amounts for purposes of this call and all amounts, percentages and related items are presented for 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. We continue to face very difficult and challenging conditions in the hiring environment for our staffing services, which have been ongoing since the second half of 2023 and throughout 2024 and 2025. These have stemmed from what is now acknowledged as over hiring that took place in 2021 and 2022 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 the 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 interest rates and 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 HR and project planning opportunities and risks facing virtually all companies, including consumers of our services. These conditions negatively impact job orders for both contract and direct hire placements and have negatively impacted our financial results for the fiscal year and fourth quarter ended September 30, 2025, accordingly. Our contract staffing and direct hire placement services are currently provided under our Professional segment. The operations and substantially all the assets of our former Industrial segment were sold during fiscal 2025 and have been reclassified as discontinued operations and are excluded from the results of continuing operations we'll discuss today, unless otherwise stated. Consolidated revenues were $23.5 million for the quarter and $96.5 million for the fiscal year. Gross profits and gross margins were $8.4 million and 35.8%, respectively, for the quarter and $33.4 million and 34.6%, respectively, for the fiscal year. Consolidated non-GAAP adjusted EBITDA was negative $306,000 for the quarter and negative $1.2 million for the fiscal year. We reported a loss from continuing operations of $613,000 or $0.01 per diluted share for the quarter and a loss from continuing operations of $34.7 million or $0.32 per diluted share for the fiscal year. We are aggressively taking actions to adjust and enhance our strategic focus, growth plans and financial performance and results. As we announced earlier, we completed an M&A transaction with the acquisition of Hornet Staffing in the March 2025 fiscal quarter. We also continue to streamline our core operations and improve or adjust our productivity to match our current lower volumes of business, which helped us improve our results in terms of non-GAAP adjusted EBITDA and EBITDA. We reduced our SG&A during the fiscal year by an estimated annual amount of $3.8 million, of which an estimated $954,000 was realized in our fiscal year results. In addition to our ongoing cost reduction and integration activities, we have renewed our focus on VMS and MSP source 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 achieving continuing improvements in our productivity and restoring profitability as soon as practically possible. Our goal is to become profitable again in fiscal 2026. In addition to these 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 in addition to growing and expanding existing client revenue. We are seeing some positive results from these efforts as the uncertainty and volatility currently gripping our economy and labor markets begins to subside. I am very confident that we are positioned to meet the increased demand from existing customers and win 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. I want to reassure everyone that we fully intend to successfully manage through the challenges I've outlined and restore the growth and profitability as soon as possible. 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 also continue to believe that our stock is undervalued, especially so based upon recent trading at levels very near and even slightly below tangible book value and that there is a good opportunity for upward movement in the share price once we are able to operate again in more normal economic and labor conditions and restore profitable growth. Management and our Board of Directors share the responsibility and are committed to restoring growth and profitability, which will lead to maximizing shareholder value. Before I turn the call 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 service and are the most important ingredient for our company's future 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 full year and fourth quarter results.

Kim Thorpe, Senior Vice President and CFO

Thank you, Derek, and good morning, everyone. As Derek noted, our previous Industrial segment results are not included in the continuing operations results, which I will now discuss. Consolidated revenues for the quarter and the fiscal year were $23.5 million and $96.5 million, both decreasing by 10% compared to the same periods last year. Professional contract staffing services revenues for the quarter and fiscal year were $20.4 million and $84.7 million, also down by 11% year over year. These revenues included $1.3 million and $3.4 million generated by Hornet Staffing since its acquisition in January 2025. Direct hire revenues for the quarter and fiscal year were $3.1 million and $11.8 million, reflecting declines of 9% and 3% respectively, in comparison to the previous year. Gross profits and margins for the quarter and the fiscal year were $8.4 million and 35.8%, and $33.4 million and 34.6%, respectively, compared to $9.2 million and 35.1%, and $36.1 million and 33.8% for the prior fiscal year. The decrease in gross profit was primarily due to reduced volumes in our professional contract staffing services revenues. Conversely, the slight improvement in our gross margins was largely due to a higher mix of our direct hire placement revenues, which have 100% gross margins. Selling, general and administrative expenses, or SG&A, for the quarter and fiscal year were $8.9 million and $35.6 million, dropping by 13% and 11% respectively compared to last year. SG&A as a percentage of revenue was 38.1% for the quarter and 36.9% for the year, down from 39.4% and 37.2% in the previous periods. Given the current business environment, we continue to focus on streamlining our core operations and boosting productivity to align with our reduced business volumes. As Derek highlighted, we lowered our annual SG&A in the 2025 fiscal year by approximately $3.8 million on an annualized basis, with part of this reflected in our 2025 results, and we expect to fully realize this reduction along with further cuts as necessary in the 2026 fiscal year. This has led to improvements in our non-GAAP adjusted EBITDA and non-GAAP EBITDA for both the quarter and the fiscal year despite the decline in business volume. Alongside our ongoing cost-cutting and integration initiatives, we have renewed our focus on VMS and MSP source business, incorporating special recruiting resources and accelerating the integration and use of AI technology in our recruiting, sales, and other operations. I want to reiterate Derek's earlier point: our plans aim to restore profitability as soon as feasible. We are targeting a return to profitability as early as mid-fiscal 2026. For the quarter, our loss from continuing operations was $613,000, or negative $0.01 per diluted share, compared to a loss of $2.1 million, or $0.02 per diluted share, for the same quarter last year. For the fiscal year, we reported a loss from continuing operations of $34.7 million, or $0.32 per diluted share, compared to a loss of $22.7 million, or $0.21 per diluted share, in the prior year. These losses included noncash impairment charges of $22 million for the 2025 fiscal year and $19.4 million for the fiscal 2024 year. EBITDA improved for the 2025 fiscal fourth quarter and the year, reporting negative $524,000 and negative $2.3 million, respectively, compared to a negative $1.1 million and negative $3.7 million for the previous fiscal year. Adjusted EBITDA also improved for the 2025 fourth quarter and fiscal year, which were negative $306,000 and negative $1.2 million, respectively, versus negative $924,000 and negative $2.0 million for the prior fiscal periods. Our working capital ratio as of September 30, 2025, was 4.1:1. We achieved positive free cash flow, including cash from discontinued operations, of $533,000 for the fiscal year, compared to $144,000 in the previous year. Our liquidity position as of September 30, 2025, remains robust with $21.4 million in cash, an undrawn ABL credit facility with $4.8 million available, net working capital of $24.0 million, and no outstanding borrowings. Our net book value per share and net tangible book value per share were $0.46 and $0.23, respectively, as of September 30, 2025. In summary, while we are disappointed with our results and remain cautious about the near term, we are committed to restoring profitability and preparing for the long term, including modernization improvements such as integrating AI across all our operations. Since completing the acquisition of Hornet in the March quarter of 2025, we also plan to pursue additional acquisition opportunities in a disciplined manner, focusing particularly on businesses engaged in AI consulting, cybersecurity, and other IT consulting. Before I hand it back to Derek, please note that reconciliations of GEE Group's non-GAAP financial measures discussed today with their GAAP counterparts are available in the supplemental schedules included in our earnings press release.

Derek Dewan, Chairman and CEO

Thank you, Kim. Despite the challenges posed by the macroeconomic environment and the staffing industry affecting the demand for our services, we are proactively managing and preparing our business to minimize losses, regain profitability, and prepare for a forecasted recovery. We want you to understand from our earnings press release, our comments today, and our strategic announcements, that we are taking significant steps not only to prepare for a more favorable and growth-focused labor market but also to restore growth by advancing our plans for both organic growth and mergers and acquisitions. We will continue to work diligently for the benefit of our shareholders, including regularly assessing strategic ways to utilize GEE Group's capital to enhance shareholder returns. We are very pleased with our 2025 acquisition of Hornet Staffing and the value and opportunities it presents, and we have identified additional acquisition opportunities that we believe can provide further growth and profitability channels for us. Before we take your questions, I want to express my gratitude to all our exceptional team members for their professionalism, hard work, and commitment. Now Kim and I are ready to answer your questions. We will now enter the question-and-answer period.

Kim Thorpe, Senior Vice President and CFO

Our first question is about the company's timeline for reaching the goal of $1 billion in annual revenue. That target was originally set when we were rapidly acquiring companies. Since then, the pandemic has significantly changed our circumstances. Therefore, I can't provide a specific timeline for achieving that number, but we are focused on returning to growth and are fully committed to that. From there, we aim to grow as quickly and safely as possible. Regarding the next question about raising the stock price, I want to emphasize that we are doing everything we can. The first step in a crawl, walk, and run approach is to return to profitability. Next, we will pivot the business to get back on a growth track while addressing current realities. We believe that AI, automation, and integration will be crucial in this process. That's the direction we are currently pursuing. Derek, would you like to add anything?

Derek Dewan, Chairman and CEO

We have implemented numerous cost-reduction initiatives and made significant efficiency improvements in our recruiting and sales processes, and we are beginning to see the benefits of these changes. Organically, we are witnessing improvements as they unfold. Regarding growth and size, I believe that making a substantial acquisition in the right sector will also enhance our operating results and growth metrics, ultimately leading to a higher stock price.

Kim Thorpe, Senior Vice President and CFO

The next question refers to BGSF and a recent transaction it had, suggesting that it might be worth our consideration. Derek, do you want to comment on that one as well?

Derek Dewan, Chairman and CEO

Well, we're very familiar with that company, and they sold off professional division at a pretty good multiple to Alvarez & Marsal, a private equity group that has a platform of primarily IT staffing. And the transaction was valued appropriately and got a good price for it. The question is what was left and how is that performing? And I think they have their own strategic plan. And we, on the other side of the fence here, are always looking for opportunities to enhance shareholder value. And we believe that critical mass and size matter in this industry, scalability, leveraging your SG&A and lowering it as a percentage of revenue. So M&A is very important in the bigger scheme of things. And we're always looking for opportunities, no matter how they are brought to the table. And I think that was a good transaction for them.

Kim Thorpe, Senior Vice President and CFO

The next questions involve insider buying. Can we discuss why the market isn't seeing more insider buying from management and directors recently? If you look at our 10-K, you'll notice that insiders and significant shareholders own about 25% or more of the company's outstanding stock. The senior management team collectively holds about 5 to 6 million shares. We are all aligned on this matter and have a vested interest. We are not in a blackout period and there isn't a specific policy requiring stock purchases, but individuals are free to buy stock outside of blackout periods or when they don't possess insider information. Regarding whether senior management and the Board are taking salary cuts to navigate through a tough period, our senior executive pay plans stipulate that we are rewarded for performance and not rewarded for lack of performance. For two consecutive years, we have not earned any management bonuses. The three senior executives have forfeited around $1.3 million worth of stock that was previously granted due to performance issues over the last two years. There have been no pay increases since 2023, and that also applies to the Board. That's our response to the question. Derek, do you have anything to add?

Derek Dewan, Chairman and CEO

We are very cautious about paying based on performance. Since we haven't reached the levels we aim for or that are expected, the incentive pay has not been distributed, and we have forfeited a significant amount of potential equity that would have been part of the pay plan. We are closely monitoring this and are hopeful that we can benefit from the company's improving profitability. However, it is important for senior management to meet performance goals to qualify for any incentive pay.

Kim Thorpe, Senior Vice President and CFO

Next question, are you consolidating offices given lower demand? The answer to that is yes. Probably over the last 2 or 3 years, we've consolidated or closed about half a dozen offices.

Derek Dewan, Chairman and CEO

I'd like to add as well that we have moved away somewhat from bricks and mortar because of the ability to use technology, hybrid work schedules and remote working. So we are taking advantage of that. And as AI has become more prevalent in our toolbox, that facilitates the ability to reduce our bricks-and-mortar footprint.

Kim Thorpe, Senior Vice President and CFO

Okay. Would you consider initiating your buyback once you have visibility into achieving profitability again rather than waiting until it's actually achieved?

Derek Dewan, Chairman and CEO

I think that strategically, that's an option. And we evaluate that option at our Board of Director level virtually at every Board meeting that we have. We take a look at that, look at our financial position, look at our growth metrics and performance. So it's on the table at virtually every meeting we have, and restoring profitability will help drive that as an option as well.

Kim Thorpe, Senior Vice President and CFO

Can you explain why the original question about pay cuts was concerning base salary rather than bonuses? As I mentioned, we haven't increased base salaries since 2023, and we won't consider raising them again until we return to reasonable profitability.

Derek Dewan, Chairman and CEO

Can you explain the emphasis on growing the company through acquisitions instead of focusing on increasing future earnings per share by buying back stock at current valuations that target both asset and intrinsic value? If this is related to returns on equity, what return per share threshold are you aiming for in mergers and acquisitions that you believe isn't achievable through buybacks at this time? While I understand the interest in stock buybacks, the primary objective of these buybacks is to ultimately liquidate the company. Currently, we do not want to aggressively repurchase stock when there are still opportunities available that could help us return to a more attractive growth trajectory. Our belief is that if we position the company for better profitability and growth, the returns from that strategy will surpass those from buybacks. What are you seeing in M&A valuation multiples right now? What multiples do you realistically want to buy at? And what do you think it will take to bridge that gap to be able to close on additional deals? Derek, do you want to take that one? The goal is to spend as little as possible, but the valuation multiples are between 6 and 10 times EBITDA, depending on the growth rate and sector of the business. We hope our own multiple will increase alongside the acquisition, which would be logical. We anticipate significant synergies because, despite having reduced many expenses, we are well-equipped technologically and have strong internal resources to handle an acquisition and realize efficiencies and economies of scale. Acquisitions can lead to economies of scale, with multiples varying from 6 to 10 times, where 10 times would typically apply to a rapidly growing consulting firm rather than a staffing company. In terms of acquisitions, shifting towards statement of work-based consultancies is a key priority, particularly focusing on AI, cybersecurity, and high-end IT consulting.

Kim Thorpe, Senior Vice President and CFO

And then the last question here. Can you share if the company is committed to leveraging offshore or international sales and recruiting? And if so, what is the company's current utilization of offshore?

Derek Dewan, Chairman and CEO

That's a great question. We currently have a team in India that we are utilizing. We aim to enhance the use of our offshore team and expand it to improve recruiting efforts. Providing them with AI recruiting tools will enable that team to significantly increase their capabilities, while our senior domestic recruiting team will oversee the offshore team, which is the ideal scenario. We intend to incorporate three components: onshore, nearshore, and offshore, and are also looking into nearshore prospects. Latin American recruitment is gaining traction and will be a focal point for us, making it a three-pronged approach involving onshore, nearshore, and offshore.

Kim Thorpe, Senior Vice President and CFO

And we had another late question come in. And to this questioner, I'm going to make a bit of an apology. He called me out a little bit for the liquidating the company comment on share buybacks. And he's right. Of course, I didn't mean that we would buy shares back to liquidate the company. My point is that buying shares back does grow the per share value, but it does not invest in assets or properties that will grow the company. So that was the point I was making, and I apologize for that.

Derek Dewan, Chairman and CEO

Ideally, once we restore profitability, the capital allocation strategies should include taking current cash flow and using that for both M&A support and buybacks, and taking the existing cash and creating a combination of both of those types of activities to enhance shareholder value. So these are heavy discussions that we have consistently. But the worst thing to do in the world is to burn your cash position out in a down market with not great operating performance and put the company at risk to have to borrow to fund current operations when you really don't need to. So I think ideally, the concept of a buyback is something considered highly, but we'd like to see the restoration of profitability on a current cash flow basis before we turn on the spigot.

Kim Thorpe, Senior Vice President and CFO

Correct and free cash flow.

Derek Dewan, Chairman and CEO

And we actually are hitting close to that. I mean if you could look at the numbers, Kim, I think we had positive.

Kim Thorpe, Senior Vice President and CFO

We had positive cash flow and free cash flow for the year. However, until the market stabilizes and orders return to normal, I don't believe it's wise to spend our cash when there are other opportunities we consider more advantageous.

Derek Dewan, Chairman and CEO

One thing I want to add, too, is AI has provided both a reduction in the human workforce and labor, as we knew it before, but it's also provided an opportunity to grow business and to streamline our own business. So we are heavily focused on AI, both internally and through M&A.

Kim Thorpe, Senior Vice President and CFO

And Derek, that's our last question. So do you want to...

Derek Dewan, Chairman and CEO

Well, we will conclude the call now, and we truly appreciate your interest as a shareholder of the company. Please know that we are not complacent. We are not satisfied, but we are diligently working to get back on track to restore growth and profitability while enhancing our shareholder value. Thank you for joining the call today. Have a wonderful holiday. Thank you.

Kim Thorpe, Senior Vice President and CFO

And that concludes our call. Thanks, everybody.