Star Equity Holdings, Inc. Q3 FY2025 Earnings Call

Greetings, ladies and gentlemen. Thank you for standing by, and welcome to the Star Equity Holdings Third Quarter 2025 Results Conference Call. Please be advised that the discussions on today's call may include forward-looking statements. Such forward-looking statements involve certain risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. Please refer to Star Equity's most recent 10-K, 10-Q and other filings for a more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligation to update forward-looking statements as a result of new information, future events or otherwise. Please note that on this call, management will reference non-GAAP financial measures, including EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share, which are all financial measures not recognized under U.S. GAAP. As required by SEC rules and regulations, these non-GAAP financial measures are reconciled to their most recent comparable GAAP financial measures in our earnings release issued this morning. If you do not receive a copy of the earnings release and would like one after the call, please contact Star Equity at (203) 489-9500 or its Investor Relations representative, Ms. Lena Cati of the Equity Group at (212) 836-9611. Also, this call is being broadcast live over the Internet and may be accessed at Star Equity's website via www.starequity.com. Shortly after the call, a replay will also be available in the company's website. It is now my pleasure to introduce Mr. Jeff Eberwein, Chief Executive Officer of Star Equity. Please go ahead, sir.

Thank you, operator, and welcome, everyone. We greatly appreciate your interest in Star Equity Holdings, and thank you for joining us today. As a reminder, on August 22, 2025, the company completed its previously announced acquisition of Star Operating Companies, formerly known as Star Equity Holdings, pursuant to the agreement dated May 21. Effective September 5, the company changed its name to Star Equity Holdings from Hudson Global and our trading symbol on NASDAQ from HSON to STRR. Following the merger, we are now operating as a diversified holding company with four divisions: Building Solutions, Business Services, Energy Services and Investments. I'll begin by reviewing our third quarter results for 2025 at the holding company level. After that, Jake Zabkowicz, Global CEO of Hudson Talent Solutions, will give us an update on the performance of our Business Services segment. Finally, Rick Coleman, our Chief Operating Officer, will provide additional insights into the performance of our Building Solutions and Energy Services segments. Third quarter results reflect the impact of our recent merger with revenue, gross profit and adjusted EBITDA, all showing year-over-year growth. These increases were largely driven by the inclusion of Star Operating Companies beginning August 22. For the third quarter of 2025, revenue totaled $48 million, representing a 30% increase from the same quarter in 2024. Gross profit rose 11%. The company reported a net loss of $1.8 million or $0.54 per share, compared to a net loss of $800,000 or $0.28 per diluted share in the third quarter of last year. On a non-GAAP basis, adjusted net income per share was $0.02 compared to an adjusted net loss of $0.13 per share in the prior-year quarter. Importantly, on a pro forma basis, which includes the full third quarter's results from Star Operating Companies, adjusted earnings per share were positive $0.19 versus negative $0.54 in the third quarter a year ago. Adjusted EBITDA increased to $1.3 million from $800,000 in the third quarter of last year, reflecting improved operating leverage following the merger. Pro forma adjusted EBITDA was $3.1 million versus $600,000 in the third quarter of last year. Total cash, including restricted cash, was $18.5 million at the end of the quarter. I'll now turn the call over to Jake to discuss our Business Services segment.

Thank you, Jeff, and good morning. Our Business Services segment continued to demonstrate solid performance in the third quarter despite the challenging macroeconomic environment impacting many industries. While the broader talent acquisition market has contracted in 2025 compared to 2024, our HTS business has been able to maintain its profitability and even saw a slight increase in gross profit for both the third quarter and year-to-date. This resilience highlights the robustness of our business model, our ability to adapt to market shifts and the strength of our long-standing client relationships, which continues to drive repeat business and steady demand for our services. I'm particularly proud to recognize our team has received in the marketplace. HTS was named to the prestigious Bakers Dozen for the 17th consecutive year, a testament to our consistent delivery of high-quality talent acquisition solutions. What's even more notable is that we achieved our highest-ever overall ranking, reflecting the strength of our service offering and our commitment to excellence. Additionally, HTS was recognized as the #1 provider in the Asia Pacific region, further underscoring our global reach and the trust our clients place in us. For the third quarter of 2025, Business Services revenue was $37 million, slightly up from $36.9 million in the same period last year. Gross profit remained flat at $18.6 million compared to the prior-year quarter, again, speaking to the quality of our operations despite external challenges. Adjusted EBITDA for the segment was also flat at $1.7 million. This performance reflects our ability to effectively manage costs, sustain margins while continuing to deliver value to our clients in a difficult market environment. Building on our momentum from the first half of the year, in the third quarter, we continued to execute our land-and-expand strategy. This strategy, which emphasizes expanding our geographical footprint and broadening our service offerings to both existing and prospective clients, has proven to be highly effective. As a result, we secured approximately $39.8 million in gross profit from renewals and extensions at existing clients, reflecting the strong relationships we have cultivated by our ability to deliver ongoing value. Additionally, we have secured approximately $11.1 million from new logo wins over the past four quarters. Looking ahead, we're focused on creating a more resilient, agile and growth-oriented business for the long term. By continuing to invest in new technologies such as our digital offering, we are confident in our ability to drive sustainable growth and create lasting value for our clients and stakeholders. Our commitment to execution and operational excellence will continue to guide us as we seize new opportunities and expand our market leadership. Now I'll turn the call over to Rick, who will discuss the financial and operational performance of our Building Solutions and Energy Services segments.

Thank you, Jake, and good morning, everyone. Our Building Solutions segment delivered strong growth during the third quarter, capitalizing on the rebound in commercial construction demand while managing through softness in residential markets. In the third quarter, Building Solutions revenue totaled $9.6 million with a gross profit of $1.7 million and adjusted EBITDA of $600,000. On a pro forma basis, which includes results for the entire third quarter beginning July 1, Building Solutions revenue was $21.4 million, up from $13.7 million in the third quarter of 2024. Pro forma gross profit rose to $5.3 million compared to $2.8 million in the prior-year quarter, while pro forma adjusted EBITDA grew substantially to $2.6 million from $700,000 a year ago. The segment ended the quarter with a $20 million backlog of committed orders and the trailing 12-month book-to-bill ratio remained solid at 1.01, reflecting a healthy pipeline and sales dynamics heading into 2026. By focusing on higher-margin projects and ensuring rigorous project management, we've been able to maintain healthy profit margins and strengthen our existing client relationships. Our reputation for high-quality, on-time and within-budget deliveries is key to our continued success and positions us well to expand our footprint across key markets. Our Energy Services segment also achieved strong results despite a broader slowdown across the energy sector impacted by lower drilling rig counts in all oil-producing basins but offset somewhat by growth in natural gas and geothermal drilling activity. As a smaller company in the drilling arena, we believe our growth opportunities are outsized versus our larger competitors and expect to drive future growth through strong sales execution, disciplined operations and targeted capital investments. These initiatives have not only improved sales and utilization rates but have also enhanced customer satisfaction and strengthened our overall market position. In the third quarter of 2025, Energy Services revenue was $1.3 million with gross profit of $300,000 and adjusted EBITDA of $100,000. On a pro forma basis, which includes results for the entire third quarter beginning July 1, revenue increased to $3.7 million, gross profit reached $1.5 million and pro forma adjusted EBITDA rose to $1 million, underscoring the segment's strong overall performance. I'll now turn the call back over to Jeff for closing remarks. Jeff?

Thank you, Rick. Following our recent merger, we are operating from a much stronger and more diversified platform, which has significantly enhanced our scale, expanded our exposure to a broader range of end markets and improved our operating leverage. The integration has been progressing smoothly, and we are already beginning to realize efficiencies across shared services. This will continue to improve our cost structure and streamline operations as we fully integrate the businesses. Across all our operating segments, we remain highly focused on operational excellence, ensuring we optimize every facet of our business for improved performance. At the same time, we're committed to prudent capital allocation and a disciplined approach to growth, which will allow us to maximize shareholder returns while maintaining financial discipline. In line with this strategy, we believe our stock price remains undervalued. In recognition of this belief, during the third quarter, we repurchased about 8% of our shares outstanding, demonstrating our confidence in the intrinsic value of the company and our commitment to enhancing value per share. Furthermore, our Board of Directors has authorized a new $3 million share repurchase program, which underscores their confidence in the long-term growth prospects of the company. Looking ahead, we are well positioned to drive shareholder value through a balanced strategy that combines organic growth, disciplined capital allocation and accretive acquisitions. As part of this strategy, we continue to evaluate acquisition opportunities that complement our diversified holding company model. Our focus remains on identifying scalable cash-generating businesses that align with our long-term growth objectives, particularly those businesses with strong local operating management teams and sustainable competitive advantages. By executing this strategy, we believe we'll strengthen Star Equity's foundation for sustained profitable expansion to deliver meaningful value to our shareholders. Operator, can you please open the line for questions?

Our first question for today will come from Theodore O'Neill with Litchfield Hills Research.

For Rick, on the third quarter on a pro forma basis, that looks like a record for the quarter, at least in my book here.

Yes. Thanks, Theo. I appreciate you noticing that. We're enjoying the throughput from a lot of projects in the Building Solutions division that were held up in 2024. I think we talked about that in prior calls. But throughout the year, we didn't have jobs being canceled, but they just weren't making it through the pipeline as builders and architects and others were kind of daunted, I guess, by interest rates and other things. So we kept pushing jobs to the right, further out in time, and they finally started coming through.

And looking at seasonal patterns here in the last couple of years, your fourth quarter has been higher than your third quarter. Do you think that seasonal trend will continue?

It's really hard to say, Theo. The fourth quarter is really dependent on a lot of weather patterns. If we have difficulties in Building Solutions, for example, with builders not having the sites ready for us to build on, then there could be delays. But as long as the weather holds, we're optimistic.

And when you talk about softness, I know that part of what you had cited as strength was workplace housing and low-income housing. Is that still the view?

It is an important part of our operations. While our strategy is more varied, those areas still present good opportunities for us. They may be somewhat affected by the reduction of government programs over time, but we expect that will rebound.

The next question will come from Michael Mathison with Sidoti & Company.

Congratulations on the revenue performance, you guys. Just a couple of questions from me. First of all, looking at Business Services and going through your slide deck, it looks like the adjusted net revenue as a percentage of sales is much higher in the Americas versus APAC. I wondered if you could just explain what's behind that.

Jake, do you want to walk him through that?

Yes. And I'm sorry, can you repeat that question? I apologize.

No problem. It looks from your slide deck like the adjusted net revenue as a percentage of sales is higher in the Americas compared to APAC. I'm just wondering why.

Yes. We saw some significant growth in our Americas business this last quarter through our land-and-expand strategy, and that has driven some of the uptick for us. And we're really excited to see that as we also launch our digital product, as I mentioned last quarter, and we are seeing the clients really gravitate towards that as agentic AI adds enhanced value to our clients and our partnerships.

Michael, this is Jeff. When we compare the business by region, particularly looking at the previous Hudson results, which will be included in our upcoming 10-Q, it’s clear that there are essentially two distinct business segments. The RPO business operates such that adjusted net revenue or gross profit effectively equals revenue, as there are no costs associated with sales. All expenses are categorized under SG&A. On the other hand, the contracting business, which contributes about half of our revenue, records all contractor costs as sales expenses. This structure results in a notably low adjusted net revenue and a significantly reduced margin percentage. This is why we emphasize adjusted net revenue or gross profit as a more accurate reflection of real revenue, as it accounts for that pass-through effect. Our contracting business is predominantly concentrated in Australia and the Asia-Pacific region, with minimal activity in the Americas. To put it differently, RPO represents a much larger share of revenue in the Americas compared to other regions.

Terrific. I just wanted to confirm that it was the impact of contracting. Just as long as we're on the Hudson business, I think the one region we didn't speak of yet is Europe. How does that look?

Jake, do you want to talk about what's going on with Europe?

Yes. Europe is definitely undergoing a transformation, and this transformation involves not just our land-and-expand strategy but also the new geographies we are entering. For instance, we entered the Middle East last year, and we are starting to see positive signs of growth in that business. However, Europe remains our smallest region when compared to the U.S., the Americas, and APAC. We are also mindful of the broader macroeconomic impacts affecting the region. We experienced a decline in the European market this past year, as a few clients chose to bring some of their business in-house, which has affected our revenue. Nevertheless, our land-and-expand strategy is beginning to gain traction in other areas within Europe. Therefore, Europe will remain a key focus for us, even though it is currently the smallest region compared to APAC and the Americas.

Michael, I would add, we do have a new management team there that we're very excited about, and we're very optimistic about the Europe segment doing much better in next year than this year.

Okay. Just one last question from me. Looking at Building Solutions, revenue was significantly higher than I had expected. So again, congrats on that. The gross margin was a little less than I had forecast, though. Is this gross margin sort of what we can expect going forward?

Yes, we aim for mid-20s gross margin, which we believe is the best figure to consider over the medium and long term. In any single quarter, it may vary higher or lower due to business mix and the nuances of construction accounting. For some large projects, we tend to recognize expenses more quickly than revenue, which can lead to a scenario where the final revenue recognized, such as after completing a punch list, might show a very high margin because all expenses have already been accounted for. Therefore, quarterly results can fluctuate, and I wouldn't place too much emphasis on those variations. Overall, we anticipate a mid-20s margin on a trend-line basis over a rolling four-quarter period.

Our next question will come from David Siegfried, an investor.

So just a number of questions. First, regarding Building Solutions. I noticed KBS on September 1, they completed that 10,000-square-foot project in Nantucket. Are there more contracts like that in the pipeline?

This is Jeff. I'll take that. I'll answer in two ways. On our slides, if you look at Slide 9, we show our backlog, which started to improve about a year ago as some of the larger projects that Rick mentioned, which were on hold, got moving again. We've announced several projects, some of which we have completed and others still in our backlog. In terms of our sales pipeline, we continue to have many opportunities, and we are working to secure them and get them initiated. We also expect more projects like that one to occur in the future.

It's great to hear. I noticed you mentioned that you're looking for bolt-on acquisitions. Are you considering those in the region or beyond? Since you have the empty facility in Oxford, Maine, will you be looking to fill that capacity?

Yes. Good memory. So I think the short answer to that is kind of D, all the above. Our highest priority is to add more size to our existing businesses. We feel like we have some good operating management teams across all of our businesses. And so we would like to give them more to manage. And so that could be an acquisition in their geographic region. Yes, you're right, we do have an idle factory in Maine, and we constantly explore different ways to reopen that and have more growth. And then the bar is a little bit higher for what we would call an adjacent acquisition where, let's say, it's a business we're in, so we know the business well, but it's in a new geography. We do look at those, but I'd say that's priority #2 after adding to what we have in an existing geography.

Okay. I have a question about your public investments. Is most of that in Gyrodyne? You have about 150,000 shares. What do you see as a catalyst to monetize that investment?

Yes, all of that information is publicly available regarding our holdings in Gyrodyne. They are currently in the process of liquidating, as you can see from their public filings. They have a history of selling off their remaining real estate assets and distributing those proceeds as dividends. It's currently undervalued based on net asset value, with potential returns of 50% to 60% based on their stated NAV. According to their public documents, their plan is to liquidate their remaining real estate holdings, distribute the cash, and wind down the company by the end of 2027.

Okay. All right. Good. And then, let's see, so regarding Hudson, I noticed they moved to a larger office in Edinburgh this past quarter. What was behind that change, move?

Very good question. I'll let Jake answer that one. He was there for the grand opening of that new location. Go ahead, Jake.

Yes, David, Edinburgh is an important hub for our European market and supports many of our clients globally. One of the things we appreciate about Edinburgh is the dynamic talent there, which includes language capabilities, a favorable cost structure, and a great culture. Over the past year, we reviewed our footprint, moving from shared office space to leasing our own in Tampa, and we applied the same approach in Edinburgh. Previously, we were in a shared space that didn't align with our growth as Hudson Talent Solutions. The team has found an excellent office location right off Princess Street in Edinburgh. This new space will help us attract the talent needed for our clients and provide a welcoming environment for our clients and prospects to experience our culture and quality team members. We recently held a ribbon-cutting ceremony, and Edinburgh is a beautiful area to visit. We're excited to be there, benefiting from great talent and culture.

Yes, I noticed that compared to the third quarter last year, the new logo acquisitions, expansions, and renewals have increased significantly. What contributed to that increase?

Yes, David, great analysis. As I mentioned before a couple of times, our land-and-expand strategy is really working. And what I mean by that is really looking at the clients that we service today and how do we continue to support them in other geographies and other business lines and making sure we're having those conversations. So we're seeing a pretty significant tailwind with that and allowing us to build on to our existing client portfolio. Not to mention adding the digital offering and our different solutions and our different products, with boutique executive search as well, we are seeing clients gravitate more to that one talent solution. So all of that is allowing us to gain more market share with our clients and provide a better level and higher quality of service to them.

Got it. Last quarter, Jeff mentioned that one company was specifically interested in the AI offering. You were hoping that this would lead to expansion into other services. Is there any follow-up on that? Have there been any expansions or success stories related to the AI offering?

Yes, we have some clients that now... let me take a step back. We've integrated our digital offering into our RPO solution suite. Each of our clients has unique needs and is on different paths. Sometimes they seek a complete AI solution, while other times they prefer just parts of the solution. We're able to accommodate those varying demands. Our TalentIQ solution, which delivers real-time market intelligence and data to help clients make informed talent decisions, has been particularly successful. We have multiple partners currently using it, and the feedback has been very positive. The key advantage of this solution is its global reach. Clients can consult with us to determine the optimal locations for offshore finance or manufacturing facilities in the FMCG sector, and we can assist in guiding those important decisions.

Okay, good. And then the goal...

Yes, this is Jeff. Sorry. I would encourage you to follow and all of our shareholders really follow the Hudson Talent Solutions website. They sometimes have news and announcements that you wouldn't see on Star's website or might not be a Star press release, but they will have more to say about what they're doing on the digital side going forward.

Got it. Okay. Question about the partnering with private equity or growth capital. If someone were interested at some point, how would that impact Star as a company? Would there be like would they have to buy equity in Hudson Talent or in Star Equity? Or I'm just trying to figure that out.

Yes, I appreciate that question. To put it simply, we’re not exactly sure what the future will hold. Our top priority is to return to the levels we achieved in 2022, but with a more stable foundation this time. In 2022, the Hudson business represented about 70% of what we define as enterprise RPO, which involves contracts with Fortune 500 companies. This time, we aim for that figure to be closer to 100%. When we reach those 2022 gross profit levels of about $100 million and $20 million in EBITDA, we believe it will be more sustainable with a stronger, more reliable clientele. Additionally, we see our clients increasingly inquiring about how AI will influence talent procurement and assessment. It's challenging to predict exactly how that will evolve. We have discussed potential investments in digital, AI, and technology, but we would not commit large sums of money to areas that aren't generating revenue or immediate cash flow. However, it may be beneficial to collaborate with partners who specialize in that field, especially those with existing investments in digital AI companies, as they can provide both expertise and funding. There are various pathways for us to explore moving forward. While this won't materialize in the immediate future, the likelihood of such collaborations happening down the line is quite high. Essentially, we are transitioning from a primarily people-focused business model to one that is more tech-enabled, integrating technology with expertise. We're also open to interesting partnership opportunities when the timing is right.

Yes. Good. I know there's value in that division because a much larger company, Heidrick & Struggles, just was bought out this past quarter with similar type services that are offered. So what about the preferred shares? I know you utilize that as a tool for acquisitions. But is there a point where you see interest payments becoming unsustainable for the company to carry? I mean, you can't just offer preferred shares endlessly, correct?

That's a great question. We view preferred shares in acquisitions as offering a 10x multiple based on a par value of $10 per share and an annual dividend of $1 per share. If we can acquire a business, as we did earlier this year, that has a growing cash flow stream and purchase that at 3, 4, or 5 times cash flow, it's very beneficial for us. Essentially, the cash flow generated from the acquisition should be more than sufficient to cover the dividends that we would need to issue.

Got it. One last question about the mutual funds that have been selling since the Star merger was announced. You removed 8% of the shares back in September, and we’re still around $9. Jeff, you were buying at higher prices. I understand you believe the company is undervalued, but it seems there might still be some selling pressure. Do you think you could execute another significant block transaction to remove those shares?

We're always open to that. I believe the most effective share repurchases we've completed have involved negotiating transactions with block sellers, which have proven to be the most efficient method for buying back stock. If there is an overhang or a remaining block available and the seller is willing to sell to us, we would certainly consider it. To our knowledge, there are no longer any institutional holders with more than 5%. Therefore, if there is a seller with a block for sale, it will likely be for a size smaller than 5%.

The next question will come from William Kim with Presidio Asset Management.

So with the merger now closed, I guess, is there any update on the expected synergies that you plan to achieve?

Yes. Great question. We still believe that we'll deliver the $2 million in synergies. And that target could be higher over time, but that's the number that we're comfortable using. And where you're going to see that is in the corporate line. So if you look at the pro forma table in our press release, you'll see EBITDA from each one of our four business segments, and then you'll see a column for corporate. And in Q3, that total was $2.6 million for the quarter. That's a pro forma number. And so as we start to realize some of those synergies, you're going to see the corporate costs decline. And so our goal is to get that number down more to like $2 million a quarter or $8 million on an annualized run rate. So that's really where you're going to see the synergies show up if you're going to be tracking it quarter-to-quarter.

And do you think that's achievable in the near term? Or is that kind of a year out? Or what kind of timing are we looking at?

It's a gradual process that unfolds in steps. We have high confidence that we will reach that run rate. I believe that within the next six months, we should achieve that run rate. In other words, the $2 million in synergies should be fully realized in about six months.

Great. A couple of more questions on the corporate side before going to the RPO. Could you just clarify for us what the quarter end share count looks like with the repurchase?

Yes, you'll see the number on the cover of our 10-Q. I think it's around 3.4 million shares, possibly a bit higher than that.

Great. Great. Okay. And then is it fair to say there was a little bit of debt paydown this quarter as well?

We have debt in two of our businesses, Building Solutions and Energy Services, at the sub-level. In Building Solutions, we have an acquisition loan from when we acquired Timber Technologies, and that loan is amortizing. We are making principal payments on that every quarter, similar to the seller note associated with Timber Technologies. Over time, and assuming everything else remains constant, you will see our debt decline as these two debt components decrease.

Great. And then the last question about the RPO business. I think you previously mentioned the 2022 numbers and the environment the company has been in for the past year or so with very low attrition. Where do you think we are in the cycle now?

We have reached a low point. There was a significant decline from 2022 to about a year ago. It appears that we have hit the bottom and have not experienced a strong recovery yet, but we believe it's on the way, partly due to the unusually low attrition rates at the Fortune 500. If you looked at the attrition statistics for the Fortune 500, you would have noticed it was abnormally high after COVID, starting in 2021, throughout 2022, and into early 2023. It was above normal then, but now it has dropped well below typical levels. Some have referred to this as a job market with no hiring or firing. We are observing that the attrition rate is gradually returning to a normal level, but it's a slow process. I hope that clarifies your question.

So if the business returns to a more typical environment, is that what leads to the $100 million in gross profit and $20 million EBITDA figure? Or are we considering a return to the peak attrition rate numbers?

No, I think reaching that level would be mid-cycle, not peak. In the past two years since Jake took over that division, we have expanded our presence in the Middle East, launched services in Latin America, and completed an acquisition in Japan. These are three significant geographic areas where we previously had no presence. The relevance of the 2022 numbers is that $100 million in gross profit and $20 million in EBITDA represents a 20% margin. To compare, in 2018, we had a 10% margin. I’ve mentioned that once we reach a steady state, we should achieve a 30% incremental margin as we grow. Therefore, we see reaching $100 million in gross profit and $20 million in EBITDA as a mid-cycle normalized level rather than a peak level, considering the business we have developed with those three new geographic regions and our digital offering.

This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Eberwein for any closing remarks. Please go ahead.

Thank you all for joining our call and for your interest in the company. We appreciate the great questions. If you would like to reach out to us, you can find our contact information in the press release or on our website, starequity.com. We're here to answer any questions you may have. Thanks again for your time today.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.