GEE Group, Inc. (JOB) Q4 2024 Earnings Report, Transcript and Summary

Hello, and welcome to the GEE Group Fiscal 2024 Full Year and Fourth Quarter Ended September 30, 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 year and fourth quarter ended September 30, 2024, and provide you with our outlook for fiscal year 2025 in 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 Thursday's earnings press release and our most recent Form 10-Q, Form 10-K and other SEC filings under the captions cautionary statement regarding forward-looking statements and forward-looking statement 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 this quarter or the quarter or this fiscal year or the fiscal year, which refer to the 3-month or 12-month periods ended September 30, 2024, respectively. Likewise, when we refer to the prior year quarter or prior year, we are referring to the comparable prior 3-month or 12 months period ended September 30, 2023, respectively. During this presentation, we will also 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. Now on to today's prepared remarks. In fiscal 2024, we encountered and continued to face very difficult and challenging conditions in the hiring environment for our staffing services and human resources solutions, stemming from macroeconomic uncertainty, recession fears, interest rate volatility and inflation, leading to a less than robust hiring environment and slowdown in the labor market, which resulted in fewer job orders and lower revenue. These conditions have produced a near universal cooling effect on businesses' use of contingent labor and the hiring of full-time personnel. As a brief reminder, the demand environment for our services as well as our industry peers began to soften in the latter part of calendar 2023 following a robust hiring of both contract labor and permanent employees in the calendar year 2021 and 2022, much of which was attributable to a post-COVID-19 bounce. Since then, many client initiatives such as IT projects, backfilling of open jobs and corporate expansion activities, requiring additional labor in general, have been put on hold. Instead, many businesses who we serve have implemented and proceeded with layoffs and hiring freezes. These conditions persisted during the 2024 fiscal year and have continued to negatively impact job orders for both temporary help and direct hire placements. Thus, our financial results for the 2024 fiscal fourth quarter and full year ended September 30, 2024 have been negatively impacted by these conditions. GEE Group's consolidated revenues were $28.3 million for the 2024 fiscal fourth quarter and $116.5 million for the fiscal year ended September 30, 2024. Gross profits and gross margins were $9.5 million and 33.7%, respectively, for the quarter, and $37.6 million and 32.3%, respectively, for the fiscal year. Consolidated non-GAAP adjusted EBITDA was negative $1 million for the quarter and negative $2.3 million for the fiscal year. We reported a net loss of $2.3 million or $0.02 per diluted share for the quarter and a net loss of $24.1 million or $0.22 negative per diluted share for the fiscal year. In order to improve our financial results, we are taking aggressive actions both short term and long term. As recently announced, we are taking this opportunity to ramp up our M&A activities at the same time we're streamlining our operations. We have now executed on substantially all of the estimated $3 million in annual reduction in SG&A costs that we announced earlier and continue to tightly manage costs. In addition, we are exploring various options to streamline our business and further reduce costs. Additionally, we intend to begin to migrate and integrate further our remaining legacy front-office and back-office systems onto singular cloud-based platform starting in 2025. We have the resource to complete this process over a period of 12 to 18 months once commenced, and anticipate we will further achieve economies of scale and be positioned to accelerate and integrate future accretive acquisitions more efficiently. In addition to these near-term initiatives, we are closely working with our frontline leaders in the field across all of our verticals to help them continue to aggressively pursue new business as well as opportunities to grow and expand existing client revenues. We are seeing some positive results. When anticipated recovery does occur in the future, I am very confident that we are positioned to meet the increased demand from existing customers and win new business. We successfully did this following the COVID-19 pandemic and severe downturn in 2020. We generated significant growth in 2021, 2022 and the first part of 2023 prior to the current downturn and were profitable in all 3 of those years. As a matter of fact, 2022 was one of our best years ever. We can do it again and are laying the foundation to do so. I am also happy to report that we are now well underway formulating and executing on our recently enhanced strategic plans, which include making prudent investments to grow both organically and through mergers and acquisitions. At the same time, rest assured that we will always manage our business prudently, maintaining a solid cash position with available attractive financing. With regard to M&A, we've identified several potential strategic acquisition targets and expect to complete accretive transactions early in the calendar year 2025. As you 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 always will 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 based upon all of the facts and circumstances. Before I turn it over to Kim, I want to reassure everyone that we fully intend to successfully manage through the aforementioned challenges, and restore growth and profitability as quickly 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 internally and be acquisitive. We also continue to believe that our stock is undervalued and especially so based upon recent trading at levels very near and even slightly below tangible book value. Also, only a relatively small portion of our float is actually trading at these levels, further evidence that there is a good opportunity for upward movement in the share price once we are able to operate again in economic and labor conditions that are more conducive to our business. The management team and our Board of Directors are working collectively and diligently to deliver strong financial results, which will drive an increase in shareholder value. Finally, I 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. 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 the call over to our Senior Vice President and Chief Financial Officer, Kim Thorpe, who will further elaborate on our fiscal 2024 annual and fourth quarter results. Kim?

Thank you, Derek, and good morning, everyone, and happy holidays. As Derek reported, consolidated revenues for the 2024 fiscal year and the fourth quarter were $116.5 million and $28.3 million, down 24% and 17%, respectively, from the comparable prior year periods. Contract staffing services revenues for the fiscal year and quarter were $104.3 million and $25 million, down 22% and 19%, respectively, from the comparable prior year periods. Professional contract services revenue for the fiscal year, which represents 91% of all contract services revenue, and 80% of total revenues, decreased $25.3 million or 21% as compared with the prior year. Professional contract services revenue for the quarter also represented 91% of all contract services revenue and 80% of total revenue, and decreased $4.9 million or 18%, as compared with the prior year quarter. Industrial contract services revenue for the fiscal year, which represents 9% of all contract services revenue and 8% of total revenues, decreased $3.5 million or 27% as compared with the prior fiscal year. Industrial contract services revenues for the quarter represented 9% of all contract services revenue and 8% of total revenue, and decreased $800,000 or 27% as compared with the prior year quarter. Direct hire revenues for the fiscal year were $12.2 million, down 37% as compared with the prior year, and were $3.4 million for the quarter, down 5% as compared with the prior year quarter. As Derek commented, our top line performance was directly impacted by the difficult economic and labor market conditions facing us and the entire industry. Gross profit for the fiscal year was $37.6 million, down 29% as compared with the prior year. Gross profit for the quarter was $9.5 million, down 18% as compared with the prior year quarter. Our overall gross margins were 32.3% and 34.7% for the fiscal year and comparable prior fiscal year, respectively. Consolidated gross margins were 33.7% and 33.9% for the quarter and comparable prior year quarter, respectively. The decreases in gross profit and gross margins are mainly attributable to the decline in volume and mix of direct hire revenues, which have 100% gross margin relative to total revenue. Lower numbers of job orders and tight labor markets on the contract services side also contributed, resulting in more competitive conditions and downward pressure on bill rates and spreads accordingly. Our professional contract services gross margin was 25.3% for the fiscal year, as compared with 26.1% for the prior fiscal year, a decrease of 80 basis points. The gross margin for professional contract services was 25.5% for the quarter, compared with 27.2% for the comparable prior year quarter, a decrease of 170 basis points. The decrease in professional contract staffing services gross margins is due in part to increases in contractor pay and other employment costs associated with the recent rise in inflation in combination with more competition for orders and candidates, again, resulting in overall net spread compression. Our industrial contract services gross margin for the year was 15.8%, compared with 16.5% in the prior year, which was a decrease of 70 basis points. The gross margin for industrial contract services was 16.6% for the quarter, compared with 16.5% for the prior year quarter, an increase of 10 basis points. In addition to fewer job orders, we continued to experience challenges with our industrial business including sourcing and recruiting qualified candidates, as well as increased competition, resulting in overall net spread compression experienced. Selling, general and administrative expenses, or SG&A, for the fiscal year were $41.5 million, down 13% compared with the prior fiscal year. SG&A for the quarter was $10.7 million, down 5% as compared with the prior year quarter. The ratios of SG&A to revenues were 35.7% for the fiscal year, compared with 31.2% for the prior year, and were 37.9% for the quarter compared with 33% for the prior year quarter. The increases in SG&A as a percentage of revenues during the fiscal 2024 year and fourth quarter were primarily and mainly attributable to declines in revenues in relation to the level of fixed SG&A expenses, including fixed personnel-related expenses, occupancy costs, job boards and applicant-tracking systems and due to the presence of certain noncash and/or nonoperational and other nonrecurring expenses. I also wish to inform you all that as a result of the company's performance in fiscal 2024, senior management did not earn and has not or will not, in the future, be paid any incentive compensation for that year under the company's annual incentive compensation program. As a matter of fact, some of the performance-based equity awards previously granted the senior management team members were clawed back under the workings of the company's annual incentive compensation plan, based upon the fiscal 2024 performance. A key aspect of our plans to streamline operations that Derek spoke of in his opening remarks, is to migrate and integrate our remaining legacy front and back-office systems onto cloud-based platforms. And that means consolidation of some of these systems. The company has the financial means to do this and expects to commence this task in early 2025. We anticipate financial and operational returns -- operational returns in terms of providing the means to improve our ability to generate organic growth and to accelerate and integrate future accretive acquisitions more efficiently, and achieve economies of scale more rapidly. We reported a net loss for the fiscal year of $24.1 million or a negative $0.22 per diluted share, as compared with net income of $9.4 million or $0.08 per diluted share for the prior year. Our net loss for the quarter was $2.3 million or negative $0.02 per diluted share, compared with net income of $200,000 or $0 per diluted share for the prior year quarter. Our adjusted net loss, which is a non-GAAP financial measure, for the fiscal year was a negative $7.6 million, down $18.7 million, as compared with adjusted net income of $11.1 million for the prior fiscal year. Our adjusted net loss for the quarter was negative $2.1 million, down $33.2 million, excuse me, as compared with the adjusted net income of $1.1 million for the prior year quarter. The main drivers of these declines in net income and loss for the quarter and the fiscal year were -- I'm sorry, for the fiscal year, were the $20.5 million in noncash impairment charges taken in the June quarter, and the declines in job orders and placements resulting in lower recurring revenues that we've discussed, as well as the reversal of a valuation allowance of our deferred tax assets in the prior year. EBITDA is a non-GAAP financial measure, and for the fiscal year was negative $4 million, down $9.3 million, as compared with $5.3 million positive for the prior year. EBITDA for the quarter was negative $1.2 million, down $1.5 million, as compared with positive $300,000 for the prior year. Adjusted EBITDA also is a non-GAAP measure, and for the fiscal year was negative $2.3 million, down $9.3 million, as compared with $7 million for the prior year. Adjusted EBITDA for the quarter was a negative $1 million, down $2.2 million, as compared with $1.2 million of adjusted EBITDA in the prior year quarter. Again, the main drivers for the declines in non-GAAP EBITDA and non-GAAP adjusted EBITDA for the quarter are the declines in job orders and placements resulting in lower revenues as we've discussed. Our current -- I'm sorry, our current or working capital ratio as of September 30, 2024, was 3.8:1, up from 3.6:1 as of September 30, 2023. The company reported $200,000 and $5.9 million in cash flow from operations for the fiscal years ended September 30, 2024, and 2023, respectively. Our liquidity position at September 30, 2024 remain strong with $20.8 million in cash, an undrawn ABL credit facility with availability of $8.1 million, net working capital of $26.1 million, and no outstanding debt. Our net book value per share and net tangible book value per share were $0.77 and $0.34, respectively, as of September 30, 2024. Our net book value per share and net tangible book value per share were $0.96 and $0.35, respectively, as of September 30, 2023. The decrease in net book value per share in particular was the result of the noncash impairment charges taken in the third quarter ended June 30, 2024. These had no effect on our cash position, tangible assets, net working capital or net tangible book value. In conclusion, while we're obviously disappointed with our results and remain somewhat cautious in our near-term outlook, we do remain optimistic about and are preparing for the long-term. Our management team and field leadership are experienced in managing through difficult times such as the business disruption attributable to COVID and previous cyclical downturns affecting the labor markets. Collectively, we have demonstrated that our company can generate earnings consistently under more favorable economic conditions and a more conducive demand environment for the staffing industry. Before I turn it back over to Derek, please note that reconciliations of GEE Group's non-GAAP financial measures discussed today with their GAAP counterparts can be found in supplemental schedules included in our earnings press release. Now I'll turn the call back over to Derek.

Thank you, Kim. Despite some economic headwinds and staffing industry-specific challenges impacting the demand for our services, we are aggressively managing our business and taking steps to increase revenue and reduce expenses to mitigate losses and restore profitability. What we hope to take away from our remarks today, our earnings release and from our strategic announcement last quarter is that we are moving aggressively not only to prepare for a more conducive and growth-oriented recovery in the labor market, but also to restore growth sooner by executing on both organic and M&A growth plans and 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 specific thank-you to all our wonderful people for their professionalism, hard work and dedication. Now Kim and I would be happy to take questions.

It will be a gradual process, but we're very excited about moving forward. But we will also adjust our income statement based on the current revenue to restore profitability and, of course, look for new business, new business from existing customers, new clients, and, of course, make strategic acquisitions, and then reexamine our capital allocation strategy. Another question, Kim, this one is for you. What is the quarterly annual revenue level to achieve breakeven results? What is the annual revenue level needed to generate $5 million to $10 million in EBITDA as you were not too long ago? That's an outstanding question and something we look at regularly. Kim, go ahead and take this.

Yes. We're very close, right underneath the level to -- that I would call breakeven, as you can tell from the numbers. If you focus on the adjusted EBITDA number that we quoted for the quarter, you could just about tune everything else from there. Now -- and that's before we do anything else, including all the strategic things that we're in the process of doing with systems and so forth to improve profitability and to improve throughput on sales. One of the things we didn't get into in detail on the call is one of the reasons we're taking this hiatus and spending investment money into our systems is because it will help us share orders across all our brands, which now we're having to do more or less through referral, the old-fashioned way. With the systems we have teed up, which are very affordable, it's an excellent investment for us to now share orders across brands, and we're very bullish on that. Let me also say that, as a rule of thumb, you can go back to 2018, 2021 and 2022, and those are the levels that you would see where we're anywhere from $150 million up in revenue, we're beginning to generate high single-digit EBITDA numbers again. And then of course, we want to grow beyond that. And the icing on the cake, in our view, to get beyond that is to focus both on organic and M&A, which Derek mentioned. So that, as a rule of thumb, I think if you look at our 2018 year or 2019 year, 2021 and 2022, those are good benchmarks to look at to figure out profitability of the business. Let me say one more thing, talking about the pandemic and the recovery from the pandemic and so on. 2020 was not only a pandemic year. For us, it was a huge deleveraging that occurred in June of 2020. We took out all our subordinated debt and all of our preferred and we basically cleaned up our balance sheet a lot and for a little bit of money. We took out about $47 million in subordinated debt for about $5 million in cash and 1.8 million shares of stock. So that was a hallmark. The following year, we took out senior debt, and the senior debt really was what was choking us. We took the senior debt out. And to do that, we had to do a large offering, and the large offering did cause dilution, but we made the strategic decision and the tactical decision that it was better to take the dilution and grow from there than to continue in a downward spiral -- with debt lagging. So in 2020 and 2021, the result was we took out over $120 million in debt, and I'm throwing the PPP money in there. We took out $120 million in debt. And since then, we've built up $20 million in cash, free cash. So to -- don't -- you can't look at '21, '22 and '23 and say, "oh,, you just had a short period of profitability. No." We rebuilt and restructured the company in 2020 to be profitable. We are experiencing a temporary downturn in profitability right now. We proved out in COVID that we can produce and be profitable. When this recovery happens, I'm fairly confident, in fact, I'm very confident we can do it again.

And we're trying to find deals and we'll do deals that not only bring their business to the table, but that would benefit us. For example, if we could get an offshore recruiting model to lower our SG&A, that would be very helpful, so we can compete more effectively on high-volume accounts, on what we call managed service provider or VMS accounts, vendor management systems. Most of the Fortune 500 have those programs in place, I'd say, the Fortune 1000 actually. So that's another area that we don't typically go after very hard that we will if we get the recruiting mechanism in place. And one way to do that is through an acquisition that has an existing recruiting offshore model going. That's been successful, that's proven too. How is AI affecting the sectors you operate in, either in new jobs or jobs lost? Again, we think AI is a benefit to our industry. It streamlines recruiting. We have AI in some of our tools that we use. It's becoming more prevalent as a tool in our industry. And is it eliminating positions that we would normally fill? Clearly, low-end positions can be replaced by AI. AI will benefit the high-end IT business and we have a focus to staff jobs that require AI capability and AI knowledge. So we're big fans of AI. We think AI will actually allow us to move quicker on placements, find the best candidates and create jobs, but high-end jobs. And it will replace menial task-oriented jobs. So that's our view on AI. Let's see.

Derek, can I go back and pick up one I think we skipped over?

Of course.

Yes. There was a question by one of our good investors who we talked with occasionally about our revenues having declined in the 20% range this year, while the industry was down 10% to 15%. Therefore, are we losing market share? How does it get resolved? We're a large company in the big pond of small staffing firms, but there are several companies that are larger than we are. They tend to have more large client business than we do. We have our fair share. But the preponderance of our business is SME, small medium enterprise type business. And the 10% or 15% that the questioner is referencing is probably more of an average. We're a little higher than average because we have a preponderance of smaller businesses. Smaller businesses being a higher proportion tend to take the hits more in a down economy. How does it get resolved? It gets resolved with a rising economy and a recovery. And we will be right back in business, we believe, when that happens. So...

And let me add that in the peer group, there's some really good companies in the peer group larger, much larger than us, that are down 20% plus. And I have a list of those. I'm not going to go through them now. And I don't want to say misery loves company because we don't like that. But these are blue-chip staffing companies, and they're taking aggressive actions as well on their SG&A to restore profitability at the levels that they're used to. So we look at those hard. We also look at the international firms to see if the U.S. segment has taken a hit. That seems to be the trend on the large firms that are global as well. So typically, IT has been immune from downturns in the staffing industry. This year you saw a lot of IT layoffs at Cisco and Facebook and Google and Amazon and some others, plus Corporate America as well. So that's just something that's pretty new actually to the industry. And that will -- that's on the wane and the recovery on project work and so forth is starting to move forward. We're starting to see that. So we're very optimistic, but not complacent. I think that's very important. Complacency breeds mediocrity, and that's not something that's in our vocabulary or plans. We need to move forward and deliver the results that you should expect and want. So I think we're all geared up for that. I think the activity on the M&A and capital allocation front will benefit us greatly both existing operations and to enter new markets, possibly new verticals too. Those are the things that we're doing, and I think you'll -- we'll be pleased, hopefully, in our next call that we've made great progress here. So Kim, do you see any other questions that we need to address?

Yes. There's a new question just popped up. Can you talk a bit about client retention rates? I can speak to this. We track clients and client retention, and Derek and I get regular reports on all clients that generate $100,000 a month or more. And on the basis of that report and on the basis of other intelligence from our businesses, we have not lost any large clients, but rather our issue is more with clients reacting to the current economy and cutting back orders, as we discussed. So our client retention is very good. We're not -- we haven't lost any major accounts recently or that I can recall throughout 2024 for that matter.

Okay. Good. So that pretty much concludes covering the questions that we have for today. And I can say, everyone, happy holidays to you, and please enjoy that period of time. And note -- and rest assured that we will work hard for all of our shareholders. And thank you so much for getting on today and your investment and interest in our company. That concludes our call for today. Thank you.