GEE Group Inc.

Hello and welcome to the GEE Group fiscal 2025 first quarter ended December 31st, 2024 earnings and update webcast conference call. I'm Derek DeJuan, 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 today. It is our pleasure to share with you GE Group's results for the fiscal first quarter ended December 31st, 2024, and provide you with our outlook for the remaining fiscal year of 2025 and the foreseeable future. Some comments Kim and I will make may be considered forward-looking, including predictions, estimates, expectations, and other statements about our future performance. These represent our current judgments of what the future holds and are subject to risks and uncertainties, but 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 10 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 this quarter or the quarter, which refers to the three-month period ended December 31st, 2024. Likewise, when we refer to the prior year quarter, we are referring to the comparable prior three-month period ended December 31st, 2023. During this presentation, we also will talk about some non-GAAP financial measures. Reconciliations and explanations of the non-GAAP measures that 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. Beginning in the second half of 2023, throughout 2024, and so far in 2025, we have encountered and continue to face very difficult and challenging conditions in the hiring environment for our staffing services. These have stemmed from what is now acknowledged as overhiring 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 these businesses we serve have implemented and proceeded with layoffs and hiring freezes, and in many cases have focused on retaining their existing employees rather than adding new employees. These conditions have continued to negatively impact job orders for both temporary help and direct hire placements. Thus, our financial results for the 2025 fiscal first quarter ended December 31st, 2024 have been impacted by these conditions. Consolidated revenues were 26 million for the quarter ended December 31st, 2024. Gross profits and gross margins were 8.3 million and 31.9% respectively for the quarter. Consolidated non-GAAP adjusted EBITDA was a negative 300,000 for the quarter. We reported a net loss of 700,000 or one cent per diluted share for the quarter. We are taking aggressive actions to improve our financial results. As recently announced, we are taking this opportunity to ramp up our M&A activities and at the same time streamline our operations. Last fall, we eliminated an estimated $3 million in annual SG&A costs and continue to look for cost reduction opportunities on a routine basis and expect to eliminate more expenses. In addition to these near-term initiatives, We are working closely 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 beginning to see some positive results. When an anticipated recovery does occur in the future, I am very confident we are positioned to meet the increased demand from existing customers and win new business. I am also happy to report that we are now underway formulating and executing on our recently enhanced strategic plans, which include making practical 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. On January 3rd, 2025, we acquired Hornet Staffing, Inc. Hornet provides staffing solutions to markets serving large scale blue chip companies in the information technology professional and customer service staffing verticals. It has an experienced offshore recruiting team, which will be utilized across all GEE group verticals to gain more efficiency and reduce recruiting costs. We expect the Hornet acquisition to enhance our ability to compete more effectively anticipated, helping to secure a new business from Fortune 1000 and other large users of contingent and outsourced labor. Hornet's workforce solutions include significant expertise in working with managed service providers, MSP, and vendor management systems, VMS. Hornets' initial post-acquisition results will be reflected in our consolidated financial statements beginning January 3, 2025, the closing date of the transaction, and are accretive to earnings. 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. Before I turn it over to Kim, I want to reassure everyone that we fully intend to successfully manage through the challenges and headwinds outlined previously 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 to be acquisitive. We also continue to believe that our stock is undervalued and especially so based upon recent trading levels very near and even slightly below tangible book value and that there's a good opportunity for upward movement in the share price once we are able to operate again in a more normal economic and better labor market conditions. Finally, I once again wish to thank our 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 an 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 2025 first quarter results. Kim.

Thank you, Derek, and good morning. As Derek reported, consolidated revenues for the quarter were $26 million, down 15% from the comparable prior year quarter. Consolidated contract staffing services revenues for the quarter were $23.5 million, down 15% from the comparable prior quarter. Professional contract services revenues were 21, I'm sorry, consolidated contract services revenues for the quarter were $23.5 million, down 15%. Professional contract services revenues were $21.5 million for the quarter, which represents 91% of all contract services revenue and 83% of total revenue and decreased $3.6 million or 14% as compared with the prior year quarter. Industrial contract services revenue was $2 million for the quarter, which represents 9% of all contract services revenue and 8% of total revenue and decreased $500,000 or 20% as compared with the prior year quarter. Direct higher revenues for the quarter were $2.5 million, down 18% as compared with the prior year quarter. Our top line performance was directly impacted by the difficult economic and labor conditions facing us and the staffing industry referenced by Derek in his opening remarks. Gross profit for the quarter was $8.3 million, down 15 percent as compared with the prior year quarter. Consolidated gross margins were 31.9 percent and 31.8 percent for the quarter and the prior year quarter, respectively. The small increase in our consolidated gross margin is mainly attributable to changes in the mix of our contract services businesses favoring higher spread temporary placements and margins offset to some extent by lower perm or direct higher revenue. Our gross margin for professional contract services was 25.2% for the quarter compared with 25% for the prior year quarter, an increase of 20 basis points. Our gross margin for the industrial contract services business was 18.5% for the quarter, compared with 16% for the prior year quarter, an increase of 250 basis points. Again, these increases are mainly due to the focus on higher margin businesses previously mentioned. Selling general and administrative expenses, or SG&A, for the quarter were $8.8 million, down 17% as compared with the prior quarter. The ratio of SG&A to revenues were 31.9 percent for the quarter compared to 34.6 percent for the prior quarter. The improvement in SG&A expenses as a percentage of revenues during the fiscal 2025 first quarter was primarily the result of cost reduction initiatives taken during the prior sequential quarter to decrease fixed SG&A expenses. including fixed personnel-related expenses, occupancy costs, job boards and applicant tracking systems, and the like that are not driven by revenues. We reported a net loss for the quarter of $700,000, or a loss of a penny per diluted share, as compared with a net loss of $1.6 million, or also approximately a penny per diluted share for the prior year quarter. Our adjusted net loss for the quarter was $600,000 as compared with adjusted net loss of $1 million for the prior quarter. The reduction in net loss is mainly due to the improvement in SG&A expenses as well as decreases in amortization and depreciation expense. Adjusted net loss is a non-GAAP financial measure. EBITDA, which also is a non-GAAP financial measure for the quarter was negative $600,000 compared with negative $900,000 for the prior year quarter. Adjusted EBITDA, which also is a non-GAAP financial measure for the quarter was a negative $300,000 as compared with negative $200,000 for the prior year quarter. Our current or working capital ratio as of December 31, 2024 was 4.7 to 1, up from 4.2 to 1 as of December 31, 2023. Our liquidity position as of December 31, 2024 remained very strong with $19.7 million in cash, an undrawn ABL credit facility with availability of $7 million, net working capital of $26 million, and no outstanding debt. Our net book value per share and our net tangible book value per share were 76 cents and 34 cents respectively as of December 31, 2024. Our net book value per share and net tangible book value per share were 93 cents and 33 cents respectively as of December 31, 2023. The decrease in net book value per share was primarily the result of a non-cash or of non-cash impairment charges taken in the fiscal third quarter into 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 disappointed with our results and remain cautious in our near-term outlook, we also remain optimistic and prepared for the long term. Our management team and field leadership are very experienced in managing through difficult times, such as the business interruption attributable to recent COVID pandemic and previous cyclical downturns affecting the labor markets. Collectively, we have demonstrated that our company can generate substantial earnings consistently under more favorable macroeconomic conditions and a more conducive demand environment for the staffing industry overall. Having completed our acquisition at Hornet this quarter, we also intend to continue to pursue other acquisition opportunities, taking advantage of the current environment to develop new platforms for profitable growth. Before I turn it back over to Derek, please note that reconciliations of G Group's non-GAAP financial measures talked about today with their GAAP counterparts can be found in the supplemental schedules included in our earnings press release. Now I'll turn the call back over to Derek.

Thank you, Kim. Despite macroeconomic headwinds and staffing industry challenges impacting the demand for our services, we are aggressively managing and preparing our business to mitigate losses, restore profitability, and be prepared for an anticipated recovery. What we hope you take away from our earnings press release and our remarks today and from our strategic announcements is that we are moving aggressively, not only to prepare for a more conducive and growth-oriented labor market, but also to restore growth by continuing with the execution 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. We are very pleased with our recent acquisition of Hornet Staffing and the value and opportunities it brings and have identified other acquisition opportunities that we believe can offer additional growth and profitability platforms for us. 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.

We'll now go into the question and answer session.

Derek, we have a question from one of our investors on the call or interested parties. What is the company doing to drive sales and motivate the sales teams in a down cycle such as the one we're in now?

That's very important because sales really drives the business and revenue growth. So each of our vertical leaders meets regularly with our management team and the field, and they identify targets. They discuss progress made on new customers that talk about penetration and plans to increase business from existing customers. And then the third leg on the stool is the cross-selling opportunities amongst the verticals. And there's good communication between each of the vertical leaders like IT and accounting and finance. In addition, we've brought the Hornet team into the fold. And there's been a collaboration there on gaining new business, particularly for the vendor management system and MSP accounts. So we are aggressively pursuing new business, both new customers and from existing customers in a very strategic and organized fashion with regular follow-up. In addition, we've revamped our commission structure and our profit sharing structure in order to motivate our salespeople and recruiters as well who participate in that plan to move into higher production that actually rewards them better percentage-wise than if they had lower production. So we put in incentive compensation plans that we believe are robust and extremely competitive in the industry. Kim, do you want to add anything to that?

No, I mean, I think that covers the main part. We are helping the field based on input that we receive from communications with other members of the industry as to where the verticals are, what are the positions that are doing the hiring right now or are being – There are job orders for them, and we're trying to help the field sort through those kind of things. But it's a very intense communication process, like Derek mentioned.

I want to add that we are going to and in the process of integrating AI agents to target new customers and also to make contact with them to gain new business. In addition, we are exploring and are testing AI recruiting tools to automate more of that process, which would decrease costs and increase time to market a candidate and place a candidate. So those are tools that will aid in revenue growth as well. The next question is, can you comment on the rather unusual trading that occurred upon the announcement of the Hornet acquisition and your understanding of what occurred? When we announced the Hornet acquisition, the trading volume, do you remember what we hit? Was it $85 million or more?

I thought it was over $100 million, $195 million.

Yeah. We had 109 million shares outstanding and we traded actually more than the total outstanding shares. I think it was significantly more. And the price doubled in the process. So the question is, how did that happen? And how could that happen? We explored that with the exchanges and the New York Stock Exchange. We had one of our larger shareholders and directors actually had someone explore that as well. And It is possible to print that type of volume with multiple trades back and forth, but it was very, very hard with electronic trading to identify the source of that activity. So we're still looking at it, but I doubt that we'll be able to really put our finger on it. I would call it an aberration for sure. It happened one other time a couple years back when we, renegotiated our outstanding debt and settled it for less than face. I think, Kim, when was that, back in 2020?

That was in 2020, and we traded up to 80-something million shares in one day, I believe. Right, right. By the way, at that time, we had about 18 million shares outstanding.

Yeah, so it was even more pronounced. We do watch that. We make inquiry of both the exchange, FINRA and otherwise. And then we've had some tracking of it. But I can't explain completely what occurred and who made the trades because it was just hard to get that information at this point. Next question. Good question. Could you update us on the use and impact of generative AI on your business, both in your ability to use it internally to benefit operations and also any impact on the competition front and such as customer competitors and so forth. Okay. So I mentioned AI agents in connection with sales targeting of both new and existing customers and contact management. In addition for recruiting, That's another application. Both of these will be installed in our day-to-day environment, tech environment. It'll also be integrated with our applicant tracking systems and to the extent necessary, our ERP systems. But we are pursuing it aggressively. I'm a firm believer in the use of AI to not only compete, but to do it to increase speed and to also lower costs. We use ChatGPT now for several things, but those other tools that I mentioned are in beta. And I've tested some personally, and I'm bringing it to corporate into the field for further evaluation. And I think by the next quarter, hopefully we can announce what we've done and that we've moved forward aggressively on the implementation phase. And I've shared knowledge with my peer group at the highest levels and feel very confident of our strategy and where we're going with it. Kim, you want to add anything since you're involved in that as well?

Yeah, I mean, to some extent, AI is coming along a lot like the microcomputer did. It's new technology and it's been put out there and really, there'll be a lot of individual innovation involved. We've been using it here for a couple of years now. For example, just for one application, my department does, we use it to write a lot of regulatory composition and things of that nature because it not only fairly accurate although we have to review it obviously it also is quick so it helps us be more productive and those two types of things but it's really it's really being innovated at the grassroots level largely across the business right now okay and then another question is

Is everyone in the industry struggling? What are the outperforming companies doing? And I have met with several of the peer group, both large and small, and in different verticals. So I'll break it down by size and vertical because I think that's relevant. And then also direct hire versus contract staffing. both of which are impacted slightly differently. Both direct hire and contract staffing have been impacted by stagnant labor markets for the staffing industry. Within the verticals, IT took a pretty big hit, which historically it's weathered downturns much better than the other verticals. And you've seen a lot of layoffs in the IT space. You see it from Meta, Google, other tech companies, Cisco, you name it. And this is kind of a correction in the overhiring that Kim mentioned in his presentation that occurred post-pandemic. We believe that that's leveling off in that space. And Accounting and finance has been hit as well. That's another one of our larger verticals, in particular the perm portion or the direct hire portion. If you look at industrial staffing, which we have a little bit of that, that also has been hit, but it's been mixed. And in general, you can make the comment that the whole industry has been impacted. However, The question said, there are some performers that are doing a bit better than others. And I would say that the customer base of that competitor is not as impacted by layoffs. Their industry is faring better. There's a pickup in oil and gas going on. We hope to take advantage of that, particularly in the Houston market. The banking sector got hit. We're pretty heavy in there, but we're starting to see a leveling off. And I look at comparative data of both the peer group and then our own data internally to see whether we flattened out, how far down we are, are we moving upward. And there's some volatility here. week to week and if you look at what's called the bullhorn staffing index which is an industry statistic or statistics that are put out weekly you're starting to see the down portion on a comparative basis is changing downward meaning instead of 12 down in professional staffing and 13 down and everything else you're starting to see that go into single digits on a week-to-week basis So we are mirroring that. But, you know, flatness, first you've got to find the bottom. And we're very hopeful that we found that. And now we're starting to see some upward movement in headcount and billable consultants. And the per business, which is more what I want to call lumpy, is still moving in the right direction. So I'll tell you, the health care segment, something we looked into, Nurse staffing in particular got hit hard, and I think that bottom has not been reached yet. Allied staffing, which includes speech pathologists, audiologists, physical therapists, and other what we call allied health support, has done better and is moving upward. So there's pockets of success. Now look at the big companies. You see ADECO, Manpower, robert half ronstadt and others their spotty performance there some of their sectors and they're they're global so they have foreign operations as well um clearly global has been hit so they they've had mixed results overseas and in the u.s some of their verticals are performing a bit better than others but they're they're typically down on a comparative basis across the board and robert has uh but for its productivity consulting unit has been down i would say too that part of our strategy going forward is to upscale some of our business into more of a consultative nature and move up the food chain with statement of work type projects and so forth asgn is a competitor that has it staffing but has moved up the food chain as I call it, with a consultative approach with some of their business units. They do have a heavy federal government business, and they're hopeful that they won't be impacted by the cuts that are going on now. But in general, moving up what I call the food chain and having a time of materials consultative practice as part of your vertical, be it IT or accounting and finance, will be the trend for enhanced performance. And one way to get there is through acquisition as well as trying to build internally. But the faster route would be to acquire in that space. In addition, putting a recurring revenue stream into our business model is something that we're looking forward to doing. So we anticipate moving aggressively on those two fronts.

Kim, do you want to add anything to that? Okay. Let's see what the next question is. Tim, do you want to take the next question? Yeah.

Derek, I believe, isn't that the last question? I'm not showing another question.

Well, it's basically talking about industry and competitors, which is the same as the prior question. We covered it pretty good, but I can tell you there's cautious optimism in the peer group for a leveling off and upward movement. We're not going to see a hockey stick, but we do feel that we're going to be climbing the steps upward as we move further into 2025. The other thing is we're adjusting our cost structure to the current environment. So we've realized some good benefits from the cuts we've made and reductions in costs, but we will do more. And I think, you know, it's a, It's a constant evaluation of where best to spend our dollars.

Right.

That pretty much concludes our call for today. Thank you for getting on, and we'll talk to you next quarter.