Q4 2023 GEE Group Inc Earnings Call

Presentation

Hello, and welcome to the GEE Group fiscal fourth quarter and year ended September 30, 2023 earnings and our 2024 update webcast conference call. I’m Derek Dewan, the Chairman and Chief Executive Officer of GEE Group, and 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, 2023, and provide you with our outlook for the fiscal year 2024 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 Monday’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 Statements Safe Harbor. We assume no obligation to update statements made on today’s call.
During this presentation, we also will talk about some non-GAAP financial measures. Reconciliations and explanations of the non-GAAP financial measures that we 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.
Having turned in record performance and results for the fiscal 2022 year, we encountered significant macroeconomic and staffing industry particular headwinds in fiscal 2023, which negatively impacted our full fiscal year and fourth quarter ended September 30, 2023. Consolidated revenues were $152.4 million for the fiscal year and revenues for our fiscal fourth quarter were $34.3 million. Gross profit and gross margins were $52.9 million and $11.6 million, and 34.7% and 34%, for the fiscal year and fourth quarter ended September 30, 2023, respectively.
Our consolidated non-GAAP adjusted EBITDA for fiscal 2023 was $7 million, down $5.5 million or 44%, compared to fiscal 2022. Non-GAAP adjusted EBITDA for the fiscal 2023 fourth quarter was $1.2 million, up $0.2 million or 23% compared to the fiscal 2022 fourth quarter. We were able to achieve consolidated net income of $9.4 million or $0.08 per diluted share for the 2023 fiscal year. Consolidated net income for the fiscal 2023 fourth quarter was $0.2 million and slightly above breakeven per diluted share.
As Kim will explain further, the prior fiscal year’s results were well above normal, led by record high demand for direct hire placement services fueled by a post COVID-19 bounce upward in hiring. The pullback in demand for direct hire placement services and in certain administrative, clerical, and light industrial contract services in 2023 contributed to the shortfall in 2023 results compared with last year’s numbers. Fiscal 2023’s performance still compares favorably with our industry peers, taking into account the operating environment, and particularly, in terms of the growth we achieved in our combined professional IT contract services businesses and brands.
Before I turn it over to Kim, I would like to share some important achievements and milestones during the quarter. First, the September 2023 quarter was our ninth consecutive quarter of profitability and free cash flow generation since we completed our deleveraging initiatives in June 2021. Despite fiscal 2023’s lower results compared to fiscal 2022, our operating performance and financial results have been on par with and better in certain respects than our largest industry peers. We believe our IT contract services brands demonstrated the ability to grow under difficult conditions, and in particular, positions us well for future growth and further increasing shareholder value.
We implemented our $20 million share repurchase program in late April 2023, which has served as a key component of our capital allocation plans in fiscal 2023. As of September 30, 2023, we had repurchased 3.4 million shares of our common shares and as of December 15, 2023, we have repurchased 5.8 million JOB shares, or 5% of our outstanding shares at the beginning of the program.
I want to assure everyone that we believe that our stock is undervalued and has substantial room to grow. As a matter of fact, many if not most publicly traded staffing firms are trading below market indices and their 52-week highs due to economic concerns. Measuring forward from the time, we announced the funding of our follow-on offering on April of 2021.
GEE Group stock has outperformed most of its public staffing industry peers, including several of the largest players. Despite the macroeconomic and staffing industry specific headwinds facing us, we are continuing to focus on the growth of our businesses and taking other definitive actions to help grow shareholder value.
In addition to repurchasing 5% of our outstanding shares in 2023, we added three new independent directors to our board in the fall, including the managing director of our largest shareholder, appointed a lead independent director, and committed to undertake a review of strategic alternatives available to us with a view towards unlocking shareholder value. Most recently, we have engaged the investment banking firm of DC Advisory to assist us with the review of strategic alternatives which includes capital allocation strategies, mergers, acquisitions, etcetera.
Finally, before I turn it over to Kim, I want to once again 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 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 2023 annual and fourth quarter results. Kim?

Thank you, Derek, and good morning. As Derek mentioned, revenues for fiscal 2023 were $152.4 million, down 8% as compared with fiscal 2022 revenues of $165.1 million. Revenues for the fourth quarter of the fiscal year were $34.3 million, down approximately 18% as compared with the fourth quarter of fiscal 2022.
The lower revenues in fiscal 2023 were primarily the result of the macroeconomic forces including inflation, rising interest rates, and the resulting negative impacts on the labor market and hiring environment, which impacted the entire staffing industry. Fiscal 2023 followed a period of recovery experienced in 2022, which was primarily due to a post COVID-19 bounce upward in employment. As Derek mentioned, the pullback in demand for direct hire placement services and in certain administrative, clerical, and light industrial contract services in 2023 that contributed to the shortfall in 2023 results were primarily the result of these headwinds.
While fiscal 2023 results were lower overall, the company once again was profitable and generated good positive cash flow from operations, as it has consistently done since completion of the significant deleveraging initiatives and a follow-on offering during the quarter ended June 30, 2021. We also believe our top-line performance has been in line with our industry peers and above average in certain respects, including the performance our IT brands. Our lowest-performing businesses continued to be those serving light industrial and administrative and office clerical markets.
At this stage, we remain cautiously optimistic about our ability and timing to return to growth once again, which we expect to be led by our IT brands and our other professional services businesses, and with the anticipation that the uncertainties and unknowns about the economy and labor environments weighing on our businesses begin to lessen during fiscal 2024.
Professional and industrial contract staffing services contributed $133 million and $30.7 million, or 87% and 90% of revenues for the fiscal 2023 year and fourth quarter, respectively. Professional contract services revenues, our largest contract services segment, represents 86% of all contract services revenue and 79% of consolidated revenue, and decreased $2.5 million or 2% compared to fiscal 2022.
The bright spots in this comparison were the professional IT brands’ contract services revenues which grew 3% year over year. IT contract services revenues were 59% of all professional services contract revenue. And IT direct hire and contract services revenue combined represent 49%, nearly half of consolidated revenues for fiscal 2023.
Direct hire placement revenues for fiscal 2023 were $19.4 million, down $7.2 million or 27% compared with fiscal 2022. Direct hire placement revenues for the fiscal 2023 fourth quarter were $3.6 million, down $2.9 million or 45% as compared to the fiscal 2022 fourth quarter. As Derek and I have mentioned, fiscal 2022 was a record high year for direct hire placement services.
Industrial staffing services revenues were $13.0 million and $3 million and represented 9% of total revenue for both the fiscal year and fourth quarter ended September 30, 2023, respectively. We continue to experience growth challenges in our light industrial markets, which we attribute to increased competition for business and temporary labor, which again, has occurred since the COVID-19 pandemic. Among the newer post-COVID 19 competitors for labor are emerging B2C firms, such as Uber, Lyft, and Door Dash. These firms are able to compete effectively due to the additional independence and flexibility they offer workers.
Recent inflation also has led us to increase hourly wages and benefits for our temporary workers in our light industrial business in Ohio. These conditions also have helped drive increased competition among staffing firms in Ohio for laborers to fill staffing job orders. We are continuing to actively develop and implement new sales and recruiting programs to help attract and retain candidates and restore growth in our industrial business. We also have implemented price increases in Ohio, which have improved spreads and helped to mitigate the impact of inflation on labor conditions there.
Consolidated gross profits and gross margins were $52.9 million or 34.7%, and $11.6 million or 34% for the fiscal year and fourth quarter ended September 30, 2023, respectively. The declines in gross profit and gross margin, again, are mainly attributable to lower revenues, including, most notably, direct hire placement business, which has a 100% gross margin.
On the contract side, increases in contractor pay associated with recent inflation also caused some spread compression within our professional services businesses. The company continues to focus on counter-inflationary measures, including increases in mark-ups, bill rates, and spreads in order to improve margins and profitability. Despite lower year-over-year gross profit and gross margins, our current margins remain relatively high and are very competitive as compared with the company’s industry peers.
Selling, general and administrative expenses, SG&A, for the fiscal year and fourth quarter ended September 30, 2023, decreased $4.3 million and $3.2 million, respectively, as compared to the comparable fiscal 2022 periods. SG&A expenses were 31.2% and 33% of revenues for the fiscal year and fourth quarter ended September 30, 2023, respectively, as compared with 31.4% and 34.8% of revenues for the fiscal year and fourth quarter ended September 30, 2022, respectively.
In the fiscal fourth quarter of 2023, the company’s SG&A included $700,000 in legal and corporate expenses related to negotiations with shareholder activists and associated compliance matters. Excluding the effect of these SG&A expenses, the ratio of SG&A expenses to revenue would have been 30.9% and 30.7% for the fiscal year and fourth quarter ended September 30, 2023, respectively.
In late February and March 2023, you’ll recall the company implemented certain cost reductions, with estimated annual savings of approximately $4 million. Despite the significant declines in revenues in 2023, these cost reductions have helped achieve lower SG&A and total operating expense ratios in fiscal 2023 versus fiscal 2022, again, despite lower revenues. The company monitors operating costs including the impacts of inflation, with a view towards identifying and taking advantage of possible cost reductions on a routine basis.
We achieved net income for fiscal 2023 year of $9.4 million or $0.08 per diluted share, as compared with net income of $19.6 million or $0.17 per diluted share in fiscal 2022. Adjusted net income, which is a non-GAAP financial measure, for the fiscal year and fourth quarter ended September 30, 2023, was $11.1 million or $0.10 per diluted share, and $1.1 million or $0.01 per diluted share, respectively, as compared to $7.7 million or $0.07 per diluted share, and $400,000 loss or breakeven per diluted share for the fiscal year and fourth quarter ended September 30, 2022, respectively.
The company recognized a net deferred tax benefit of $7.2 million for the fiscal year ended September 30, 2023, which accounted for approximately $0.06 of this period’s earnings per share. The elimination of our former long-standing 100% deferred tax asset valuation allowance, that resulted in this large net deferred tax benefit, has been another positive achievement for our company. Adjusted EBITDA, which is a non-GAAP financial measure, for the fiscal year and fourth quarter ended September 30, 2023, was $7 million and $1.2 million, as compared with $12.5 million and $1 million, respectively, for the comparable 2022 periods.
Several factors we’ve covered, including notably, the decrease in fiscal 2023 revenues from fiscal 2022’s record highs, as well as economic headwinds, inflationary pressures, and rising interest rates present this year account for these declines. As I mentioned a moment ago, we continue to monitor operating costs for possible cost reductions on a routine basis, and also will take other definitive actions in order to improve our margins and profitability.
Our current or working capital ratio at September 30, 2023 was 3.7-to-1, up 100 basis points from 2.7-to-1 as of September 30, 2022. Free cash flow, a non-GAAP financial measure, for the fiscal year ended September 30, 2023, was $5.8 million, as compared with $9.1 million for fiscal 2022. Our liquidity position remains strong. We have no outstanding debt. Our net book value per share and net tangible book value per share were $0.98 and $0.36, respectively, as of September 30, 2023. Net book value per share is up $0.10, and net tangible book value per share is up $0.11, compared with $0.88 and $0.25, respectively, as of September 30, 2022.
To conclude, as Derek said, we remain cautiously optimistic in our outlook for fiscal 2024, with appropriate consideration of macroeconomic and labor market-related uncertainties and unknowns that exist in our operating environment. Before I turn it back over to Derek, please note, again, that reconciliations of GEE Group’s non-GAAP financial measures discussed today and, in our earnings release, 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. Derek?

Thank you, Kim. The fiscal 2023 fourth quarter marked our ninth consecutive quarter of strong operating performance since de-leveraging the company. Having consistently achieved higher margins and free cash flow over the years, we continue to build a positive track record, as well as positive momentum for the future.
As of September 30, 2023, the company had no debt and approximately $22.5 million in cash, with $11.3 million in availability under its bank ABL credit facility. GEE Group’s prospects today for future profitable growth continue to expand and improve. Despite macroeconomic headwinds, staffing industry specific challenges, and unforeseen events, we will continue to work hard for the benefit of our shareholders. And we expect to deliver solid results for the upcoming fiscal 2024 year and beyond, and significantly increase shareholder value.
Before we pause to take your questions, I want to again say a special thank you to all our wonderful people for their professionalism, hard work, and dedication. Without them, we could not have accomplished all the good things that we have shared with you today. 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. So the question-and-answer period will now start.

Question and Answer Session

One of the first questions is regarding a stock buyback versus a potential for dividend payout. We have engaged DC Advisory to explore all these strategic alternatives, including capital allocation strategies and the best use of our funds. So that will be included as part of the analysis. And we expect that information to be furnished to us at conclusion of the project, which will probably be somewhere in 45 days or so, possibly 60 on the outside, but they will do an extensive review of all the alternatives, including the potential for a dividend or otherwise.
Next question is why didn't you start on time? To be honest, I held back the start time for the benefit of our shareholders who were logging in and rapid numbers. We can actually see when you login. So I felt like I need to give all shareholders an opportunity for a couple of minutes, and we started approximately 2023 company performance in a nutshell, this was a tough year. Are we satisfied? Absolutely not did. We do well under the circumstances what we did pretty well generating cash flow and profitability, but we're never satisfied. So complacency breeds for performance of mediocrity. That's not in my vocabulary. So going forward, I can assure you that winning matters to us and there's been some parties bid winning isn't everything. It's the only thing. And I believe that give us some time we will get to where you want us to be and where I want us to be. I am a significant shareholder as is count, and we will continue to execute our largest shareholders on the Board of Directors, and he has affirmed our strategy going forward and is totally supportive of where we're going upward, why earth should we have equity investments in your company?
The answer to that is because we believe that you will ultimately do well, given a period of time and not too long based upon our strategies and how we execute. And there's a lot of arrows in the quiver to deliver success. And we are focused on that. And rest assured, we are not satisfied with the performance or complacent because complacency breeds mediocrity, and that's not in our vocabulary. Let's see for peer group analysis. We're happy to provide that separately from discussion and we can talk about that.
So if you want to make an inquiry to us on a separate call about talking about the peer group in the industry, including statistical data. We have that information. We're happy to share it with you. So just let us know if you'd like to conduct have a call regarding that and by the way, misery loves company, but we don't like it. So just because the peer group is not doing great because of external factors. That doesn't mean we're complacent and satisfied. So rest assured, we're doing everything in our power to deliver great results. We don't think we had a great year. We think we had a good year relative to the circumstances, but not a great year.
Let's say wise the stock price dropping well is pretty clear that due to the results not being as stellar as they were the prior year some people take that to mean that's indicative of a longer-term downfall in result. That is not what we think nor predict. So I would say rest assured we'll get back on track where we need to be or wanted to be and move forward. Our revenue run rate going from here is Q. three a baseline going into next year. The The important thing here is that we do believe that the industry suffered this year, some decline clearly in permanent placement, our direct hire revenue across the board that was down substantially, but also there's been a pause in the labor markets on hiring due to uncertainty in a macroeconomic sense, higher interest rates. So projects were put on hold as well and there was tepid hiring and particularly in the fourth quarter for us, the indicative someone's that is Q. three, indicative of what you can do it is, but we could we don't know when that faster turns on? Is it first quarter second, which has seasonality in it, or is it second or third quarter?
The important thing is on a on a fairly short with Egypt. View, we think we're going up and we will turn the corner. The other thing is in liquid. I mean, we are working on keeping SG&A down, but we don't want to cut too much. We're actually hiring people to generate revenue. So that's very important to be prepared for an upswing and cyclicality in this industry over the years. And we're happy to share that with you privately because I don't want to get into a dissertation about it. So you can see the downswing and upswing. And I do want to say that typically in a downturn. Perm gets hit first, then temp a bit, but the upswing contract starts upward and then perm follows. So that's been traditionally So and you can go back to '80, '81, '91, 2021, '06 to '08 and then the decline in a recession. And then the upswing again on COVID, it teppan performance in 2020, but then the upswing '21, 2022 and last year was a big post COVID. Covid bounce because of really cutting to the bone unemployment by many companies and then, of course, a quick recovery. So our goal is to normalize profitability upward as far as revenue growth as well, which verticals show improving demand, IT, which was industry down 10% to 12%, but we're seeing a good solid movement. The key is the rate of decline slowed, and then now we're starting to see some pickup. So that's historic as well. And I can tell you that as I sit here today, I'm focused on growth and profitability. And I think we're starting to see improving demand. As someone said when when do you think it's going to happen. We think it's probably the second quarter, which is our June 30 quarter in 2024. On the March quarter, we stable at 12/31 quarter, which will end soon will be on par with what we've been was showing some increase in demand. But I think more importantly, we're well positioned. We have no debt. We have cash, we have good operating margins. We have better than peer group gross margin. I can go down the list and I'm happy to share those with you. But you know, again, I don't compare our company to the peer group. This much is what we need to do, but to be successful, are you looking at M&A opportunities?
Yes. And we are having a strategic review by DC Advisory to analyze what makes sense, tuck-in acquisitions on all the other options that are out there as well.
And let's see now the non-GAAP measures, in my opinion.
Okay. I think you better manage expectations and some of the macro challenges makes it a little more difficult from a quarterly basis. But on an annualized basis annualized basis, we're better able to manage on the expectations.
The cash flow sharply. Yes.
What do you think about cash flow? Okay. Owns in some regions, industry conditions are they getting better answer is yes. And we feel like we've hit kind of the bottoming out phase for the cyclicality in the staffing industry, and we are seeing some improvement. The improvement typically is not drastic is gradual except on in the spring and summer months. We're looking forward to better than others, gradual improvement. We hope there's some better acceleration there. So okay, see what someone said here where I think you better manage the here. This was a very nice. Thank you very much on someone's a Packer fan. So they like my Vince Lombardi quote, unless it really ties up and I'm dead serious, always a Packer fan growing up in Green Bay was America's team instance, Dallas claims that position. So no, I have a lot of respect for people that can win consistently, and that's then Mike, no track record. I will absolutely would I'm not happy with the results that we have. I'm reasonably satisfied because how we're positioned for success is probably the best of the best indicator our future stock performance seeing internal head count was out looking our eight sectors that grew more than others. Can we comment on IT. contract because we actually grew that.

Yes, even in the environment, happy to yes, we only grew IT contract, but we also grew our engineering contract services, which is a much smaller business, but they grew nonetheless. And we grew our accounting firm business, which also small. The reason IT is important. It is because as is our strategy. It's our priority vertical and it is becoming larger and larger in proportion to our total business. When I joined the company, it was just under 40%. Now it's almost 50%. And the significance of it is, is that it has much more resilience in economic cycles or tends to although there was a pullback in IT hiring actually Doug, I think that begin in 2022 and into 2023. But we have a very good array of businesses. We're focused on cutting edge areas such as AI and generative AI, cybersecurity and those come.
And I also, Derek, if you don't mind, I'd like to comment on there's been a couple of questions on your stock's down. Why should we buy your stock. I just want to point out a metric that that maybe some of you haven't necessarily focused on and that is if I look at the stock price where it is right now at $0.49. And I'm mark that down for reasonable control premium, say 30%. That gets me in the high 30% mid to high $0.3 range. Our tangible book value that is all in our cash and AR minus our liabilities is $0.36 a share. That means that there's zero value, zero being given to the operating businesses, even though we just went through an audit and were able to support the value of nearly $70 million of intangible assets with conservative cash flow forecast So I yes, I'll I can say is I think that something is missing in the marketplace here that we were not getting any recognition for that. And for there was a comment in here. That said, something about the job market was hot the entire year. What are we talking about? I don't know that that the entire staffing industry would agree with that because I can tell you that staffing industry analysts published and their industry update and an economic update in September and their prediction is that the entire staffing industry top line will be down 10% for 2023.

So I just want to bring a few facts to the table to respond to some of this where I mean, let me yes, let me amplify that because the job market and is kind of a misnomer. You have to bifurcate the not the term job market job market for what hospitality was up on some lower-level positions. Hiring was up. It was down, looked at layoffs that occurred in IT. And we succeeded despite that, we're picking up a lot of those IT people and putting them back to work on project work. And but quite frankly, projects were put on hold because of a higher interest rate environment, environment, uncertainty, the macroeconomic environment, including things like Ukraine, things like gauze or all those things weigh on CEO.s in corporate America a bit now I can say that it's an election year next year, Rich, well costs they're coming down, they probably have already. But we think that, you know, the Federal Reserve and that group will actually take appropriate actions to stimulate the economy once people think things are more normal for Tenda, higher, more contract labor because there's still a bit uncertain then when they feel really bullish the perm business kicks in in in high gear, we're hiring people now internally to grow our business because we are we measure performance by per desk average, okay? Our per desk average is good, but we want more people at that per desk average to get revenue up. We have a huge sales program going on right now in IT that we're launching. There's a whole bunch of things we're doing to get that top line crank. And on the other hand, we're very cost-conscious. So we're working on SG&A to keep that lower and in fact, reduce it particularly and when your top line is down. So there's a lot we're doing and I want to assure you that we're doing it aggressively and judiciously.
Another question is please touch on how the new directors added value to GE group. I have to say that we recently had a board meeting and the input from the new directors and their perspective has been most valuable to us are we all we all have a ton of experience, but our new directors bring a different view to the table. Our loss per share for each one of them on the other two directors that came on as well have experience in the industry. And so that's been most valuable to the executive team to get their perspective and they're very, very active. So we feel real good about the choices we've made and their contract contribution to us.
The talked about the labor market. Can you provide an update on your the market? None of you see some, you know, obviously some deals will now be cheaper and have that we have some targets in the multiples low on getting these targets. So is it better than buying stock. That's an evaluation that will be done by DC advisor, which will make sense not to overpay for something when you're trading at a certain multiple. But I think importantly, we want to acquire businesses that grow second, add EBITDA and top line to our company.
So at this point, I'd like to terminate the call and those of you that have follow-up questions. We'd like to have a discussion. Just let us know. We're happy to address that. We value you as shareholders, and we will deliver work really hard to get our stock price appropriately priced and more importantly to move forwards in a big way to create value. And again, thanks again, and have a great holiday season and we wish you all well and trust that we're working very hard to deliver the results that you guys deserve and we deserve. So thanks. That concludes our call.