GEE Group Inc. (JOB) Earnings Call Transcript & Summary

Good morning, and welcome to the GEE Group Fiscal Fourth Quarter and Year Ended September 30, 2022 Earnings and 2023 Update webcast Conference Call. I'm Derek Dewan, Chairman and Chief Executive Officer of GEE Group. I will be hosting today's call and joining me as a co-presenter is Kim Thorpe, our Senior Vice President and Chief Financial Officer. Thank you for joining us today. It's our pleasure to share with you GEE Group's results for the fiscal year and for the fourth quarter ended September 30, 2022, and also to provide you with our outlook for fiscal year 2023 in the foreseeable future. Some comments Kim and I will make may be considered forward-looking, including predictions and estimates 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 in Tuesday's earnings press release and our most recent 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 the statements made on today's call. During this presentation, we will also talk about some non-GAAP financial measures and reconciliations and explanations of these metrics are included in the earnings press release. Our presentation of financial amounts and related amounts, including growth rates, margins and trends and metrics are rounded, or based upon rounded amounts, for purposes of this call in all amounts and percentages and related items presented at our approximations accordingly. For your convenience, our prepared remarks for today's call are available in the Investor Center of our website. With that business behind us, I'm very happy to report that we achieved outstanding results in the fiscal year 2022 with revenue of $165.1 million for the year and revenue for our fiscal fourth quarter of $41.5 million. Gross profits and gross margins were $61.7 million and $15.1 million and 37.4% and 36.3% for the fiscal year and fourth quarter ended September 30, 2022, respectively. Our non-GAAP adjusted EBITDA for fiscal 2022 was $12.5 million, up $200,000 or 2% compared to fiscal 2021, and that represents a 7.5% margin to revenue. Non-GAAP adjusted EBITDA for the fiscal 2022 fourth quarter was $1 million compared to $3.6 million for the fiscal 2021 fourth quarter. We achieved net income of $19.6 million or $0.17 per diluted share for fiscal 2022 overall. We reported a small net loss of $800,000 or $0.01 per diluted share for fiscal 2022 fourth quarter. Before I turn it over to Kim, I want to say how very proud I am of our dedicated and talented people. They work extremely hard every day to ensure that our clients get the very best service. This was a key factor in the outstanding performance of GEE Group in fiscal 2022 and will contribute greatly to the company's future success. At this time, I'd like to turn over the call to our CFO, Kim Thorpe, who will further elaborate on our fiscal 2022 annual and fourth quarter results. Kim?

Derek, thank you very much, and good morning, everyone. As Derek mentioned, revenues for fiscal 2022 were $165.1 million, up 11% as compared with fiscal 2021 revenues of $148.9 million. Revenues for the fourth quarter of fiscal 2022, once again, were $41.5 million, up slightly as compared with revenues reported for the fiscal 2021 fourth quarter. Contract staffing services contributed $138.5 million and $35 million or 84% of revenues for both the fiscal year and fourth quarter ended September 30, 2022, respectively. Direct hire placement revenues contributed $26.6 million and $6.5 million, or in both cases, 16% of revenues for the fiscal year and fourth quarters ended September 30, 2022, respectively. Contract staffing services revenues for fiscal 2022 increased $8.7 million or 7% as compared to fiscal 2021. Contract staffing services revenues were near level for each of fiscal 2022 and 2021 fourth quarters, although up slightly in the 2022 fourth quarter. Direct hire placement revenues for fiscal 2022 increased by $7.5 million or 39% as compared to fiscal 2021. Direct hire placement revenues again were near level for each of fiscal 2022 and 2021 fourth quarters. Direct hire placement revenues for fiscal 2022 set a record high for the company, exceeding even pre-COVID-19 results. The increases in total contract and direct hire placement services revenues for the fiscal year ended September 30, 2022, were primarily attributable to increased demand in our professional staffing services segment as the negative effects of COVID-19 have continued to lessen. In addition, the volatility experienced in the U.S. economy and workforce in 2022 created many opportunities and increased demand, particularly in the direct higher placement services market. Total revenues from our professional staffing services segment, which includes contract staffing and direct hire placement services were $149.2 million and $37.5 million and represented 90% of total revenue for both fiscal year and fourth quarter ended September 30, 2022, respectively. Professional staffing services revenues were up 13% and 1%, respectively, from the comparable fiscal 2021 periods. Our highly specialized IT services vertical, which includes Agile Resources, Access Data Consulting, Paladin Consulting, and SNIT brands accounted for 51% of our Professional Services business segment revenues for fiscal 2022 and were up 23% year-over-year. The other professional services verticals, finance, accounting, office support, engineering, healthcare and others, accounted for the remaining 49% of professional services business revenues for fiscal 2022 and were up 5% year-over-year. Industrial staffing services revenues were $15.9 million and $4 million and represented 10% of total revenue for both fiscal year and fourth quarter ended -- I'm sorry, September 30, 2022, respectively. Industrial staffing services revenues were down 8% and 9%, respectively, from the comparable fiscal 2021 period. We continue to experience some pandemic-related conditions associated with the Delta and then Omicron variants, in our Ohio markets in the earlier quarters of fiscal 2022. These include school and business closings and interruptions we've commented on before, which were reminiscent in some respects of the early COVID-19 pandemic. Consolidated gross profits and margins were $61.7 million, or 37.4%, and $15.1 million, or 36.3%, for the fiscal year and fourth quarter ended September 30, 2022, respectively. Our consolidated gross margins for the last 6 quarters have consistently been above 36%. The overall improvement in the company's combined gross profit margin is largely due to substantial increases in direct higher placement revenues, which have grown -- I'm sorry, which have 100% gross margin. Selling, general and administrative expenses for the fiscal year and fourth quarter ended September 30, 2022, increased $10.3 million and $2.6 million, respectively. SG&A expenses were 31.4% and 34.8% of revenue for the fiscal year and fourth quarter ended September 30, 2022, respectively, compared with 28% and 28.6% for the comparable fiscal 2021 period. In addition to overall growth of the business, resulting in additional incentive compensation and bonuses, the increases in SG&A expenses and ratios were affected by $800,000 in charges associated with 2 former positions that were eliminated during fiscal 2022. Also $400,000 increase in bad debt expense associated with one of the company's former industrial staffing services customers and $1 million in charges for the settlement of legal matter -- of an old legal matter that added to our SG&A expenses in the earlier quarters of fiscal 2022. As Derek mentioned in his remarks, we achieved net income for fiscal 2022 of $19.6 million or $0.17 per diluted share as compared with net income of $6,000 or near breakeven $0.00 per diluted share rounded for fiscal 2021. There was also a small net loss for the fiscal 2022 fourth quarter of $800,000 or approximately $0.01 per diluted share as compared with net income of $2.9 million or $0.03 per diluted share for the comparable fiscal 2021 quarter. Non-GAAP adjusted net income loss and diluted EPS, excluding the effects of nonoperating and/or nonrecurring items, as outlined in the earnings press release were $7.7 million or $0.07 per diluted share and a loss of $400,000 or $0.00 per diluted share for the fiscal year fourth quarter ended September 30, 2022. Adjusted EBITDA, which is a non-GAAP financial measure, was $12.5 million for the fiscal 2022 year, up $200,000, or 2%, compared with fiscal 2021. Non-GAAP adjusted EBITDA for the fiscal 2022 fourth quarter was $1 million compared to $3.6 million for the comparable fiscal 2021 fourth quarter. Again, our fourth quarter results were impacted by the accrual of additional incentive compensation and bonuses commensurate with the significant improvements in revenues, earnings and productions we produced in fiscal 2022. As we've commented in prior years -- I'm sorry, in prior quarters, we believe these types of positive results are sustainable. A reconciliation of GEE Group's GAAP net income to the company's non-GAAP adjusted EBITDA and reconciliations of other non-GAAP measures with their GAAP counterparts discussed today can be found in the supplemental schedules as part of our earnings press release. To conclude, our current or working capital ratio at September 30, 2022, was 2.7:1. Consolidated accounts receivable net of allowances for doubtful accounts at the end of fiscal 2022 were $22.8 million. And our days sales outstanding performance metric, or DSO, was approximately 49 days. We reported positive net cash flow from operating activities of $1.4 million for the 2022 fiscal fourth quarter and $9.2 million during the fiscal 2022 year as a whole and non-GAAP free cash flow of $1.3 million and $8.9 million, respectively. Our cash flow from operations and free cash flow for the year ended September 30, 2022, were reduced, in part, by payment of the first of 2 equal installments of deferred FICA obligations allowed us under the -- the Cares Act of $1.8 million, which was made in December of 2021 and the payment of $1 million in settlement of an old isolated legal matter that was made in April 2022. Our liquidity position is strong. We have no outstanding debt, and our net book value per share was $0.88 at September 30, 2022, and our net tangible book value per share, was 25%, that was up over the prior year. Now I'll turn it back over to Derek.

Thank you, Kim. The 2022 fiscal fourth quarter and fiscal year marked our fifth consecutive quarter and first full year of strong performance since delevered the company. Having consistently achieved higher margins and free cash flow for the last 5 quarters, we are establishing a positive sustainable track record as well as positive momentum for the future. At September 30, 2022, the company had over $18.8 million in cash and another $15.4 million in availability under its ABL facility. GEE Group's prospects for today for future profitable growth have never been better. Despite macroeconomic challenges or unforeseen events, we believe we can continue to produce solid results in fiscal year 2023 and beyond. Before we pause to take your questions, I want to again say thank you to all of our wonderful people for their professionalism, hard work and dedication. Without them, we could not have accomplished all the good things we shared with you today. [Operator Instructions] At this time, we'll come back to you as well. Thank you, and we'll start the Q&A session.

One of the first questions is related to the fourth quarter. And the revenue in our fourth quarter was very similar to the fourth quarter of fiscal 2021. However, the SG&A was higher and thus, net income and adjusted EBITDA were lower. Kim, will you address that for me, please? The question was, why is your EBITDA lower? And what caused your SG&A to increase?

Part of the reason why SG&A was higher is because in the fourth quarter was because we accrued additional incentive compensation and bonuses commensurate with the outstanding performance that we had put in throughout the remainder of the year. We held off on doing that until the fourth quarter for various practical reasons. But we thought it was prudent to take the full charge for all of that incentive comp. And then also, there is a progression of increased compensation and bonuses over a calendar year, of which the last 3 quarters of this fiscal year were the first 3 quarters of the calendar year, so there is an upward progression over the year. But those things specifically account for the increase in SG&A. And one other thing I might point out that I think is worthy, if you go back to our 2018 year and you compare our revenues, they're literally within $200,000 of one another. Our revenues in 2018 were $165.3 million, they were 165.1 million. However, our gross profit this year was $3 million higher. And if you take that same ratio concept and instead of applying the ratio of SG&A against revenue you applied against gross profit, our SG&A expenses were actually lower as a percentage of gross profit. And the reason they came in that well is because of all the extensive restructuring and expenses we took out of the business between 2018 and up through the pandemic. So I just want to point that out.

Okay. Thank you, Kim. Another question is, it seems like in the middle of the month, there were some large -- there were large trades in the stock, upward around 250,000 at to close. I also observed that occur for several days, maybe 4 or 5 days. Is that stock manipulation? And if so, who's doing it? And I'm paraphrasing the question. The answer to that is that we just don't know. A lot of the trades are made around the New York on some of the electronic mediums, and those trades influence the stock price at closing or slightly after hours. That happens from time to time, and we're not too concerned about it. We don't have a large short position in our company either. So if someone was trying to manipulate the stock price, as has been suggested in the question, we're not aware of who that might be and I think that it's temporary at best. The other question that came up is what are you going to do with your large cash position? The comment -- a couple of comments related to stock buybacks. We were restricted until about now, mid-December because of the CARES Act, PPP loans that you had 1 year after the date of the last loan being forgiven that would preclude you -- up until that time that we were precluded from doing a stock buyback. So now that we're in a position that stock buybacks could be done -- those discussions are happening with our directors at our Board meetings. And we will address that soon after these earnings releases get adjusted by the Street. Some rules on stock buybacks that the SEC put out, there's some rules on 10b5-1 plans, which we would be likely to adopt, so that when we -- if and when we do a buyback, that we can take advantage of the safe harbors in 10b5-1. So those are all things that are out there. There's also a 1% excise tax that was encouraged by the President and adopted by Congress, that excise tax is on buybacks over $1 million. Just to give you a background because I had several questions on buybacks. So the answer to buybacks historically, I've done by successor company. I'm well familiar in how to do them and we will address that soon after the earnings are digested. I'm the largest shareholder. What would you do with your cash? Do you need it for working capital? The answer is no. Our working capital is sustained by our collection of accounts receivable and billings. Those accounts receivable, I think Kim gave you the DSO number of about 49 days. So we're not really having to tap our cash reserves, and we're definitely not tapping our health facility for working capital. So we're doing very well on cash management and how we deploy that cash is the subject of additional conversations with our directors. Prospects for future profitable growth. Let me address the -- what's happened in our industry and in the general economy for labor in the U.S. So way through our fourth quarter, and this was during our third quarter announcement, I said that we were very optimistic, but for some issues with potential macroeconomic turbulence with recessions or layoffs or some combination of both. We have seen layoffs at customers. We have seen employment tighten up for full-time hires in a big way. 2022 fiscal year was a robust year for full-time hires. But midway during the fourth quarter, we saw some of those full-time higher opportunities reduced. And the contract headcount was consistent and what typically happens during a downturn of some type or noise in the economy, full-time hires tend to drop some, and all hiring drops for a period of time. And then contract hiring starts to kick in, in a higher way. And then full time comes back towards the end of economic cycle or when I quote the noise goes away. So we're in that period now and you could see -- if you see the business news, Goldman Sachs laid off substantially a lot of their full-time people. Interestingly enough -- and that's indicative of what large corporate employers are doing, not just in investment banking, but across the board. Goldman is a client of ours and we were not, at this point, hurt by that. We have contract labor there. However, if there were full-time hires going in, they would put those on hold. But the contract people that we have so far have stayed out. But the point here is that the general level of hiring is somewhat muted during this period of what I call uncertainty. People don't know if we're going into a downturn. You've got a high interest rate environment. Some people have to come with additional interest expense and so forth. I believe we'll end up in the spring kick in really hard on a comeback assuming -- and when I say that, we're doing quite well, except term placements will not be at the same level as they were in fiscal 2022. All of our competition has said the same thing. And that's because the time hiring has been dampened because of potential economic turbulence on the outlook front. Additionally, in the tech sector, as you know or have read, the Amazons, the Googles, the Facebooks and so forth have laid off people. Interestingly, a lot of those people were in our business before as recruiters and they're coming back to us for their career. So we can pick and choose the best and the brightest. Our outlook is good. We have plenty of cash. We will not waste it. We will use it judiciously. And also on the SG&A front, we will make adaptations to our SG&A based on the volume of business, and it will also go down some, if the placements drop at all because commissions are included in that SG&A. So it's a variable cost in many respects. But to the extent that we can reduce SG&A, which we will absolutely do somewhat, and adjust it according to the revenue stream that will occur as well. So some of the onetime items in SG&A will go away after the fourth quarter. So remember that as well going forward. In the last 2 quarters, management has indicated they would address share buybacks. I talked about that in the last 2 quarters. Can management please again give a little bit more color on why SG&A ballooned in Q4 of this year versus last year. Kim, I think you covered that pretty good, so I'm going to move on. Let's see. Okay. This comment says we're moving into a more challenging economic environment. I address that and what we're doing about it. What's your free cash flow priorities in 2023? Again, share buyback question, addressed that. Let's see. Will you activate the buyback? Okay, another question. Obviously, there's a high degree of interest in stock buybacks. We'll take that definitely as -- into account. Can you add views on current client activity? Things are pretty good but there's a lot of uncertainty, so some people are putting hires on hold. And typically, towards the end of the year in the first couple of weeks of January, we do see a bit of what I call a hold pattern. And then the hiring cranks up again going into the later part of the spring, and we'll -- should see some good activity then. That's our expectation. How would recession affect us? I can tell you, I've managed through several recessions, including 2008, and staffing companies collect more cash in a downturn because they're not putting out as much money for payroll, but they're collecting receivables that were on the books at a faster pace than they were spending money for payroll. So cash flow actually goes up for approximately 9 months to 10 months, about the time -- the average time and duration for a recession. But for the '08 recession, which had a financial calamity issue attached to it. So if you think through that and with our cash position and no debt and the ability to draw on our credit if we need it, we're not concerned about cash flow at all. And we will not waste cash, I could tell you that. So we've accumulated cash exactly for the very reason that, that question came up. Could you sail through any downturn if you have one, the answer is absolutely, yes. And will you use your cash judiciously? Yes. Acquisitions, do you see them? Yes. Will you execute? Only the good ones. We're not going to jump into one if it's not a slam dunk. Do you expect the underlying earnings in fiscal '22 to continue in this year, fiscal 2023. The answer to that is the macro factors that keep us from hitting that same target number, but we will do quite well in the event. What is your plan to unlock shareholder value? Again stock buyback question. Availability, talent, are you able to get talent? The answer is we do a really good job recruiting internally. We pretty much have the pick of the litter, particularly with a lot of the layoffs going on in corporate America in the recruiting side. So we've been able to attract some recruiters back to our industry and back to our company or to our company, if they weren't with us before. Analyst coverage, we're working on that to get more which are long-term strategy. Our strategy is to continue doing what we're doing, managing costs, particularly adjusting it to the revenue cycle, revenue streams that we see, debt-free. Let's see. Is the outlook for direct hire -- I mentioned that, is it flat or declining a bit in fiscal '23 and will it be at fiscal '18 or fiscal '19 levels? The fiscal '18, fiscal '19 levels are probably a better indicator of where permanent hires will be or direct hire business would be for 2023. 2022 was a bit of an abnormality. It was off the charts, and that was probably because hiring was muted during the COVID era. Okay, another question on SG&A, we got that. Do you see temp hiring increasing as perm decreases? The answer is yes. Temp will increase, but there's a little bit of a transition period, somewhere between December to February, and then we should start seeing the temp hires kicking back up. In perm, we'll stay somewhat muted in that period of time, although we're hitting perm still, but not the 2022 level, which was a pretty hard benchmark to beat. Could management comment on how the pricing is looking for acquisitions? They're holding pretty good. If anything, they've come down a bit because of the economic uncertainty and potentially turbulence in the economy. So the questions are finished. I thank everyone for being on. I can tell you that we're very optimistic absent some macroeconomic potential noise going into this fiscal year, although we're going to manage our income statement appropriately in our expense line to match revenue so that we can stay in the profitability areas that we want to be at and also generating substantial cash flow, which we will continue to do and which we are doing now, and we will use our cash wisely and look for some good things coming. That concludes our call today. We sincerely appreciate all of your time and effort and your investment, and I can assure you be good fiduciaries for you, all shareholders, and we'll take care of our employees and look forward to some really good things. This is a journey. It's not a sprint. So we will absolutely make sure the journey is successful. Thank you very much, and that concludes our call.