HireQuest, Inc. (HQI) Earnings Call Transcript & Summary

Good afternoon, and welcome to the HireQuest Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Jen Belodeau from IMS Investor Relations. Jen, the floor is yours.

Thank you. I'd like to welcome everybody to the call today. Hosting the call are HireQuest's CEO, Rick Hermanns; and CFO, David Hartley. I'll now take a moment to read the safe harbor statement. This conference call contains forward-looking statements as defined within Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements in terms such as anticipate, expect, intend, may, will, should or other comparable terms involve risks and uncertainties because they relate to events and depend on circumstances that will occur in the future. Those statements include statements regarding the intent, belief or current expectations of Higher Quest and members of its management as well as the assumptions on which such statements are based. . Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those described in HireQuest periodic reports filed with the SEC and that actual results may differ materially from those contemplated by such forward-looking statements, except as required by federal securities laws, HireQuest undertakes no obligation to update or revise forward-looking statements to reflect changed conditions. Now I'd like to turn the call over to the CEO of HireQuest, Rick Hermanns. Please go ahead, Rick.

Good afternoon, and thank you for joining our call today. In the second quarter, we continued to see improving demand for temporary staffing services as the market stabilizes and employers begin to prioritize hiring again. Leading up to Q2, we saw what I described as tentative green shoots in demand over the last few quarters, but with no real traction to speak of until the second half of the first quarter of this year, when we started to see consistent demand and favorable weekly year-over-year comparisons across the business. As you can see in our results, these comps were even more favorable in Q2 as we drove year-over-year revenue growth for the first time since the third quarter of 2024. And frankly, the latter part of the second quarter was better than the start. David will take a deeper dive into the financials, but moving down the P&L at a high level, the increased revenue in the quarter, combined with disciplined expense management, generated significantly improved GAAP profitability, and earnings for our shareholders. We operate in an industry where a rising tide tends to lift all ships. With macro factors like interest rates in the political landscape, weighing heavily upon the employers' decisions to hire downsize or even freeze their efforts altogether. The latter is what we are seeing for the better part of the last 2 years. So far, there have been -- so far this year, there have been 3 primary factors enabling our growth. First, we are seeing the benefits from the immigration policies enacted at the beginning of 2025. Second, our franchisees have taken advantage of the uptick in the manufacturing labor market, especially our selling franchisees who grew their top line by almost 15%. And third, as I mentioned on last quarter's call, we are seeing a return on the investments we've made in our national accounts program. So while the industry is up as a whole, we continue to stand out from the pack, thanks to our differentiated franchise staffing model, which allows us to be nimble and flexible regardless of the market trends. I'd like to highlight that we remain profitable throughout the duration of this market downturn. In fact, we've reported GAAP profitability in each quarter since the third quarter of '24 when we recognized a onetime noncash impairment charge of $6.4 million related to our acquisition of MRI Network, which flowed down to our bottom line. On a non-GAAP basis, we have never reported a loss. With that background, you can see how exciting a stabilizing market is for our business after 2-plus years of uncertainty. We're well positioned with a proven model, increasing demand and a strong balance sheet and no debt. There is work still to be done, and the market has a long way to go before it returns to previous levels. With that being said, we're encouraged by what we are seeing in both our business and in the broader staffing market. And with our visibility today, we believe that we're in a stronger place -- a stronger place to deliver positive results through the balance of 2026. With that, I'll turn over the call now to David to provide a closer look at our second quarter financial results.

Thank you, Rick, and good afternoon, everyone. Appreciate you all joining us today. I will now provide a summary of our second quarter results. Total revenue in the second quarter of 2026 was $8.1 million compared with revenue of $7.6 million in the prior year, an increase of 6%, which is especially impressive when you take into account that the second quarter of 2025 included $690,000 of total revenue related to the MRI network assets we divested at the beginning of the year. So pro forma for the divestiture, total revenue was up 16.6% in the second quarter. As a quick repressure for all of you on the call, our total revenue is made up of 2 components: franchise royalties, which is our primary source of revenue and service revenue, which is generated from certain services and interest charge to our franchisees as well as other miscellaneous revenue. Royalties were $7.6 million compared to $7.3 million for the same quarter last year, an increase of 4.1%. Pro forma for the divestiture, franchise royalties were up 13.8%. Underlying franchise royalties are system-wide sales, which are not part of our revenue but are a helpful contextual performance indicator. Systemwide sales reflect sales at all offices, including those classified as discontinued. System-wide sales in the second quarter were $117.8 million compared with $125.9 million in the second quarter of 2025. Divested MRI network assets contributed roughly $17.7 million in Q2 2025, which translates to pro forma growth in this quarter of 6.9%. Service revenue in the second quarter was $513,000 compared with $354,000 last year. Selling, general and administrative expenses in the second quarter were $4 million compared to $5.9 million in the second quarter of 2025. Included in SG&A expenses of workers' compensation expense, which totaled $39,000 for the second quarter of 2026 compared with $127,000 in Q2 2025. For Q2 2026, core SG&A, which excludes the impact of workers' comp and any nonrecurring operating expenses was $3.8 million compared to $4.7 million last year. Q2 of 2025 included approximately $633,000 in SG&A expenses related to the divested MRI network assets. We provided a table in the press release issued earlier this afternoon with a detailed reconciliation of core SG&A to SG&A, along with tables for non-GAAP profitability metrics, net income to adjusted net income and net income to adjusted EBITDA, which I'll discuss shortly. Net income after tax was $2.7 million in the second quarter or $0.19 per diluted share compared to net income of $1.1 million or $0.08 per diluted share last year. Adjusted net income for the second quarter was $3.2 million, or $0.23 per diluted share compared to adjusted net income of $2.1 million or $0.15 per diluted share last year. And adjusted EBITDA was $4.6 million in the second quarter compared to $3.3 million last year. Given the size of noncash operating expenses running through our P&L, we believe adjusted EBITDA and adjusted net income are both relevant metrics for us. Moving on now to the balance sheet. Our total assets as of June 30, 2026, were $93.4 million compared to $88.2 million at December 31, 2025. Current assets included $1.6 million in cash and $48.9 million of net accounts receivable. While current assets at 2025 year-end included $3.9 million of cash and $39.3 million of net accounts receivable. Working capital was $35.1 million as of June 30, 2026, compared with $33 million at 2025 year-end. As of June 30, 2026, we had $41 million in availability on our credit facility, assuming continued credit covenant compliance. We have paid a regular quarterly dividend since the third quarter of 2020. Most recently, we paid a $0.06 per common share dividend on June 15, 2026, to shareholders of record as of June 1. We expect to continue to pay a dividend each quarter, subject to the Board's discretion. With that, I will turn the call back over to Rick for some closing comments.

Thank you, David. As always, I would like to thank our employees and franchisees for their hard work and commitment, and we look forward to speaking with you again when we report our third quarter results in November. With that, we can now open the line to questions. Thank you.

[Operator Instructions] And the first question today is coming from Mike Baker with D.A. Davidson.

Great. A couple of questions. One, if you're willing to answer it, you said the quarter, the run rate was better towards the end of the quarter than the beginning. Any quantification of that? What are you running at, let's say, in the last month of the second quarter?

So we started the quarter running -- year-over-year, we were running maybe 2% to 4% ahead of, let's say, the year-over-year comparisons. By the end, we were running upwards to 12%, 13% in some weeks more than the prior year comparison.

And does that -- just to figure it out, but does that include/exclude MRI in the base last year?

Well, no, I'm sorry, that's just comparing sort of our ongoing our ongoing operations, really primarily HireQuest direct and selling. Until December, we'll have that sort of the unfavorable comparison because of the MRI royalties being included.

Got it. Got it. So that's a pretty big ramp-up. I don't know you said that's -- we're seeing that in some weeks. I know you don't give any kind of guidance or anything like that, but would it be unfair to expect that kind of growth to continue into the -- for the rest of the year? Or are there other factors to consider when we think about our forward model?

Yes. I mean, look, again, you're right. We don't provide guidance. All I can say, which would go along the lines of last quarter is, of course, because we're already what, 6 weeks. We're 6 weeks into the -- into the third quarter. And I would just say that we have held the growth from the second half of the second quarter, if that makes sense.

Yes. No, it does. Okay. Well, yes, a pretty big turnaround there. The -- besides really beating on the top line, at least relative to my model, you came in well ahead in other words, lower on the expense line at $4 million if you include workers' comp or whatever, is 38%, excluding that, lower than it's been in a while, again, how do we think about expenses going forward? What have you done to lower expenses? And do you need to add back expenses as revenues start to ramp here?

Well, 1 of the things, and it wasn't really in our prepared remarks, but wasn't in our prepared remarks, but the second quarter of last year had an enormous amount of legal fees related to -- related to TrueBlue, the attempted takeover of TrueBlue. And so that created part of the favorability. But really, we didn't -- we -- I'd love to say we had some silver bullets. We bought some AI or something. So it's nothing like that. It's really just -- we're finally getting some restoration of our operating leverage that we lost over the last 3 years of a kind of a dead market. And so we were just regaining our economies of scale. I would also say is that which has helped it as well is the -- there's probably some bleed over as well from the MRI divestiture even what we maybe saw as being part of MRI, where we were able to make a few extra cuts as well. But again, mostly, it's just scale that's really working for us right now.

Your next question is coming from Kevin Steinke from Barrington Research.

Great. Thank you. also in your prepared comments, you mentioned that the visibility you have today gives you confidence in the outlook for the second half of 2026. So -- just kind of wondering what sort of visibility indicators you're able to draw from the business? I mean, how far out those go? And just any more comments around the visibility.