GEE Group Fiscal 2026 Q1 Earnings Call - Revenue Drop from Lost Client and Weak Contingent Demand, Direct-Hire Strength and Cost Cuts Narrow Losses

Derek Dewan, Chairman and Chief Executive Officer, GEE Group: Hello, and welcome to the GEE Group Fiscal 2026 first quarter ended December 31, 2025, earnings and update webcast conference call. I’m Derek Dewan, Chairman and Chief Executive Officer of GEE Group, and I will be hosting today’s call. Joining me as a co-presenter is Kim Thorpe, our Senior Vice President and Chief Financial Officer. Thank you for joining us today. It is our pleasure to share with you GEE Group’s results for the fiscal 2026 first quarter ended December 31, 2025, and provide you with our outlook for the fiscal 2026 full year in the foreseeable future. Some comments Kim and I will make may be considered forward-looking, including predictions, estimates, expectations, and other statements about our future performance.

These represent our current judgments of what the future holds and are subject to risks and uncertainties that actual results may differ materially from our forward-looking statements. These risks and uncertainties are described below under the caption "Forward-Looking Statements Safe Harbor," and in Thursday’s earnings press release at our most recent Form 10-Q, 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. Throughout this presentation, we will refer to the periods being presented as this third quarter or the quarter, which refers to the three-month period ended December 31st, 2025. Likewise, when we refer to the prior year quarter, we’re referring to the comparable prior three-month period ended December 31st, 2024. During this presentation, we will also talk about some non-GAAP financial measures.

Reconciliations and explanations of the non-GAAP measures we will address today are included in the earnings press release. Our presentation of financial amounts and related items, including growth rates, margins, and trend metrics, are rounded or based upon rounded amounts. For purposes of this call and all amounts, percentages and related items presented are approximations accordingly. For your convenience, our prepared remarks for today’s call are available in the investor center of our website. Now on to today’s prepared remarks. The challenging conditions in the hiring environment for our staffing services have been ongoing since the second half of 2023. These stemmed from what is now widely acknowledged as a substantial over-hiring that took place in 2021 and 2022, in the immediate aftermath of the pandemic, and a macroeconomic weakness and uncertainties related to persistent inflation and high interest rates that followed.

The near universal cooling effect on U.S. employment and businesses’ use of contingent labor and hiring of full-time personnel have persisted and resulted in volumes below once prior norms. Many of the businesses we serve continue to implement layoffs and hiring freezes rather than adding new employees. Companies and businesses continue to cautiously assess the economy and market conditions to ensure their investments in technology and human capital are strategic and sustainable. Another setback for us this quarter was the acquisition of one of our larger clients and movement of its business to an affiliate of the acquirer. This was a high-volume, lower-margin account, which somewhat lessened the negative impact on our results.

Also, on the brighter side, our direct hire revenue, which has the highest gross margin at 100%, was up 8% in the quarter and appears to be on course so far for a better fiscal 2026 versus fiscal 2025. We also expect the use of contingent labor to stabilize this year, as we are aware that some businesses are beginning to initiate new projects, which may be expected to lead to more job orders and full-time and contingent staffing placements. Artificial intelligence, or AI, is gaining ground at an accelerated pace and is further complicating the HR and project planning opportunities and risks facing virtually all companies, including consumers of our services. We believe these conditions are contributing to decreases in job orders for both contract and direct hire placements, also negatively impacting our financial results.

Conversely, we are implementing and incorporating AI into our own business and strategic plans in order to digitize, streamline, enhance, and accelerate our recruiting and sales processes. Another closely aligned AI goal of ours is to provide our clients with the necessary human resources to implement and support their use of AI and help them increase speed, efficiency, and profitability. These initiatives are a high priority for us, and our goal is to begin seeing returns later this year. Our contract staffing and direct hire placement services are currently provided under our professional segment. The operations and substantially all the assets of our former industrial segment were sold during fiscal 2025 and have been reclassified as discontinued operations and excluded from the results of continuing operations we’re presenting today, unless otherwise stated. Our consolidated revenues were $20.5 million for the quarter.

Gross profit and gross margin were $7.4 million and 36.1%, respectively, for the quarter. Consolidated non-GAAP adjusted EBITDA was -$97,000 for the quarter. We reported a net loss from continuing operations of $150,000 or $0.00 per diluted share for the quarter. We continue to aggressively take action to adjust and enhance our strategic focus, growth plans, and financial performance and results, including streamlining our core operations and improving or adjusting our productivity to match our current lower volumes of business. This has helped us improve our results despite lower business volume.

We took measures to reduce our SG&A during the second half of 2025 by an estimated amount of $3.8 million, which helped us achieve the $736,000 reduction in SG&A in the fiscal 2026 first quarter versus the prior year first quarter. As we announced early last year, we completed the acquisition of Hornet Staffing in fiscal 2025 and have increased our focus on VMS and MSP sourced business, including the use of special recruiting resources and acceleration of the integration and use of AI technology into our recruiting, sales, and other processes. We anticipate achieving continuing improvements in our productivity and restoring profitability as soon as practically possible. Our goal remains to be profitable again in fiscal 2026.

In addition to these near-term initiatives, we are working closely with our frontline leaders in the field to support them as we all continue to aggressively pursue new business, in addition to growing and expanding existing client revenues. We are seeing some positive results from these efforts. As the uncertainty and volatility currently gripping our economy and labor markets lessen, I am very confident that we are positioned to meet the increased demand from existing customers and win new business. I want to reassure everyone that we fully intend to successfully manage through the challenges I’ve outlined 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 organically and to be acquisitive.

We also continue to believe that our stock is undervalued, and especially so based upon the recent trading at levels very near and even slightly below tangible book value, and that there is good opportunity for upward movement in the share price once we are able to operate again in more normal economic and labor conditions and restore profitable growth. Management and our board of directors share the responsibility and are committed to restoring growth and profitability, which will lead to maximizing shareholder value. Before I turn the call over to Kim, I want to update you on recent activity since our press release issued on January 22, 2026, in response to Star Equity’s public commentary regarding an indication of interest in our company.

Since then, management and the board have met to review and discuss multiple unsolicited expressions of interest in the company and continue to evaluate various strategic alternatives to enhance shareholder value. As we indicated in our press release on January 22, 2026, our board of directors, in accordance with its fiduciary duty, will consider any bona fide offer regarding a business combination, acquisition, or other transaction that it believes will enhance shareholder value. Once again, I wish to thank our wonderful, dedicated employees and associates. They work extremely hard every day to ensure that our clients get the very best service and are the most important ingredient for 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 2026 first quarter results. Kim?

Kim Thorpe, Senior Vice President and Chief Financial Officer, GEE Group: Thank you, Derek, and good morning. Consolidated revenues from continuing operations for the quarter were $20.5 million, down $3.5 million or 15% from the prior year quarter.... Contract staffing services revenues for the quarter were $17.8 million, down $3.7 million or 17% from the prior year quarter. As Derek mentioned, one of our former larger, high-volume, low-margin clients was acquired and moved its business to an affiliate of the acquirer at the beginning of the fiscal first quarter. This accounted for $2.6 million of the declines in our consolidated and contract services revenues this quarter. Absent the loss of this single customer, consolidated revenues declined three point eight million dollars. Sorry, 3.8%, forgive me.

On the brighter side, direct hire revenues for the quarter were $2.7 million, up $200,000 or 8% from the prior-year quarter. In addition, for January 2026, the first month of our current fiscal second quarter, we recorded direct hire revenue of $1.2 million, which exceeded all of the individual prior months in this fiscal year. Gross profits and gross margins for the quarter were $7.4 million, or 36.1%, respectively, compared to $7.9 million and 33% from the prior-year quarter. The improvement in our gross margin is mainly attributable to the increase in direct hire placement revenues, which have 100% gross margin, as well as a higher mix of direct hire placement revenue relative to total revenue.

Also contributing to a lesser extent is an increase in prices and spreads on some of our professional contract services businesses. While the loss of the high-volume, low-margin client we spoke about caused a majority of our revenue reduction this quarter, it also contributed to the improvement in our business mix and gross margin on our remaining professional contract services business. Selling, general and administrative expenses for the quarter were $7.7 million, down $700,000, or 9% from the prior year quarter. SG&A expenses as a percentage of revenues for the quarter were 37.6%, compared with 35.1% for the prior year quarter. In response to the realities of our present environment, we continue to prioritize and focus heavily on streamlining our core operations and providing our productivity to match our current lower volumes of business.

As Derek just mentioned, we reduced our SG&A during the second half by approximately $3.8 million on an annual basis, which helped us achieve our overall SG&A savings of $736,000 in our current quarter versus our prior year quarter, improving our results despite a lower volume of business. I also want to re-emphasize Derek’s earlier point, that our plans and goals are intended to restore profitability during fiscal 2026. In addition, in addition to the initiatives Derek reported, we are in the beginning stages of updating and further integrating our ERP and applicant tracking systems and certain other key operating systems and processes. We also intend to consolidate certain of our legal entities later this year in order to further reduce administrative and compliance costs.

The ultimate goals of these longer-term initiatives, with the others, is to help us increase speed, accuracy, and efficiency throughout our operations, and ultimately to get an SG&A ratio of 30% of revenue or less. Our loss from continuing operations for the quarter was a hundred. Our net loss was $150,000 or 0% per diluted share, as compared with a loss of $684,000, or $0.01 per diluted share from the prior year quarter. This improvement primarily is due to cost reductions and productivity improvements, of course. Our EBITDA, which is a non-GAAP financial measure, was -$303,000 for the quarter, as compared with -$513,000 for the prior year quarter.

Adjusted EBITDA, also a non-GAAP measure, was -$97,000 for the quarter, as compared with -$304,000 for the prior quarter. As of December 31, 2025, our current or working capital ratio was 5.3 to 1. Our liquidity position remained very strong, with $20.1 million in cash, an undrawn ABL credit facility with availability of $4.2 million, net working capital of $23.9 million, and no outstanding debt. Our net book value per share and net tangible book value per share were $0.45 and $0.22, respectively, as of December 31, 2025.

To conclude, while we’re disappointed with our results and remain cautious in our near-term outlook, we remain resolved to restore profitability and are preparing for the longer term, including making modernization improvements and enhancements, such as updating our core financial and operating systems and the integration of AI across all of our businesses. Having completed our acquisition of Hornet Staffing in fiscal 2025, we also intend to continue to pursue other acquisitions, albeit in a very disciplined, prudent manner, with particular emphasis on businesses focused on AI consulting, cybersecurity, and other IT consulting. Before I turn it back over to Derek, please note that reconciliations of GEE Group’s non-GAAP financial measures discussed today with their GAAP counterparts can be found in the supplemental schedules included in our earnings press release. Now I’ll turn the call back over to Derek.

Derek Dewan, Chairman and Chief Executive Officer, GEE Group: Thank you, Kim. Despite the 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 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 2025 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. 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. 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.

Kim Thorpe, Senior Vice President and Chief Financial Officer, GEE Group: We have a few questions coming in. We will, we’ll take them in the order that they come. If you’ll bear with us for a moment. Our first question, which I will read: What incentives would need to be put in place for management to consider a value realization event, sale, special dividend, etc.? And my answer to that question is, Management has employment agreements that already provide those incentives, so there are no additional incentives that would need to be made in that regard. Our second question: Is an activist investor takeover, the only route towards getting a return for shareholders, the only path to value realization at this point? Well, of course not.

We will, as we said in the press release, the board and management are both committed to do what’s in the best interest of the shareholders, and we have some other questions coming up that will talk a little bit about what Derek mentioned toward the end of his prepared remarks. Here’s a question: If the company was sold at a comparable multiple to BGSF’s, I’m sorry, BGSF’s recent sale of their professional division, and Perin’s enterprise value to revenue, there would be about 150% upside to the current stock price. Why is the company not actively pursuing this, especially in light of the recent Star Equity exchanges and pursuing along the current path, has... And, I’m sorry, along the current path, has not recognized any value for shareholders.

Derek, do you want to comment on this?

Derek Dewan, Chairman and Chief Executive Officer, GEE Group: Sure. So as, as you’re aware, in many cases within a public company, there’s non-public information and actions being taken, that have yet not been disclosed. So as we stated in our press release, at the, at the last part of the earnings release, we do evaluate any proposals, to maximize shareholder value. And someone, I think in, in this question, you mentioned 150% increase versus the current stock price. I would say that that’s extremely low, and that would be not what, what we believe is fair value for our shares. And if there is an offer, we anticipate it’ll be much better than that.

Kim Thorpe, Senior Vice President and Chief Financial Officer, GEE Group: Okay. The next question is for someone that’s concerned about the lower value of the stock having been in place for some time. When is it time for dramatic and intentional changes to be made to correct that? We agree with that. We’re working on a number of new things. So that’s the answer to that question. And then the next question, can you provide more color on what multiple offers you mentioned included?

Derek Dewan, Chairman and Chief Executive Officer, GEE Group: We can’t at this time, but they are being evaluated, and we will respond appropriately. Also keep in mind that that’s just one facet of maximizing shareholder value. We are also internally focused on, as Kim said earlier, cost reduction, profitability improvement. Case in point, our direct hire business increased 8%, which in the industry, if you look at the peer group, is very good. That’s a 100% gross margin business, and our January month was also higher than the prior three months in the first quarter. Organically and internally, we’re improving. As you can see, the EBITDA improved and net income improved, and we anticipate, as we go further into the fiscal year, more improvement.

Kim Thorpe, Senior Vice President and Chief Financial Officer, GEE Group: I believe that’s it. Those are all the questions.

Derek Dewan, Chairman and Chief Executive Officer, GEE Group: Thank you very much for joining us today. That concludes our call.