HireQuest (HQI) Q3 2025 Earnings Call Transcript

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Date

Thursday, November 6, 2025 at 4:30 p.m. ET

Call participants

• Chairman, President, and Chief Executive Officer — Rick Hermanns
• Chief Financial Officer — C. David Hartley

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Risks

• Chairman Hermanns directly cited the negative revenue impact from several MRI network franchisees choosing not to renew their franchise agreements over the past few quarters, contributing to year-over-year declines in the MRI segment.
• Total revenue declined 9.8% year-over-year to $8.5 million from $9.4 million in the prior year, reflecting continued market softness.

Takeaways

• Franchise royalties -- $8.1 million, compared to $9 million for the same quarter last year, maintaining position as the primary revenue driver.
• Service revenue -- $387,000, compared to $428,000 for the same quarter last year.
• System-wide sales -- $133.6 million, compared with $148.6 million for the same quarter last year, but increased 6.1% sequentially from Q2 2025, noted as stronger sequential growth than the prior year's 1.7% increase.
• Net income -- $2.3 million, or $0.16 per diluted share, compared to a net loss of $2.2 million, or a loss of $0.16 per diluted share, last year.
• Adjusted net income -- $3.4 million, or $0.24 per diluted share, compared to $2.8 million, or $0.20 per diluted share previously, all on an adjusted (non-GAAP) basis.
• Adjusted EBITDA -- $4.7 million, slightly below the prior year's $4.9 million, with adjusted EBITDA margin rising to 55% from 52%.
• Core SG&A expense -- $4.6 million for the quarter, flat with last year when excluding workers' compensation, MRI ad fund, and nonrecurring items.
• Workers' compensation impact -- Benefit recognized of just under $100,000 in the third quarter, compared to a $500,000 expense in the same period last year.
• Working capital -- Improved to $31.5 million as of September 30, 2025, from $25.1 million at 2024 year-end.
• Net debt -- Approximately $1.1 million, down from $2.1 million at year-end 2024 and $12.1 million as of September 30, 2024.
• Dividend -- Paid a quarterly dividend of $0.06 per common share to shareholders of record as of September 1, 2025, continuing a consistent dividend since 2020.
• M&A pipeline -- CEO Hermanns stated, "There are several opportunities that we are looking at that could be immediately accretive to the HireQuest model," and expects increased activity in the next three to six months.
• Segment performance -- Snelling franchisees achieved "big wins," according to Rick Hermanns, indicating increased demand in light industrial and administrative staffing; permanent placement and executive search remained weak, while temp staffing and day labor outperformed other offerings.
• Immigration enforcement effect -- Hermanns acknowledged, "There are absolutely a couple of decent-sized business wins that we can point directly towards immigration enforcement," but expressed skepticism about the reported magnitude of the impact on hiring demand.
• Market conditions -- Management described the day labor and temp staffing businesses as generally stable, with some geographies still facing demand softness due to client-specific volume reductions.

Summary

HireQuest (NASDAQ:HQI) demonstrated ongoing profitability with net income of $2.3 million for the third quarter of 2025 and an adjusted EBITDA margin of 55%, despite a 9.8% year-over-year revenue decline and continued headwinds in permanent placement. The company attributed year-over-year improvements in core profitability to substantial reductions in workers' compensation expense and stabilized core SG&A spending, with core SG&A flat compared to last year. Management highlighted resilient sequential system-wide sales growth of 6.1% in the third quarter—a marked improvement over the prior year, with notable franchisee successes in the Snelling division. Strategic focus on M&A continued, with multiple accretive opportunities under review and strong liquidity supporting future acquisitions.

• CEO Hermanns said, "we are approaching the bottom, we think," referencing stabilization in the day labor business after several quarters of softness.
• Current liabilities were 42% of current assets as of September 30, 2025, down from 49% at year-end 2024, indicating balance sheet improvement and greater working capital flexibility.
• Several MRI Network franchise non-renewals were concentrated in the first quarter, with management reporting that active office declines had "leveled out by the end of the third quarter."
• Supply constraints from tighter immigration enforcement generated "a couple of decent-sized business wins," but the impact was less than anticipated given industry data, creating a potential future tailwind.

Industry glossary

• System-wide sales: Total gross receipts generated at all franchisee and company-owned offices, including discontinued locations, used as a performance indicator but excluded from reported revenue.
• Adjusted EBITDA: Non-GAAP measure reflecting earnings before interest, taxes, depreciation, and amortization, further adjusted for specified nonrecurring expenses.
• Franchise royalties: Recurring payments collected from franchisees, constituting HireQuest's primary revenue stream.
• SG&A (Selling, general & administrative expense): Operating expenses not directly tied to sales production, including overhead and administrative costs.
• Permanent placement: Staffing service focused on recruiting candidates for full-time, non-temporary employment positions.
• Adjusted net income: Net income excluding specified nonrecurring items, providing an alternate view of core earnings performance.

Full Conference Call Transcript

Rick Hermanns: Good afternoon, and thank you for joining our call today. You can see from our third quarter results, the staffing market is much the same as it has been for the past ten quarters now, in terms of staffing demand and broader market sentiment. With that said, I am pleased to report that we delivered another quarter of profitability highlighted by net income of $2.3 million or $0.16 per share, and we continue to keep our expenses in check despite market uncertainties. Our results in this quarter underscore the flexibility and strength of our franchise model, which has consistently enabled us to remain profitable in soft markets when many others in our industry have struggled.

Over the history of HireQuest, our model has proven to perform well and, importantly, be profitable in all cycles. Since its inception over twenty years ago, HireQuest has been profitable each year through all of the economic downturns and consistently provided valuable operational and financial support to our franchisees. Over the long term, we are confident that this is a winning formula for shareholders. The overall staffing market has provided some mixed signals throughout 2025, which has been impacted by a variety of macroeconomic factors, including tariffs, immigration policies, and impending interest rate cuts. Our temp staffing and day labor offerings are outperforming permanent placement and executive search, which can be less predictable by nature.

While demand for temp and day labor staffing can fluctuate based on locations and seasonality, our franchisees have a keen understanding of the market. And with our support and resources, they are able to provide the very best in temporary and day labor staffing services. This dependability and service quality is what keeps our customers coming back to HireQuest in the many geographies that we operate in throughout the United States. Snelling, our nationwide temporary and direct hiring recruiting service, performed well in the third quarter relative to our other offerings. With some of these franchisees scoring big wins indicating at least a slight increase in demand for longer-term staffing in the light industrial and administrative fields.

Permanent placement and executive search continues to lag, as has been the case for well over a year now, as many of you know. In addition to macro uncertainties that have been amplified by tariffs and other uncertainties, the MRI network mostly saw one of the biggest problems was that several MRI network franchisees elected to not renew their franchise agreement over the last few quarters, which has negatively impacted year-over-year comparisons. While this is unfortunate, our current MRI network franchisees saw shrinking declines in their perm placement business over the quarter, which is positive. I do want to emphasize that MRI franchises operate differently from the traditional franchise model that you see in our HireQuest Direct or Snelling offices.

Our MRI offices are more of a network of somewhat related recruiting firms. In fact, many of them have their own names instead of a tight network of offices that share the same name brand and operating standards like HireQuest Direct, for example. In other words, these are essentially independent recruiting offices operating under the MRI umbrella, making franchisee retention less a sure thing than our traditional model, especially in a down market. As always, M&A remains a key part of our growth strategy. There are several opportunities that we are looking at that could be immediately accretive to the HireQuest model, and we are keeping our ears close to the ground for any new deals.

This is an especially interesting time for deals given the status of the market. Smaller firms or long-term owners eyeing retirement may be planning their exit strategies. We are constantly scanning for new opportunities, and we are well equipped with a proven strategy that has helped us to close and successfully implement numerous over the lifespan of the company. With that said, I will now turn over the call to David to provide a closer look at our third quarter financial results. David?

C. David Hartley: Thank you, Rick, and good afternoon, everyone. Appreciate you all joining us today. I will now provide a summary of our third quarter results. Total revenue was $8.5 million compared with revenue of $9.4 million in the prior year, a decrease of 9.8%. Total revenue is made up of two components: franchise royalties, which is our primary source of revenue, and service revenue, which is generated from certain services and interest charged to our franchisees, as well as other miscellaneous revenue. Franchise royalties were $8.1 million compared to $9 million for the same quarter last year. And our service revenue for the quarter was $387,000 compared to $428,000 last year.

Underlying these franchise royalties are system-wide sales, which are not a part of our revenue but are helpful contextual performance indicators. System-wide sales reflect sales at all offices, including those classified as discontinued. System-wide sales in the third quarter were $133.6 million compared with $148.6 million last year. Sequentially, system-wide sales increased about 6.1% this year over Q2, which was favorable compared to last year when the increase was only 1.7%. The third quarter is typically our best sales period for HireQuest Direct and, to a lesser extent, Snelling. And this year, offerings saw double-digit sequential growth compared to only mid-single digits last year.

Selling, general, and administrative expenses in the third quarter were $5.1 million compared to $5.4 million in 2024. I would also like to point out that we recognized a workers' compensation benefit in the third quarter of just under $100,000 compared to Q3 of last year when we had a net expense of $500,000. We are pleased with the results from the changes we have implemented to our work comp program. But just so you do not get the wrong idea about the other expenses, I think it would be helpful to break down SG&A just a bit more.

For SG&A, which excludes the impact of networkers' comp insurance, MRI ad fund-related expenses, and any other nonrecurring operating expenses, was $4.6 million for the quarter, which is flat with last year. We provide a table in the press release issued earlier this afternoon with a detailed reconciliation of core SG&A to SG&A, as well as tables for the non-GAAP profitability metrics. Net income to adjusted net income and net income to adjusted EBITDA that I am going to talk about shortly. Our net income after tax this quarter was $2.3 million or $0.16 per diluted share compared to a net loss of $2.2 million or a loss of $0.16 per diluted share last year.

Adjusted net income for this quarter was $3.4 million or $0.24 per diluted share compared to last year when it was $2.8 million or $0.20 per diluted share. Adjusted EBITDA was $4.7 million compared to $4.9 million last year. And our adjusted EBITDA margin this quarter rose to 55% from 52% last year. For both adjusted net income and adjusted EBITDA, a large component of the favorable year-over-year results this quarter can be attributed to our controlling of network comp expense.

And while there have been times over the past few years where it would have been nice to be able to include it as an adjustment, we are pleased that the changes we have implemented in recent years are moving us in the right direction. Moving on to the balance sheet. Our total assets as of 09/30/2025 were $94.9 million compared to $94 million at 12/31/2024. Current assets included $1.1 million in cash and $46.9 million of net accounts receivable. While current assets at 2024 year-end included $2.2 million of cash and $42.3 million of net accounts receivable. Working capital was $31.5 million as of September 30 compared with $25.1 million at 2024 year-end.

Current liabilities were 42% of current assets as of September 30 versus 49% at 12/31/2024. We had a $2.2 million draw on our credit facility as of 09/30/2025. And that gives us about $42.5 million in availability assuming continued covenant compliance. So that puts our net debt at the end of this quarter at around $1.1 million, which is down about a million from the '2 and down about $11 million compared to $9.30 2024. So as we stand today, we have a good amount of flexibility and room for short-term working capital needs as well as the capacity to capitalize on potential acquisitions.

We paid a regularly most recently, we paid a $0.06 per common share dividend on regular quarterly dividend since the 2020. September 15, 2025, to shareholders of record as of September 1. We expect to continue to pay a dividend each quarter subject to the Board's discretion. I will turn the call back over to Rick for some closing comments.

Rick Hermanns: 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 year-end results in March. With that, we can now open the line to questions. Thanks.

Operator: Thank you. Ladies and gentlemen, the floor is now open for questions. If you wish to join the queue to ask a question at this time, please press 1 on your telephone keypad. Once again, you may press 1 at this time if you wish to join the queue to ask a question. And we do ask if listening on speakerphone today that you pick up your handset while asking your question to provide optimal sound quality. Once again, that will be 1 to join the queue to ask a question at this time. Please hold a moment while we poll for questions.

Operator: And the first question today is coming from Kevin Steinke from Barrington. Kevin, your line is live. Please go ahead.

Kevin Steinke: Hey. Great. Thank you. Wanted to start off by asking about the day labor business. Sounds like a little more optimism around that business this quarter. I think on the second quarter call, you talked about some of the softness in the manufacturing environment impacting that business. So I am just wondering if there was a, you know, kind of a meaningful improvement and trend in that business that you saw in the third quarter compared to the second quarter?

Rick Hermanns: Kevin, thanks for the question. Good to talk to you. I do not know if I would go as far as it has been stabilizing, I think, is the best way of putting it. And it has been generally reasonable market for the on-demand labor in many markets. We have a couple that are still a bit more troublesome that are typically related to one or two clients that have either stopped using temporary staffing or, you know, or there is just not the same volume that is there.

So, anyway, that is a muddled way of saying, we are approaching the bottom, we think, but, I mean, we were still down a bit, you know, overall, obviously, from where we wanted to be. But, again, there is room for optimism. And I would say the other part is in the fourth quarter, we have had, obviously, we are five weeks in. And of the five weeks in, half of those weeks, we beat our prior year, you know, year-over-year comparisons for the Snelling and HireQuest Direct division. And, you know, the other couple of weeks, we have been down.

But so there is room for optimism that we are, you know, that we have hit that, you know, we have hit that bottom.

Kevin Steinke: Okay. Good. And then you called out there some big wins for the Snelling franchisees in the quarter? I mean, should we think about those as competitive takeaways? Or I do not know, again, a sign of, I guess, as you said, at least some stabilization or small improvement in the market.

Rick Hermanns: So I think it is obviously large. The large wins are more just the result of, you know, exceptional franchisees earning more business. That said, even throughout, it is in most markets, it has been, you know, it has been better. And so, you know, Snelling in particular performed pretty well. Now again, obviously, large accounts are great when you get them, and they are terrible when you lose them. But this past quarter, we have been fortunate in that, you know, picking up a couple more than what we lost. And so, you know, again, but it is more, as you said, though, it is more competitive wins than it is, you know, overall improvement.

But, again, that said, it is pretty stable right now. It seems, you know, it feels pretty stable right now. And so I say feels. That is, I point back to the, you know, where we are so far in the fourth quarter with a couple of weeks exceeding the prior, you know, the prior year period, similar period.

Kevin Steinke: Okay. Got it. And in the discussion about MRI, you know, you had talked about some nonrenewal of franchisee agreements. So were there any meaningful non-renewals specific to the third quarter? Or were you kind of talking about quarters previous to the third quarter?

Rick Hermanns: Yeah. The, and I think we, I do not recall which quarter we addressed it, but, you know, there were a couple of, especially in the first quarter, you know, there were a couple of good-sized departures. And so we are obviously seeing those in the comparisons now. And what I would say, what, you know, what is a positive sign is during the quarter, same, you know, sort of active ongoing MRI franchisees by the end of the quarter, we are starting to run flat. Almost flat, anyway, with the prior year-end period. Not, I mean, the prior year similar period.

So again, while the, you know, the active offices were still declining, like I said, that leveled out by the end of the quarter. Whereas most of the decline came from those closed or, you know, the, basically, people who had left the network. Now look. I am not going to sugarcoat it. People losing the network, you know, leaving the network is not good for us. But like I said, from a sentiment of where the market stands, you know, it again indicates that the market seems to have bottomed out. Or is, you know, certainly stabilized.

Kevin Steinke: Okay. Yeah. Understood. Maybe just a couple more. I mean, you mentioned looking, you are looking at several accretive M&A opportunities. Just kind of wondering what the pipeline looks like in this market environment. You know, has it picked up a bit? Given, you know, maybe some of the stress on, you know, some of your smaller competitors?

Rick Hermanns: It has been surprisingly stable. You know, and we are obviously always in the market to buy competitors. And there are always competitors that are available. I would have thought there would have been a bit more opportunities than maybe what there are, but there is plenty. So do not read that the wrong way. So, you know, there is certainly plenty. I think part of it, we tend to, it is towards this time of the year when we start seeing more activity anyway. People try to get through, you know, get through the year so that they have full-year results to, you know what I am saying?

So that they could package it when they go to sell it, whereas a lot of people are, you know, they are not going to optimize their exit multiple if they are working off of interim numbers. So I would expect a bit more opportunities over the next, let us say, three to six months. There is plenty of them as they are right now. I would like to think that they would be better. But, again, they are better than what they were certainly three years ago. Which just reflects the state of the market.

Kevin Steinke: Okay. Understood. And then lastly, I just wanted to ask about, you know, tighter immigration enforcement and you had talked on the last quarter's call about that driving some new business for you. Given, you know, less competition from undocumented workers or, you know, companies that use undocumented workers. Is that continued, or is that kind of helping your pipeline still?

Rick Hermanns: So here is the thing. There are absolutely a couple of decent-sized business wins that we can point directly towards immigration enforcement without question. I have to be honest with you. A lot of, you know, the reports that I have seen, you know, state that more than 2 million people have self-deported. I really would have expected a much larger uptick in our demand if that were the case. So I will admit, you know, I do not know how they calculated, you know, the 2 million people self-deported. If they did, you know, like I said, it just seems like our demand would be stronger. So I am a bit skeptical. I will admit.

I am skeptical about that. That said, a lot of this is cumulative as well. You know, we are in a situation where, you know, the number of people coming in has been at a very low point now for, you know, eleven months, ten months. And, you know, and so part of that takes a while for it to roll through. I think that what is going to be important in combination with immigration enforcement is once some of these, let us say, reshored facilities actually start employing non-construction people, meaning, you know, basically start staffing up the factories themselves, that will also hopefully push up demand.

And so when you read, okay, you know, Japan has agreed to, you know, invest $500 billion in American plants, well, it does not mean that, you know, you snap your fingers and those plants are built and all of a sudden, there are 150,000, 200,000 new jobs. So those are going to take a while to fit in. But, again, if immigration remains at such a low point, and that continues on, it is a very favorable, you know, it should be a very favorable trend for us. Or, you know, it should create a big tailwind for us.

Kevin Steinke: Okay. Great. Well, thanks for the insight. I will turn it back over.

Rick Hermanns: Thank you, Kevin.

Operator: Thank you. And as a reminder, if you wish to join the queue to ask a question at this time, you may press 1 on your keypad. Once again, you may press 1 if you wish to ask a question at this time. And there are no further questions in queue. I would now like to hand the floor back to management for closing remarks.

Rick Hermanns: I want to thank everybody for joining us today for our earnings call. Again, I want to thank our employees, our franchisees, and our investors. It has been a challenging, really, eleven quarters now. But what has hopefully been demonstrated through all of this is we remain profitable despite the challenging environment. And when you look at our peer group, there are, you know, it is covered with red ink, whereas we have remained profitable, which is one of the main attractions of our model. And so, and I think that this quarter is a great demonstration of that. That despite weaker demand than what we would prefer, you know, we remain solidly profitable. And with good, adjusted EBITDA.

Despite the relatively challenging circumstances. And so, again, thank you for joining us, and we look forward to talking to you again in March. Thank you.

Operator: Thank you. This does conclude today's conference call. You may disconnect at this time. Thank you once again for your participation, and have a wonderful day.

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