Executive Summary / Key Takeaways

• HireQuest's franchise model demonstrates significant resilience and profitability, allowing it to weather macroeconomic headwinds and outperform many peers in the challenging staffing industry environment.
• Despite a decline in system-wide sales and revenue in Q1 2025 due to reduced hiring demand, the company maintained solid margins and profitability, supported by effective expense management, particularly in workers' compensation costs.
• Strategic acquisitions, such as RTS and TEC, continue to be a key driver for geographic expansion and franchise base growth, complementing organic initiatives and leveraging the company's strong balance sheet and credit facility capacity.
• Enhanced immigration enforcement is identified as a potential tailwind, positioning HireQuest as an E-Verify employer to benefit from increased demand for documented workers.
• Investors should monitor the pace of demand recovery, the execution of the M&A pipeline, the continued trend in workers' compensation expense reduction, and the ongoing remediation of the material weakness in internal controls.

The Franchise Advantage in a Challenging Market

HireQuest, Inc. (NASDAQ:HQI) operates as a nationwide franchisor within the dynamic and often cyclical staffing industry. Since its founding in 2002, the company has built a diverse portfolio of staffing solutions, primarily targeting the light industrial, blue-collar, executive, managerial, and administrative segments through a network of franchisee-owned offices operating under various trade names like HireQuest Direct, Snelling, MRI, and others. This franchise model is not merely an operational structure; it is the bedrock of HQI's strategy and a critical differentiator in the competitive landscape. By providing employment, marketing, working capital, software (including its HQ WebConnect system), and administrative services to its franchisees, HQI maintains a lean corporate structure while leveraging the localized expertise and entrepreneurial drive of its franchise partners.

The staffing industry is inherently sensitive to economic fluctuations. In recent quarters, macroeconomic headwinds have led to a slowdown in hiring decisions across many sectors, creating a difficult operating environment. Larger, more diversified players like ManpowerGroup (MAN) and Robert Half International (RHI) have felt the impact, reporting slower growth or declines in revenue. Even focused competitors like Kelly Services (KELYA) and TrueBlue (TBI), with overlaps in industrial and construction staffing, have faced pressures. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, HQI holds an estimated 1-2% share in the U.S. temporary staffing market. Its franchise model, however, provides a distinct advantage in cost efficiency, potentially leading to lower operating costs per office compared to the corporate-owned structures of some rivals. This lean model has allowed HQI to demonstrate remarkable resilience, maintaining profitability even when many peers are struggling, a point highlighted by management as a validation of their system's strength.

HQI's technology, centered around its HQ WebConnect software and supported by internal IT development and security efforts (including assistance from related party Insurance Technologies), plays a crucial role in enabling the franchise model. This system facilitates the core services provided to franchisees, such as payroll processing, billing, and administrative support. Specific, quantifiable performance metrics comparing HQI's technology directly to the advanced digital platforms used by larger competitors like MAN or RHI (which may offer faster candidate matching or processing) are not detailed. However, HQI's system is fundamental to the operational efficiency and centralized support that underpins the franchise network's cost advantages. The ongoing investment in IT, as evidenced by increased depreciation/amortization due to an IT project being placed in service in Q1 2025, suggests a commitment to enhancing this foundational technology, although specific R&D goals or target metrics for quantifiable improvements were not detailed.

The company's strategic journey has been marked by a blend of organic growth and targeted acquisitions. The 2019 merger with Command Center was a transformative event, significantly expanding its footprint and service lines. Since then, HQI has actively pursued accretive, tuck-in acquisitions, often financed through a mix of cash, debt, and seller financing. Recent examples include the acquisition of TEC in October 2023, expanding its Arkansas presence, and Ready Temporary Staffing (RTS) in December 2024, adding to its Colorado operations. These deals are strategically important as they allow HQI to enter new geographic markets or strengthen its position in existing ones more rapidly than organic growth alone, leveraging the acquired assets by immediately converting them to the franchise model. Management views the current market downturn as potentially creating more acquisition opportunities at more realistic valuations, signaling a continued focus on this growth pillar.

Recent Performance Reflects Macro Headwinds and Operational Strength

HireQuest's first quarter 2025 results underscore the prevailing challenges in the staffing market while simultaneously highlighting the inherent resilience of its franchise structure. Total revenue for the quarter was $7.5 million, an 11.2% decrease compared to $8.4 million in the first quarter of 2024. This decline was a direct consequence of a softening in underlying system-wide sales (SWS), which fell 11.7% year-over-year to $118.4 million. The decrease in SWS was broad-based, impacting the MRI executive search segment most significantly, but also affecting the HireQuest Direct and Snelling/HireQuest temporary staffing brands.

Despite the top-line pressure, HQI demonstrated effective cost management. Total operating expenses decreased to $6.0 million in Q1 2025 from $6.3 million in the prior-year period. A key driver of this reduction was a substantial decrease in workers' compensation expense, which fell to approximately $28 thousand in Q1 2025 from $572 thousand in Q1 2024. Management noted that while workers' compensation is expected to be a pass-through cost over the long term, short-term fluctuations occur. The historically challenging 2023 policy year negatively impacted results, but the subsequent 2023-2024 year was normal, and the 2024-2025 results were favorable, leading to the significant expense reduction seen in Q1 2025 and expected to continue trending down in 2025.

Other operating expenses saw mixed trends. Compensation-related expenses were relatively stable at around $2.9 million. However, other selling, general, and administrative (SG&A) expenses increased to $2.2 million from $1.9 million, partly attributed to timing differences in professional fees and costs associated with a minor reduction in force. Depreciation and amortization expense also increased slightly to $734 thousand, reflecting recent investments in IT infrastructure.

Profitability remained solid, albeit lower year-over-year, demonstrating the model's ability to generate income even with reduced sales volume. Net income from continuing operations was $1.4 million ($0.10 per diluted share) in Q1 2025, down from $1.7 million ($0.12 per diluted share) in Q1 2024. The effective tax rate for continuing operations decreased to 10.5% from 16.7%, primarily benefiting from the federal Work Opportunity Tax Credit (WOTC), although the increasing mix of executive recruiting business (like MRI), which generates fewer WOTCs, partially offsets this benefit. The loss from discontinued operations, related to the company-owned Philadelphia location held-for-sale, remained relatively stable at $72 thousand.

Financial Health and Strategic Positioning

HireQuest maintains a healthy balance sheet, providing ample liquidity and flexibility. As of March 31, 2025, current assets significantly exceeded current liabilities, resulting in approximately $27.3 million in working capital. The company held $2.1 million in cash and $42.2 million in net accounts receivable. Key current liabilities included $7.8 million due to franchisees and $3.4 million in workers' compensation claims liability.

The company's Senior Credit Facility with Bank of America (BAC) provides substantial borrowing capacity. As of March 31, 2025, approximately $5.4 million was drawn, with $34.8 million in availability. A portion of this facility ($9.2 million) is utilized for letters of credit securing workers' compensation obligations. The company was in compliance with all financial covenants under the facility as of the quarter end. The effective interest rate on the drawn portion was approximately 5.70%. This strong liquidity position is crucial for funding working capital needs, particularly temporary employee payroll, and for executing the company's acquisition strategy.

Cash flow from operating activities in Q1 2025 was positive at $1.9 million, a notable improvement from the $0.9 million used in the prior-year period, reflecting better management of operating assets and liabilities.

Beyond financial metrics, HQI's competitive positioning is influenced by external factors. As an E-Verify employer, the company is strategically positioned to benefit from enhanced immigration enforcement by ICE, which is increasing demand for documented workers. Management views this as a significant opportunity, potentially reopening doors with clients who previously relied on undocumented labor. This factor provides a potential tailwind that differentiates HQI from competitors who may not be as well-positioned to capitalize on this shift.

While the MRI segment has faced challenges due to the weak market for permanent placement, management has taken steps to evaluate, reorganize, and refine operations within this division, aiming to position it for recovery when demand returns. The impairment charges taken in 2024 related to MRI assets underscore the impact of the market downturn on this segment but also reflect management's assessment of its current value.

A key risk factor highlighted in the company's filings is a material weakness in internal control over financial reporting, related to insufficient accounting resources and IT system controls. While remediation efforts are ongoing, including hiring staff and reallocating responsibilities, this weakness still existed as of March 31, 2025. The focus of remediation in 2025 includes addressing segregation of duties in the IT system, journal entry controls, user access, and account reconciliations. While management has asserted that the financial statements are fairly presented, this remains an area for investors to monitor.

Outlook and Investment Considerations

Management's outlook is one of cautious optimism. They anticipate a leveling out of compressed demand in temporary and commercial staffing and are positioned for improved results as 2024 progresses into 2025. Seasonal factors are expected to drive sequential revenue increases in the second and third quarters, although the magnitude of this seasonal lift may be less pronounced than in typical years. The expected continued decrease in workers' compensation expense throughout 2025 should provide a further boost to profitability.

The strategic focus remains on leveraging the resilient franchise model, executing accretive acquisitions, and capitalizing on potential tailwinds like enhanced immigration enforcement. The strong M&A pipeline, with management noting more realistic pricing, suggests that acquisitions will continue to play a role in expanding the company's footprint and service offerings.

For investors, the core thesis revolves around the durability and profitability of the HireQuest franchise model in diverse economic conditions. While the current macroeconomic environment presents headwinds, impacting top-line growth, the company's ability to manage costs effectively, particularly workers' compensation, and maintain strong liquidity is a testament to its operational strength. The potential for demand recovery, coupled with strategic acquisitions and favorable shifts in immigration enforcement, provides avenues for future growth. However, the ongoing material weakness in internal controls and the inherent cyclicality of the staffing industry remain important risks to consider.

Conclusion

HireQuest's first quarter 2025 results reflect the challenging macroeconomic backdrop impacting the staffing industry, leading to a decline in system-wide sales and revenue. However, the company's differentiated franchise model continues to demonstrate its value through resilient profitability and effective cost management, notably the significant reduction in workers' compensation expense. With a strong balance sheet, ample liquidity, and a clear strategic focus on accretive acquisitions and leveraging potential tailwinds like enhanced immigration enforcement, HireQuest is positioning itself to capitalize on an eventual recovery in demand. While risks such as macroeconomic uncertainty and internal control weaknesses warrant attention, the core investment thesis remains centered on the proven resilience and strategic growth potential offered by HQI's unique operating model in the staffing sector.