Executive Summary / Key Takeaways

• Resilient Franchise Model: HireQuest's asset-light franchise model has consistently delivered strong profitability and cash flow, even as the broader staffing industry faces prolonged macroeconomic headwinds and declining system-wide sales. This model provides operational flexibility and localized market agility.
• Strategic Cost Management & Acquisitions: Aggressive expense reduction, particularly in workers' compensation, and a robust M&A pipeline focused on accretive, tuck-in acquisitions at more realistic valuations, are key drivers for future growth and margin expansion.
• Technological Backbone & Regulatory Tailwinds: The HQ WebConnect software platform provides a critical operational differentiator, enabling scalable franchisee support. Additionally, enhanced immigration enforcement is expected to create a more level playing field, potentially boosting demand for HireQuest's E-Verify compliant services.
• Challenging Market Dynamics Persist: The company continues to grapple with a slow hiring environment, particularly in permanent placement and executive search (MRI Network), and a contracting manufacturing sector, necessitating ongoing strategic adjustments.
• Strong Financial Position: Despite revenue declines, HireQuest maintains a healthy balance sheet with significant credit facility availability and reduced debt, positioning it for opportunistic growth and continued dividend payments.

The HireQuest Blueprint: A Differentiated Approach to Staffing

HireQuest, Inc. (NASDAQ:HQI), founded in 2002, has carved out a distinct niche in the fragmented staffing industry. Operating as a nationwide franchisor, the company provides direct-dispatch, executive search, and commercial staffing solutions, primarily targeting the light industrial and blue-collar segments. This asset-light franchise model is the cornerstone of its strategy, enabling broad geographic reach and localized expertise without the heavy capital expenditure of company-owned branches.

A pivotal moment in HireQuest's history was its 2019 merger with Command Center, which catalyzed an aggressive, accretive acquisition strategy. This expansion brought diverse brands like Snelling, DriverQuest, HireQuest Health, and the MRI Network into its portfolio, broadening its service offerings from temporary industrial labor to skilled trades, healthcare, and executive recruitment. This strategic diversification aims to capture a wider spectrum of the labor market, enhancing resilience across economic cycles.

Central to HireQuest's operational efficiency and competitive edge is its proprietary HQ WebConnect software. This integrated platform serves as the technological backbone for its franchise network, providing essential services such as employment, marketing, working capital funding, and administrative support. The software streamlines operations, allowing franchisees to focus on client acquisition and talent placement while centralizing critical back-office functions. Recent investments in this technology are evident, with depreciation and amortization increasing to $1.5 million for the six months ended June 30, 2025, up from $1.4 million in the prior year, as an IT project was placed into service. This ongoing investment in developing future systems within HQ WebConnect, supported by partners like Insurance Technologies, underscores its strategic importance in maintaining operational efficiency and facilitating seamless integration of new acquisitions. For investors, this technological foundation translates into a scalable, cost-effective model that supports higher margins and a stronger competitive moat against less integrated rivals.

The broader staffing industry currently faces significant headwinds. A "challenging hiring environment" has persisted for over two years, with employers adopting a "wait-and-see approach" amidst an "uncertain macroeconomic climate." The manufacturing industry, a key segment for HireQuest, continued its contraction in July 2025, shedding 11,000 jobs and reaching its lowest employment levels since July 2020. Geopolitical uncertainties, including tariffs and global conflicts, further exacerbate inflationary pressures and supply chain constraints, impacting demand for labor.

In this environment, HireQuest's franchise model offers a distinct advantage. While larger, more centralized competitors like Robert Half International (RHI) excel in white-collar professional staffing with higher profitability margins (RHI's TTM Net Profit Margin is 4% vs. HQI's 7.47%), HireQuest's decentralized network provides localized agility in blue-collar and industrial sectors. Its E-Verify employer status is a crucial differentiator, positioning it to benefit from "enhanced enforcement of immigration regulations" that aim to "create a level playing field" by requiring documented workers. This contrasts with past periods where "relaxed immigration policies" negatively impacted demand for its temporary and day labor offerings.

Financial Performance: Resilience Under Pressure

Despite the challenging market, HireQuest's franchise model has demonstrated remarkable resilience, particularly in profitability and cash flow generation. Total revenue for the second quarter of 2025 decreased by 12% to $7.6 million, and by 11.6% to $15.1 million for the first six months, reflecting a decline in underlying system-wide sales. System-wide sales for Q2 2025 were $125.9 million, down 13.9% from $146.1 million in Q2 2024, primarily driven by declines in MRI Network, HireQuest Direct, and Snelling/HireQuest.

However, the company's profitability metrics highlight the strength of its operational model. Net income for Q2 2025 was $1.1 million ($0.08 per diluted share), and $2.4 million ($0.17 per diluted share) for the first six months. Adjusted EBITDA, a key metric for the company, stood at $3.3 million for Q2 2025, with an Adjusted EBITDA margin of 43%. This strong margin performance, even with revenue softness, underscores the inherent leverage in its franchise model, which allows it to "deliver superior operating results for our industry."

Expense management has been a critical focus. Workers' compensation expense, a significant drag in 2023 and 2024, saw a substantial decrease of $420,000 in Q2 2025 and $964,000 for the first six months compared to the prior year. This improvement is attributed to cost control efforts, better claims data, and firmer insurance rates, with management expecting "still some improvements" into 2026, aiming for a "flat" run rate. This contrasts sharply with competitors like Kelly Services (KELYA), which reported a negative operating profit margin of -0.0035% in 2024, indicating greater struggles with cost control in a tough environment.

HireQuest's liquidity and balance sheet remain robust. As of June 30, 2025, current assets exceeded current liabilities by $28.6 million. The company had $2.7 million in cash and $42.8 million in net accounts receivable. Its $50 million revolving credit facility with Bank of America, N.A. (BAC), had only $4.3 million drawn, leaving $35.9 million in availability. This strong financial position, coupled with a significant reduction in total debt from approximately $16 million in Q2 2024, provides ample "financial flexibility and resources to pursue value-creating opportunities."

Operating cash flow from continuing operations was $4.5 million for the first six months of 2025, a significant improvement from cash used in the prior year period.

Strategic Initiatives: Growth Through Adaptation

HireQuest's strategy is a dual-pronged approach of organic growth and accretive acquisitions. Organic initiatives include expanding existing client relationships, pursuing national accounts, and providing capital access and training for franchisees to enter new markets. The company's M&A pipeline is "strong," with management noting that the prolonged "depressed state" of the staffing industry is leading to "more distressed" sellers and "more realistic" price points. This environment allows HireQuest to acquire businesses that "expand our staffing footprint and enhance our scope of offerings" at attractive valuations.

Recent acquisitions, such as Ready Temporary Staffing, LLC (RTS) in December 2024 and EPIC Labor in September 2024, exemplify this strategy. These tuck-in deals, immediately converted to franchise agreements, fortify market positions or establish new presences, leveraging the "branch level economics" where increased volume significantly enhances franchisee profitability. The company remains interested in a potential acquisition of TrueBlue, Inc. (TBI), having proposed an offer of $7.50 per share, which TrueBlue's board rejected. This pursuit highlights HireQuest's ambition for larger, strategic plays, even against a direct competitor in the blue-collar staffing space.

Operational adjustments are also underway, particularly within the MRI Network. Facing a "protracted industry-wide downturn" in permanent placement and executive recruiting, which led to a $6 million non-cash impairment charge in Q3 2024, HireQuest has "evaluate, reorganize and refine certain operations and processes." This includes combining departments like training to drive efficiencies, acknowledging that MRI's looser affiliation model makes franchisee retention more challenging than for its other brands. Despite these challenges, the "financial professionals" segment within MRI is noted as "still a really strong category" and "growing really nicely."

The company also anticipates benefiting from a "leveling out of the compressed demand" in temporary and commercial staffing, with temporary staffing brands returning to system-wide sales growth in Q3 2024 for the first time since Q1 2023. Management believes there is "slack capacity" to absorb a "5% to 10% sales increase with no appreciable increase in costs" in core SG&A, indicating strong operating leverage as demand recovers. The company also continues its policy of paying a regular quarterly dividend of $0.06 per common share, subject to Board discretion.

Risks and Headwinds: Crosscurrents to Consider

While HireQuest's franchise model offers inherent resilience, several risks and macroeconomic headwinds warrant investor attention. The "challenging hiring environment" and "uncertain macroeconomic climate" are persistent, leading employers to delay hiring decisions. The continued contraction of the manufacturing sector and slow demand in permanent placement, particularly in IT, remain significant concerns. Geographically, the upper Midwest, Northern Great Plains, and the D.C. construction market are experiencing weakness.

The MRI Network faces unique challenges, including a "depressed economic environment" and the loss of franchisees due to its "looser rules of affiliation." This makes it "more of a challenge to retain franchises" compared to the more integrated HireQuest Direct or Snelling brands. Furthermore, while enhanced immigration enforcement is a strategic tailwind, its actual impact on demand has been "not as much as what I would have thought," with the CEO noting that the number of deportations is "really nothing" relative to the U.S. economy.

The company also disclosed a "material weakness in our internal control over financial reporting" due to insufficient accounting resources and review functions. While remediation efforts are ongoing, including engaging third-party professionals, hiring staff, and strengthening review processes, this remains a critical area to monitor. Broader macroeconomic factors, such as potential wage inflation if the economy improves, could also put upward pressure on expenses, even with stable headcount.

Conclusion

HireQuest, Inc. stands as a compelling investment case, characterized by the inherent resilience and operational leverage of its franchise model. In an industry grappling with prolonged macroeconomic uncertainty and shifting labor dynamics, HQI's ability to maintain strong profitability and cash flow, as evidenced by its robust Adjusted EBITDA margins and healthy balance sheet, underscores the effectiveness of its differentiated strategy.

The company's strategic focus on accretive acquisitions, disciplined expense management, and leveraging its E-Verify compliant technology platform positions it to capitalize on market normalization and regulatory tailwinds. While headwinds persist, particularly in the permanent placement segment and certain industrial sectors, HireQuest's proactive measures and financial flexibility suggest a company well-equipped to weather current challenges and emerge stronger. For discerning investors, HQI represents a unique opportunity to invest in a proven model that generates value through adaptation and strategic growth, even when the broader market remains in flux.