Sign in
HS

HEALTHCARE SERVICES GROUP INC (HCSG)·Q4 2024 Earnings Summary

Executive Summary

  • HCSG delivered Q4 revenue of $437.8M and diluted EPS of $0.16; reported CFOA was $36.2M and adjusted CFOA (ex change in payroll accrual) was $27.0M . Versus prior year Q4 2023, revenue increased from $423.8M while EPS declined from $0.32, reflecting new-business start-up costs and higher cost of services .
  • 2025 outlook: management expects mid-single-digit revenue growth, Q1 2025 revenue of $440–$450M, and 2025 adjusted CFOA (ex payroll accrual) of $45–$60M; cost of services targeted at ~86% and SG&A targeted at 8.5–9.5% (near term 9.5–10.5%) .
  • Cash/liquidity: cash and marketable securities of $135.8M and an undrawn $500M revolver; repurchased ~$1M of stock in Q4 and have 6.0M shares remaining under authorization .
  • Estimate comparison: S&P Global consensus EPS and revenue for Q4 2024 were unavailable due to data access limits; therefore, a beat/miss vs consensus could not be assessed (see Estimates Context).
  • Potential stock reaction catalysts: accelerating top-line into Q1 on healthy pipeline/retention, stronger collections (Q3–Q4 collections >99.5%), but dining-heavy start-up costs pressuring near-term margins and SG&A tracking near 10% in the near term .

What Went Well and What Went Wrong

  • What Went Well

    • Strong quarterly cash generation supported by “strongest cash collection results in over 3 years,” with Q3–Q4 collections >99.5% and Q4 collections >100% on CFOA .
    • Top-line momentum: revenue reached $437.8M in Q4, and management guided Q1 2025 to $440–$450M with confidence in mid-single-digit 2025 growth, underpinned by cross-sell and new business adds with >90% client retention .
    • Liquidity and capital return: cash + marketable securities of $135.8M and undrawn $500M facility; repurchases continued with ~$1M in Q4 and 6.0M shares remaining .

  • What Went Wrong

    • Margin pressure from start-up costs: cost of services rose to 86.6% (vs. 85.2% in Q3) and adjusted EBITDA margin declined to 4.6% (vs. 5.8% in Q3), with $3–4M of start-up costs, largely within dining .
    • EPS and operating income down YoY: diluted EPS was $0.16 vs. $0.32 in Q4 2023 as cost of services and SG&A pressure offset revenue growth .
    • Accrual timing volatility: payroll accrual day count and cash flow cadence remain a swing factor; management outlined a 2025 quarterly accrual cadence that will materially move reported CFOA by quarter, and noted a higher-than-anticipated Q4 accrual base (12 days) .

Financial Results

MetricQ4 2023Q2 2024Q3 2024Q4 2024
Revenue ($M)$423.8 $426.3 $428.1 $437.8
Net Income ($M)$23.5 $(1.8) $14.0 $11.9
Diluted EPS ($)$0.32 $(0.02) $0.19 $0.16
Cost of Services (% of Revenue)n/a90.3% 85.2% 86.6%
SG&A (% of Revenue)n/a10.4% 10.4% 10.1% (actual)
Adjusted EBITDA ($M)$38.8 $4.0 (≈$3.961) $24.8 $20.2
Adjusted EBITDA Margin (%)9.1% 0.9% 5.8% 4.6%

Segment performance (revenue and margin):

Segment KPIQ2 2024Q3 2024Q4 2024
Housekeeping & Laundry Revenue ($M)$191.0 $191.1 $192.7
Housekeeping & Laundry Margin (%)8.9% 6.4% 10.2%
Dining & Nutrition Revenue ($M)$235.3 $237.0 $245.1
Dining & Nutrition Margin (%)6.3% 5.3% 4.7%

KPIs and balance sheet:

KPIQ2 2024Q3 2024Q4 2024
CFOA Reported ($M)$16.3 $4.3 $36.2
CFOA Adjusted ($M)$(2.4) $19.0 $27.0
Payroll Accrual Days (End of Qtr)n/a9 days 12 days (as referenced in Q4 call)
Cash + Marketable Securities ($M)$130.7 $130.0 $135.8
Credit Facility$500M undrawn $500M undrawn $500M undrawn
Share Repurchase ($M)$3.0 in Q2 $1.0 in Q3 ~$1.0 in Q4; 6.0M shares remain

Consensus vs Actuals (Q4 2024):

MetricActualS&P Global Consensus
Revenue ($M)$437.8 N/A (see note)
Diluted EPS ($)$0.16 N/A (see note)

Note: S&P Global consensus estimates were unavailable due to access limits at the time of retrieval; therefore, a beat/miss assessment vs Street could not be provided.

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueQ1 2025Not previously provided$440–$450M Initiated
Revenue GrowthFY2025Not previously providedMid-single-digit growth Initiated
Adjusted CFOA (ex payroll accrual)FY2025Not previously provided$45–$60M Initiated
Cost of Services (Mgmt Goal)FY2025Manage ~86% Manage ~86% Maintained
SG&A (Mgmt Goal)FY20258.5–9.5% target 8.5–9.5% target (near term 9.5–10.5%) Target maintained; near-term tracking higher
Share Repurchase AuthorizationOngoing6.1M shares remaining (post Q3) 6.0M shares remaining Lower by ~0.1M due to Q4 buyback

Earnings Call Themes & Trends

TopicQ2 2024 (Q-2)Q3 2024 (Q-1)Q4 2024 (Current)Trend
Collections/Cash FlowReaffirmed 2024 adj CFOA $40–$55M; Change Healthcare timing delayed cash into H2; Q2 DSO 85 days Q4 historically strongest; reiterated focus on higher-frequency payments; positive start to Q4 Q4 collections >100%; back-half collections >99.5%; 2025 adj CFOA $45–$60M Improving
Cost of ServicesManage ~86% target; Q2 structurally high from CECL/restructurings 85.2% achieved 86.6% including start-up costs; target remains ~86% Stable target; mixed execution (start-up timing)
SG&A10.4%; goal 8.5–9.5% with leverage as growth resumes 10.4%; continued investments 10.1% actual; near term 9.5–10.5% before leverage Gradual leverage expected as revenue scales
Start-up Costs & Growth MixQ2 client restructuring noise; preparing for growth/cross-sell Cross-sell and new EVS wins; retention supports growth $3–$4M start-up costs (mostly dining) weighing margins; guidance for Q1/Q25 provided Growth resuming; near-term margin drag
Pricing/InflationFood deflation (Q2) to pass through; wage inflation stabilizing Food inflation modest; pass-through in billing Food-at-home inflation sequentially higher; wage inflation trending lower; contracts allow pass-throughs Manageable via pass-throughs
Regulatory/Staffing RuleLitigation/SCOTUS Chevron noted; rule may be revised/not implemented Expect revision/non-implementation amid litigation/admin change Reiterated view; positive tone on new administration collaboration Reduced risk tone
ReimbursementCMS +4.2% Medicare (FY25) and positive state trends +4.2% effective Oct 1; state trends positive Reimbursement environment remains stable/positive Supportive
Education Segment<5% of rev; selling season constructive Seasonality acknowledged; not yet material Continued opportunity; remains complementary to core Growing from small base

Management Commentary

  • “2024 was a transitional year for HCSG, as it marked a pivotal shift from recovery to renewed growth.”
  • “We expect mid-single-digit revenue growth in the year ahead and estimate a Q1 revenue range of $440 million to $450 million.”
  • “Our cash flow continued to gain strength throughout 2024, culminating in an outstanding fourth quarter, largely fueled by our strongest cash collection results in over 3 years.”
  • “Net income and diluted earnings per share were reported at $11.9 million and $0.16 per share, inclusive of an estimated $3 million to $4 million of new business start-up costs.”
  • “Our 2025 goal is to manage cost of services in the 86% range…and manage SG&A into the 8.5% to 9.5% range,” with acknowledgment that near-term SG&A will track 9.5–10.5% before leveraging lower .

Q&A Highlights

  • Start-up costs and margin cadence: Start-up cost timing drives quarterly margin variability; majority (>75%) of start-up costs hit cost of services and were largely in dining; guidepost ~90 days to budget for EVS and ~120 days for dining .
  • Cash flow cadence and payroll accrual: Management outlined 2025 quarterly payroll accrual day changes that will swing reported CFOA (Q1 -$8M, Q2 +$20M, Q3 -$17M, Q4 -$17M), reinforcing focus on full-year cash generation .
  • Credit quality: Positive trends with lower DSO driven by strong collections and sales mix; CECL bad debt ~ $10M (~1.2% of revenue in H2) in line with historical expectations .
  • Growth composition: Health care remains primary growth driver split between EVS and dining, with dining contracts ~2x EVS revenue per facility; cross-sell opportunity remains significant as dining penetration is ~50% of EVS base .
  • Retention: Client retention remained >90% for 2024 and trended higher in the back half, supporting top-line momentum into 2025 .

Estimates Context

  • S&P Global consensus EPS and revenue for Q4 2024 could not be retrieved due to an API daily request limit, so we cannot assess beat/miss vs Street this quarter. Where comparisons to consensus would ordinarily appear, values are marked N/A, and investors should consult their S&P Global portal for current consensus figures.

Key Takeaways for Investors

  • Revenue momentum is building into Q1 2025 ($440–$450M guided) and 2025 mid-single-digit growth, underpinned by improved retention (>90%), a healthier pipeline, and dining cross-sell opportunity (~50% penetration) .
  • Near-term margins face dilution from start-up costs (largely dining), lifting cost of services to 86.6% in Q4 and trimming adjusted EBITDA margin to 4.6%; however, the 86% cost-of-services target and SG&A leverage framework remain intact .
  • Cash generation is improving on strong collections (Q3–Q4 >99.5%), but quarterly reported CFOA will be noisy given payroll accrual timing; focus on full-year adjusted CFOA (ex payroll accrual) target of $45–$60M for 2025 .
  • Liquidity is ample (cash + marketable securities $135.8M; $500M undrawn revolver), supporting organic growth investments, selective inorganic opportunities, and opportunistic buybacks (6.0M shares remain) .
  • Watch SG&A trajectory: management signaled near-term 9.5–10.5% of revenue before trending to 8.5–9.5% with scale; topline delivery is key to leverage .
  • Macro/regulatory backdrop is constructive: reimbursement favorable (CMS +4.2% for FY25) and management sees reduced risk from minimum staffing rule amid litigation and administrative posture .
  • Risk monitor: start-up cost timing (especially in dining), CECL/bad debt normalization, and accrual timing could create intra-year volatility despite constructive full-year setup .
Cross-reference notes:
- Q3 guide that Q4 payroll accrual would be 3 days was superseded by Q4 commentary indicating 12 days accrued in Q4; management provided a detailed 2025 accrual cadence during the Q4 call **[731012_HCSG_3403378_3]** **[731012_HCSG_3415539_6]**.