DHI Group Inc (DHX) 2017 Q1 法說會逐字稿

Good morning, and welcome to the DHI Group, Inc.

First Quarter 2017 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Brendan Metrano, Vice President of Investor Relations.

Please go ahead.

Thank you, Andrew.

Good morning, everyone.

With me on the call today is Mike Durney, President and Chief Executive Officer of DHI Group, Inc.; and Luc Grégoire, Chief Financial Officer.

This morning, we issued a press release describing the company's results for the first quarter of 2017.

A copy of that release can be reviewed on the company's website at dhigroupinc.com.

Also a copy of the presentation accompanying today's call will be available on the website after the call has ended.

Please note that if you're listening to the call by phone, you may experience a slight delay after the transition of each slide.

Before I hand the call over to Mike, I'd like to note that today's call includes certain forward-looking statements, particularly statements regarding future financial and operating results of the company and its businesses.

These statements are based on management's current expectations or beliefs and are subject to uncertainty and changes in circumstances.

Actual results may vary materially from those expressed or implied in the statements here due to changes in economics, business, competitive, technological and/or regulatory factors or our ability to execute our tech-focused strategy and our view of potential dispositions in certain of our businesses and the terms and timing of such transactions.

The principal risks that could cause our results to differ materially from our current expectations are detailed in the company's SEC filings, including our annual report on Form 10-K and quarterly report on Form 10-Q, and the sections entitled Risk Factors, Forward-looking Statements and Management's Discussion of Analysis of Financial Conditions and Results of Operations.

The company is under no obligation to update any forward-looking statements except where it is required by federal security laws.

Today's call also includes certain non-GAAP financial measures, including adjusted EBITDA, adjusted revenues, adjusted EBITDA margin, free cash flow, net debt.

For details on these measures, including why we use them and reconciliations to the most comparable GAAP measures, please refer to our earnings release and our Form 8-K that has been furnished with the SEC, both of which are available on our website.

With that, I'll turn the call over to Mike.

Great.

Thanks, Brendan, and welcome and thanks for joining us today.

So on today's call, I'm going to provide an update on the conclusion of the strategic alternatives process, discuss our tech-focused strategy and give an update on some of our initiatives.

Then I'll turn the call over to Luc, who will give an update on the financial results.

And then we'll open the call up to questions.

First, given the number of developments for our company over the last 6 months, I'd like to start with an overview of our recent path and where we stand today.

So let's start by recapping the strategic alternatives process, which we announced in November 2016, and concluded last month.

To put that process and outcome in proper context, it's important to understand the backdrop around the decision to explore strategic options.

Last summer in the fall, while we were engaged in the internal strategic review that ultimately led to our tech-focused strategy, LinkedIn, Monster and CareerBuilder all announced that they had been sold or were exploring strategic transaction.

Given the significant level of M&A activity in our industry, coupled with our refined focus, the board determined it is in the best interests of our shareholders to explore options for an alternative ownership structure to optimize shareholder value.

We and our financial adviser, Evercore, conducted a thorough process that generated interest from a number of strategic and financial parties, and at the same time, validated our tech-focused strategy.

Ultimately, the board determined that the company and shareholders are best served at this time by remaining as an independent company and continuing to execute the company's strategy.

For the foreseeable future, we'll be an independent company, determine to grow the business and enhance shareholder value.

Our vision is to be the leading global provider of technology in next-generation talent solutions, serving tech employers and professionals across all industries and markets.

We believe we have the ability to achieve this goal with our unique portfolio of assets, coupled with the tech-focused strategy we began implementing in the fourth quarter of 2016.

We'll achieve our strategic vision by executing against 4 objectives: First, focusing resources behind our core tech talent brands; second, deepening engagement with professionals; third, investing further in next-generation recruiting solutions; and fourth, adding complementary assets to accelerate growth.

Today, I want to drill down into the first objective, focusing our resources behind our core tech business.

There are 2 key elements of this objective.

The first is optimizing our portfolio, and the second is creating a single tech-focused organization.

So I'll start with optimizing our portfolio.

To our internal review last summer, and work related to the strategic alternatives process we believe that we can best execute our strategy by simplifying the organization and focusing all the company's resources on its tech-focused business.

Which brings us to the news announced this morning that we plan to divest 4 businesses that do not fall under our tech-focused strategy.

BioSpace, Hcareers, Rigzone and Health eCareers.

These businesses have strong franchises in their respective verticals with solid margins and cash flow generation.

The exception here is Rigzone, which is still facing challenges in the energy sector, although we've started to see some signs of recovery in energy.

Moreover, we think the businesses may be able to benefit from different ownership, perhaps closer alignment with other media or data providers in their employment categories, for example.

Until transactions occur, we'll continue operating the businesses as long-term owners, and we'll only execute transactions that enhance shareholder value.

Any proceeds from the divestitures of these businesses can be reinvested in our tech franchise to accelerate our progress.

As a simpler and more focused organization, management and the broader organization can concentrate on opportunities that will have the greatest impact on our growth, profits and shareholder value.

So moving on to creating a single streamlined organization, the first element is realigning resources to support our tech-focused businesses.

Dice, ClearanceJobs, eFinancialCareers and our new products Open Web, getTalent and Lengo.

DHI has always been one entity, but simplifying the organization further, we can mobilize our talented people for the most important projects.

The functional structure will enhance the company's ability to execute, developing new products more quickly and leveraging marketing resources more efficiently.

One of the goals of creating a simplified organization is building on and enhancing the Dice platform.

Dice comprises roughly half of our business today, and is well established as the premier tech talent acquisition platform in the U.S. with a growing international presence.

That said, Dice faces competitive pressure from newer recruiting solutions, and we need to enhance its value proposition for employers and professionals.

We've identified 3 areas to enhance Dice's value.

The first is deepening engagement with professionals with career management solutions.

The second is solving recruiter pain points.

And the third is shifting the go-to-market strategy to a suite of solutions with an enterprise sales team focused on strategic selling.

We made project -- progress on some of these and as a more nimble organization, we will accelerate our progress.

Deepening engagement with tech professionals is a theme we consistently touch on.

We envision Dice as the hub for tech professional career management, serving professionals' needs throughout the arc of their career, whether it's job searching, skills assessment, career mapping or career-related content.

Today, Dice offers a suite of career solutions, but we need to continue enhancing these solutions to increase the nature and frequency of interactions with professionals, where tech professionals are connecting with Dice on a monthly or weekly basis rather than few times a year.

The Dice careers app is a great example of how we're launching tools that meet tech professionals' needs and increase engagement.

The relaunch of the app last spring, coupled with new tools we added like skills mapping and market value calculator has driven a significant increase in activity with downloads for the app up over 70% year-over-year, unique visitors up 86% and unique applications on the app also rising.

In March, the app drove about 5% of all unique applications on Dice in the U.S.

So in summary, deepening engagement professionals is the core of what we're doing.

Another key element, reinforcing Dice's value proposition, is solving recruiter pain points, and we're addressing this in multiple ways.

We've updated the go-to-market strategy for Dice implementing a model that emphasizes profile views, so that's both Open Web and in the traditional Dice database, and offers more flexible product bundles.

This strategy is driving greater experimentation and adoption, evidenced by a 98% increase year-over-year in Open Web customers as of March 31, with Open Web penetration of Dice recruitment package customers reaching a new high of 30% compared to 14% a year ago.

Keeping DHI top of mind and relevant to recruiters work flows, another key to our success or engaging within the recruiter workflow through search API integrations on the Chrome extension to improve performance attribution and client retention.

With the search APIs, the customers' applicant tracking system automatically downloads profiles from our database.

This integration ensures that we're seamlessly and consistently putting new and relevant candidates in front of recruiting customers.

This results in the significant increase in the number of profile views from our database.

In addition, the candidates sourced through our API integrations were tagged, so to speak, in the customers ATS, as Dice-provided candidates, which ultimately improves attribution.

We completed over 700 API integrations to-date, with overwhelmingly positive results for those, translating to higher usage and renewal rates for those customers.

A Chrome extension has driven more usage within the Dice product and higher engagement with the customers.

Early metrics here are positive and we expect more significant growth in the coming months.

As the recruitment process further shifts to a -- more of a sourcing model, employers are looking for insights, qualified candidate leads and increased efficiency.

We're innovating with new Dice recruiting solutions that address the demands of the evolving market.

For example, we've launched a partnership with HackerEarth, which enables us to offer customized talent assessments.

These talent screening tools are a differentiating point for us and also build efficiency for employers with tech needs.

We're not stopping the assessments and we're developing a pipeline of new services.

So stay tuned for more soon.

In the longer term, we see opportunities to enhance Dice's value proposition to recruiting customers by offering Dice's part of a broader suite of solutions, including our getTalent CRM service and Lengo, our hyper-targeted social media ad service to address employers' evolving talent sourcing needs.

We have a sound plan for how to focus on these resources.

We're in the early stages of executing that plan, and while current trends for Dice remain challenging, we're seeing evidence -- elements of our plan are delivering results, such as Open Web, the API and the Dice Careers app strengths, that will eventually help return the business to growth.

A strong core tech business is also critical to the success of our next-generation solutions, getTalent, Lengo and Open Web.

Our core tech customer base of over 10,000 offers a pipeline of potential customers, as the recruiting function becomes increasingly strategic and the future companies will require more sophisticated tools, which will be the primary driver of growth for our company.

Some of the key areas we expect to see strong growth in recruiting include expanding and managing talent pools, employer branding and data and analytics.

The foundation of our next-generation solutions is our Open Web social sourcing service.

Open Web creates aggregated social profiles from over 200 publicly available sources.

While Open Web is integrated into our Dice offering, it also feeds our other next-gen services.

The product we're most excited about is getTalent, our SaaS-based candidate relationship management solution, which helps recruiters build and manage talent pipelines, improving efficiency of HR organizations in a pre-applied base.

Today we have a relatively small but established customer base.

And key priorities for 2017 include fine tuning our go-to-market plan, refining the sales process and building the sales pipeline.

We believe getTalent can become an indispensable tool for recruiters at enterprise-level companies.

In fact, just this week, we learned that getTalent was the winner of 6 American business or Stevie awards, including a gold for new product to service of the year in software relationship management solution category, and we also won a silver for our innovative mobile app, and I anticipate many more good things to come for getTalent in the future.

Lengo is our hyper-targeted social recruiting and marketing service.

It performed well outside the U.S. to date, and is gradually gaining momentum in the States.

There are a number of live Lengo campaigns in the U.S. and Europe, and we're learning from our customers which features are of the most value.

The data analytics involved with the Lengo campaign offer us another way to provide value to customers.

Understanding when, where and how candidates interact with different messages enables more efficient future campaigns and general recruiting tactics.

And lastly, FreshUp is our candidate profile updating and depending solution, which is built on Open Web technology and integrated into getTalent.

We continue to evaluate the industry for evolving trends and compelling nexgen solutions that would complement our portfolio.

Given the dynamic nature of the talent sourcing industry and large number of start-up companies, we expect to be able to add other services through partnership or acquisition over time.

The really exciting thing about our business is that when you marry our strong core tech talent acquisition franchise with our next-generation solutions, we provide a talent solution offering that is totally unique in the market.

If you start with the foundation of Dice as the leader in tech-talent acquisition, the core business and you add Open Web, you have unique product offering.

There are other companies that do what Open Web does, but nobody has integrated a proprietary database like Dice with an Open Web-type solution.

Then there are other companies that do what getTalent does, but nobody has the ability to funnel talent into a getTalent-like solution like we do.

And other people do what Lengo does, but nobody has the ability to leverage Lengo into a getTalent service and use the Open Web and Dice interactions to expand that opportunity.

And lastly, FreshUp, we don't believe there is others that do anything like FreshUp.

But it provides a [unique value] proposition for Lengo and for getTalent.

So we have a unique combination of assets that can really move us forward.

We understand the challenges that we have and we're focused on those challenges, but the unique combination and set of assets we have, we believe position us well to move the business forward.

And with that, I want to turn it over to Luc.

Thanks, Mike.

Good morning, everyone.

Today, I'll first review the key points of our first quarter 2017 financial performance.

And then I'll provide some directional insight on how we view the rest of the year.

Note that all my comments today exclude the results of Slashdot Media, which we sold in early 2016 as well as the impact of other items noted in the adjusted EBITDA reconciliation that's included in the release.

First quarter 2017 results were consistent with our expectations, namely that the yearly rate of decline in revenue would begin to improve on a constant currency basis.

While our financial results remained under pressure in the quarter, we continue to see progress in the adoption of the new offerings at Dice, particularly those services that help solve customer pain points, which should improve retention rates as the offerings reach subscale.

First quarter total company billings and revenue declined 9% year-over-year and 8% excluding the impact of foreign exchange.

Our energy business continued to impact the company growth in Q1.

Excluding energy and foreign exchange, overall revenue declined 6% year-on-year.

First quarter revenue in our Tech & Clearance segment declined 7% against last year or 6% excluding foreign exchange.

Tech & Clearance billings declined 9% or 8% on a constant currency basis with a 14% decline in Dice U.S., partially offset by 22% increase in ClearanceJobs.

Dice U.S. revenue declined 11%, driven by a 9% decline in recruitment package customers to 6,800 as we faced competitive pressures on our customer renewals with a rate of 65% this quarter.

We feel we can turn that trend as our new products continued to increase our penetration into customer workflows.

Average monthly revenue per recruitment package customer was 1,110, which was down slightly from last year's level, as we offered new alternative volume entry points.

At the end of the quarter, 95% of our recruitment package customers had annual or longer contracts as compared to 92% last year.

Dice Europe revenue declined 1% on a constant currency basis, mainly due to the winding down of our Benelux business in the fourth quarter of 2016.

The first quarter saw another strong showing for ClearanceJobs, with revenue growing 26% from continuing robust uptake of its performance-based products and favorable market dynamics.

Revenues on billings for eFinancialCareers declined 12% year-over-year, but only 3% excluding the impact of the weaker sterling, with the uncertainty of Brexit mitigating improvements we're seeing in other markets in Europe and Asia.

Moving to our non-tech businesses, energy revenue declined 43% year-on-year or 41% excluding foreign exchange.

Billings were down 28% year-over-year, but are stabilizing on a sequential basis, with the U.S. business starting to show some modest improvement.

Hcareers Billings and revenue declined 6% year-over-year, driven by increasing competitive pressures mostly from aggregators.

Health eCareers quarterly revenue in billings declined 4% against last year, as reductions in our traditional job postings business were higher than the uptake of our new performance-based products.

Turning to the income statement.

First quarter operating expenses before depreciation, amortization, stock-based compensation and disposition and other costs declined 4% driven by reductions in cost of revenue, sales and general admin, offset by increases in marketing and product development.

Our cost reductions were mainly attributable to slower hiring as we contemplated internal redeployments to support tech-focused initiatives.

Adjusted EBITDA was $10.5 million for the first quarter as compared to $14 million in the prior year for a margin of 20.1%, which was about 4 points lower than the prior year, primarily due to Dice U.S. and the non-tech businesses.

Depreciation and amortization declined $2.2 million from last year due to energy-related impairment charges in 2016 and certain intangible assets becoming fully amortized in the third quarter of '16.

Stock-based compensation decreased due to declining grant values, while interest expense decreased due to lower debt.

Our effective tax rate this quarter was 62%, but this higher rate was primarily due to discrete items, mostly attributable to a change in accounting rules for tax impact of employee stock incentives.

Excluding these items, our effective rate would have been approximately 38%.

Net income for the quarter was $1.3 million versus $1.1 million in the prior year.

Based on 48 million diluted shares, this quarter's earnings per shares was $0.03 as compared to $0.02 last year or $0.04 and $0.07, respectively, when you exclude exceptional items.

In the first quarter, we generated $14.5 million of operating cash flow and $10.3 million of free cash flow compared to $12.7 million and $10.4 million, respectively, last year.

Our March 31, 2017 balance sheet is healthy, with cash of about $24 million and total debt of about $77 million for a net debt of about $53 million.

Deferred revenue was approximately $90 million at the end of the first quarter, slightly up from last year's first quarter, mainly due to a slight increase in average contract length at Tech & Clearance.

Now turning to our 2017 outlook for the entire business.

Our financial expectations for the year are generally in line with the view we expressed last quarter, but with a modestly weaker top line offset by corresponding lower expenses.

We expect that revenue will decline at a slower rate than experienced in 2016, with trends starting to improve later in the year.

Key drivers will be first increasing penetration of Dice customer integrations and new offerings to improve customer retention.

Second, continued strong growth on ClearanceJobs, although we wouldn't expect the current 22% billings growth to maintain such a strong pace for the entire year.

Third, we're seeing stabilizing trends for Rigzone and eFinancialCareers, but the latter should continue to be a challenge in the Brexit environment.

Finally, we expect health care revenue will increase, but at a slightly lower rate than it did in 2016.

Moving to expenses.

We plan to continue supporting our tech-focused strategy with a view to returning the business to top line growth in the next year.

With our strategic alternatives process concluded and our organizational realignment underway, we should now see quarterly spending grow gradually against the corresponding periods in 2016 as we increase headcount for tech-focused product development and sales.

Ongoing cost controls in non-tech brands, along with some efficiencies from our organizational focus on simplification will partially offset the tech-related increases.

Other costs should remain relatively in line with 2016 after adjusting for exceptional items in both years.

With slowing revenue declines and modest increases in expenses, we expect some margin compression in 2017 as we invest in our tech-focused business.

These investments are critical to reinvigorating our tech franchise, but they do take EBITDA below what [wouldn't] be our normal run rate.

However, we would expect to see margin expansion within a few years as customer retention rates recover and new product penetration achieves scale.

We expect the tax rate for the remaining quarters this year to revert to our regular rate of approximately 39%, excluding discrete items, and the dilution count to be around 50 million shares.

In conclusion, we believe the strong fundamentals in our business, which continues to generate healthy cash flows even while we're investing, along with our solid financial position, will enable us to carry out our tech-focused strategy and return our business to growth.

And with that, I'll turn it over to Mike.

Thanks, Luc.

So in summary, we understand the competitive challenges we have and we know what we need to do to turn the business.

I think the refined focus will benefit all of our initiatives.

Focusing on increasing engagement with professionals and providing them more services is critical to returning the business to growth.

But we have a unique set of assets and unique data in that we can capitalize on that to grow the business, but it will take some time.

We're absolutely focused on it as an organization.

In closing, I just want to thank all of our employees for their hard work and dedication.

We have a passionate group who are committed to turning the business around.

And I want to thank them.

And with that, we'll turn it over to questions.

(Operator Instructions) The first question comes from Kip Paulson of Cantor Fitzgerald.

Just a couple for me.

For guidance you mentioned, you expect the year-on-year rate of revenue decline to abate later in 2017.

But comparing this to prior quarter where you mentioned the rate of decline would be less than half the 2016 loss, do you expect it to be more than half now?

Just some additional clarification there would be helpful.

And then second, could you give us a sense of Open Web additions within the existing user base versus new DHI customers that have signed up for Open Web?

Have we reached that point where Open Web is the primary value proposition for Dice subscribers?

And when does this offset downward pressure in the legacy products?

Kip, it's Luc.

On the guidance, we feel, I guess, with the first quarter and with the experience of that, we see that the business is progressing, but there are some hesitancy that took place.

You saw the renewals were at 65% in the quarter.

So we see that growth coming.

We still see the progress.

And it's going to come, but probably a little later than we had anticipated last quarter.

So Kip, on the Open Web question, the majority of -- the vast majority of Open Web customers are sold to existing.

But it does help win back customers, who may not have renewed in the past as another offering and as another way for them to enter the tech recruiting market.

So there are win backs we get from Open Web, but the vast majority are customers that we already have and have had on Dice.

And just -- sorry, the last question.

Can you ask again?

Yes, just as far as when we're thinking about the Open Web value proposition here.

When does the addition to the business really offset downward pressure in legacy products?

How do you think about Open Web offsetting those more legacy, traditional declines?

So I think one of the things that we're focused on in Open Web is expanding the opportunities within existing customers.

So we have a number of customers who are new to social recruiting and want to try it.

So where we have customers that may have a significant number of users of Dice in the proprietary database, they have fewer users who are subscribed to and have access to Open Web.

So they don't have the ability to do the search that combines the two in integrated search.

Over time, we expect further penetration of Open Web.

I don't think it's this year.

To literally answer your question, I think it's into next year.

Okay, great.

And then just one more, if I could.

ClearanceJobs has really been a consistent double-digit grower for you guys for a while.

Are there any learnings from the clearance business that you've already applied or can apply to the core Dice business?

So that's a great question.

There is some amount of uniqueness to the security-cleared business, as we say often, it has certainly benefited by having supply and demand driven by the same entity, the U.S. government, although as a reminder, the vast majority of our customers are not the government but are contractors for the government.

But the government certainly aids by slowing down the clearance process and creating a supply issue.

There are a handful of things we've learned.

Certainly, variable pricing and pay-for-performance type products, which we've integrated into the Dice offering and more usage-based structures, certainly come from ClearanceJobs.

So there is some learning.

But ClearanceJobs is a unique product for the reasons I mentioned.

(Operator Instructions) The next question comes from

Jafar Azmayesh of 1776 Holdings.

It relates to the suspension of your buybacks.

Will you help us understand in the past, last year for instance, $30 million was put to buybacks, all from free cash.

Is the estimate now that there is no free cash or where is that free cash going?

You've mentioned investing in the technology first, but I'm trying to make the numbers add up here.

Help me do this.

Sure.

So we expect to have free cash flow this year.

As there is no change in that view and we had free cash flow in the first quarter.

As we refine the strategy and hone in on the tech-focused strategy, we are focused on investing in that business.

And that's the primary goal.

But we'll leave open the possibility that there may be buybacks in the future.

But it's not what we're focused on right now.

But to be clear, there is free cash flow.

And, okay.

So I guess, what I'm still trying to pin down, what is exactly the plan with the free cash flow?

When you guys came out of a strategic review and we're new to the name, we just started building a position this quarter.

So maybe there is a lot we're missing.

But you came out of the strategic review with the conclusion, "We're not going to sell ourselves and we're going to suspend our buybacks," which is the first time we've seen a conclusion like that.

And from there you mentioned, "We're going to invest in the business," which is great, except I don't see where this free cash flow is going to be put towards investing in the business.

Help us understand, is it going to be debt paydown?

Is it going to be acquisition?

Because the track record there has not been terrific.

How can an investor get comfortable with where the free cash is going to go?

So for now, we are leaving it as a fair amount of flexibility.

It could be debt paydown.

But it could be partnerships or investments where we get access to new products and new services.

For instance, we made a small investment in HackerEarth to help accelerate the growth of that business and benefit the partnership we have with them.

That's one example.

One tangible example.

So I would view it now as flexibility and we'll see as we go through the year the rate of free cash flow growth, and we'll make the decision as we go along.

Okay.

So the idea is maybe an update by the end of the year on that front?

I think you'll hear periodic updates from us.

I don't think it's end of year.

I think we'll assess as we go along as we always have.

Where we have opportunities to expand our offerings, whether we do it organically or through partnership or investment.

So I don't think it's end of the year.

I think we'll give periodic updates.

And we're happy to do it as we go along.

The next question comes from Kara Anderson of B. Riley & Co.

Just one for me.

Given the competitive environment, can you talk about your strategy for pricing at Dice?

Sure.

So we have certainly become more flexible in the types of packages we offer.

We've added, with the advent of Open Web, we've added more view-based pricing as opposed to fixed pricing per user.

So there is a fair amount of flexibility.

We've created more entry-level packages.

But at the end of the day, where we are now is, what we're yielding per customer that range from smallest customers to the very biggest customers, is roughly in the range that we've been in.

So it's $1,100 plus, and that's been relatively consistent for the last year.

So I would say, we're more flexible on the types and structure.

But the yield is roughly the same.

This concludes our question-and-answer session.

I would like to turn the conference back over to Brendan Metrano for any closing remarks.

Thank you, Andrew.

We appreciate everyone's interest in DHI Group.

If you have any follow-up questions, you call (212) 448-4181 or e-mail IR at dhigroupinc.com.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.