DHI Group Inc (DHX) 2018 Q1 法說會逐字稿

Good morning and welcome to the DHI Group Inc. First Quarter 2018 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded. I'd now like to turn the conference over to Rachel Ceccarelli. Please go ahead, ma'am.

Thanks, Keith, and good morning, everyone. With me on the call today is Art Zeile, 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 2018. A copy of that release can be reviewed on the company's website at dhigroupinc.com.

Before I hand the call over to Art, 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. Listings 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 and the planned divestitures of our noncore businesses and the possibility that any such divestitures do not occur. 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 in the sections entitled Risk Factors, Forward-Looking Statements and Management's Discussions and 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 the federal securities laws. Today's call also includes certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin. For details on those measures including why we use them and reconciliations to the most comparable GAAP measures, please refer to our earnings release that has been furnished to the SEC on Form 8K, which is available on our website.

And now with that, I will turn the call over to Art.

Thanks, Rachel. Welcome, everyone, and thanks for joining us this morning. I'm just hitting the one-month mark as the CEO of DHI. Because of this, I thought I'd spend some time today talking about how and why I took this position, how I viewed DHI in the marketplace and what my expectations are for the business going forward.

Since I'm relatively new to the company, I'll let Luc take a deeper dive into the key financial and business metrics for the first quarter. Then we'll open it up for your questions.

I'll start with how I came to DHI and what motivates me to be here. I'm here because our core value proposition truly resonates for me. DHI creates solutions that connect employers to professionals to propel their businesses forward. Prior to joining DHI, I was the cofounder of Hosting, a company, which delivered advanced cloud solutions. A decade back, we were one of the first private cloud service providers in the United States, developing and delivering a full suite of solutions for clients that could see the potential of cloud computing.

The company upgraded its product catalog continuously hundreds of times, adjusting constantly to the shifting demands of the market. A deep pool of engineering talent drove the success of that company. In fact, every company I have founded has basically been an army of technology professionals, bringing new solutions to a fast-moving market.

I know all too well the headaches and difficulty of recruiting highly skilled tech professionals and have been a customer of Dice to source the best and brightest. This starts to answer why I'm here. Throughout my career, I've always created or run a business that solved the pain point I personally experienced myself. Building high-performance teams is the core challenge I've faced in every step of my career. It is a natural fit for me to end up here at DHI where we are creating solutions that enable companies to win the war for talent and help candidates find opportunities that fulfill their career ambitions.

Here is a little more background on me and how my experience is a good fit for leading DHI into the future. In 2006, I led the turnaround of a health care technology company that created software to deliver physician exam records to dozens of government agencies. The turnaround consisted of adding new revenue streams and adjacent commercial markets and redesigning the fundamental system workflow.

This experience led me to realize that a successful business constantly challenges its market assumptions and how it can deliver value to its clients.

In 1997, I founded one of the first public data center companies in the world. This company developed a data center products and service standards that underpinned the e-commerce companies you see all around us today.

Earlier still in my career, I was a cofounder of one of the first videoconferencing service companies. We developed advanced scheduling software that allowed companies to hold videoconferences connecting dozens of sites into a single meeting. As the founder of these technology businesses, I have successfully launched dozens of product development initiatives. I bring a strong methodology to define the market need, drive product from concept to execution and pivot quickly when customer requirements change. One of my core leadership principles is to stay close to the client. The war for talent is constantly changing, and we have to focus on our client's evolving needs.

DHI is very fortunate to have a base of over 10,000 customers to work with, including some of the top technology, financial services and recruiting firms in the world.

A big part of my onboarding plan over the next 90 days involves talking to our clients, prospects, technology professionals and DHI team members to understand where we need to focus our product development efforts.

One of the first revelations on the job was to recognize that one of our key brands, ClearanceJobs, can be our internal test bed for client-focused innovation. ClearanceJobs serves the 3.4 million professionals with government clearances.

The heart of ClearanceJobs is what we have branded the Cleared Network, a private protected community of employers and candidates. We believe that ClearanceJobs is the first recruitment site in the world to provide instant voice and text communication between an employer and candidate. ClearanceJobs also incorporates a talent radar capability that allows candidate activity on the site to trigger recruiting alerts for employers.

At the same time, ClearanceJobs also sets specific connection limits so that candidates receive only the communication they desire.

There is a reason ClearanceJobs is growing revenue at a rate of 20%. It's because it excels at product innovation. ClearanceJobs serves a specific community, but the many aspects of its product innovation can be applied to our other brands. A great example is IntelliSearch. This technology employs machine learning and latent semantic indexing to determine relationships between jobs and resumes.

IntelliSearch allows recruiters to cut and paste a full job description into the search field to produce better candidate matches.

Our clients now have an incredibly powerful alternative to bullion search that allows them to spend more time recruiting and less time mastering search string logic.

We used ClearanceJobs to rollout IntelliSearch in 2017 and are working to bring those same advanced search capabilities to our other brands quickly. Search capability is a core competency inside of DHI, with a dedicated team of engineers tasked with refining our algorithms.

IntelliSearch also highlights advancing our basic value proposition to efficiently deliver the highest quality candidates with the right experience and skill sets.

I want to spend a moment talking about one of the key metrics we have highlighted in past earnings calls. The number of recruitment package customers has been an important tracking metric for Dice. In order to efficiently grow, however, we need to get more granular than a top-level client count. A key priority will be for DHI to better understand and categorize which clients best embrace our value proposition and can grow with us. I want to target that set of clients and prospects. The good news is that businesses across the globe and here in the United States are in the process of being transformed by technology.

According to Evans Data Corporation, there are about 18.2 million software developers worldwide, a number that will grow by 45% when we get to 2019.

The DHI solution set operates at the intersection of the supply and demand for tech talent. I've seen this market opportunity in other companies I have run and I believe that by applying the experience and lessons I have learned over time, I can help the company execute on its strategic objectives and realize its full potential. With that, I'll turn it over to Luc to provide a summary of this quarter's financials and we will look forward to opening it up for your questions afterwards.

Well, thank you, Art, and good morning, everybody. Today in addition to discussing our financials, I'll update you on our progress in the divestiture of our nontech businesses as well as talk about some of our product highlights. Finally, I'll provide you with additional context on the share repurchase program we announced today.

We've had many changes and unusual items in Q1. So let me set the stage for ongoing business by covering these first. We recorded a $1 million charge in the quarter related to a class action lawsuit filed under the Fair Credit Reporting Act.

The charge reflects an agreement in principle for a settlement, which, if approved by the parties and the court, will resolve all claims in that matter. We incurred approximately $400,000 of legal costs associated with this suit as well as in pursuing the Olipro civil suit we discussed last quarter.

We also incurred $1 million in disposition and related costs associated with our ongoing divestiture process, some staffing reductions at Rigzone and costs pertaining to the CEO transition.

Regarding the dispositions of our noncore businesses, we'd previously announced the sale of Health eCareers in December for $15 million. In January, we transferred ownership of BioSpace to its manager and retained a minority share in the company.

In February, we completed the sale of the Rigzone Data Services division for $4.2 million. All these divestitures affect the comparability of our financial results for the prior year, so we've provided historical financial details of these businesses on the Investor Relations page of our company website.

As we mentioned on our last call in February, we've been receiving strong interest in Hcareers, our hospitality business. We're currently engaged in active discussions with a potential buyer and we hope this will lead to a transaction in the near future. But if our negotiations were not to culminate in a transaction, we're prepared to hold onto this business, which is finding stability and continues to generate attractive contribution margins.

My commentary today regarding year-over-year performance will exclude all of these items, which impact comparability with prior periods.

Let me give a brief update on some of our product developments in the quarter. We now have had our functional organization in place for more than 6 months and are gaining momentum in our product focus to engage quality professionals with relevant content and jobs information and providing efficiency in the recruiting process for our customers.

Art has already given you some insight on ClearanceJobs products, so I'll focus on Dice and eFinancialCareers. In the quarter, we launched an updated version of our salary predictor on Dice to help professionals gauge their worth in the market. Our unique machine learning model provides salary estimates that build on factor combination of traits such as title, skills, location, years of experience and education.

While it's still early on, we're seeing an encouraging uptake in the key metrics surrounding the product. The salary predictor coupled with a tool to explore career paths can drive strong engagement.

The interactive nature of these tools provides new channels to encourage tech professionals to complete their profiles and leverage relevant insights to power their career.

We've also continued to expand the number of customers using ATS integrations with Dice, which enables a more efficient access to qualified professionals. In the first quarter, we onboarded over 120 ATS integration clients, ending the quarter with over 1,000 such clients. This is one more way we can engage our customer and efficiently present qualified candidates and ultimately improve attribution to Dice.

During the quarter, Dice launched a new homepage, driving 100% of traffic to a redesigned, user-friendly homepage. The redesigned page has improved tech professionals' engagement with a decrease in bounce rates and increase in applications to jobs and an uptick in traffic from the homepage to job search results.

This follows the recent upgrade of our eFinancialCareers homepage, which provided a more personalized user experience for candidates and helps lead them to job views. Later on this year, we plan to have more to share about new features our team has been working on, which we feel can directly improve quality, relevancy and effectiveness for both professionals and recruiters. Now let's move on to our financial review. For the first quarter, results were consistent with our expectations with total revenue of $43.1 million, which was 4% below last year on a comparable business bases.

Our tech-focused segment revenue declined 4% and corporate and other revenue, which includes Hcareers and the remaining Rigzone business, declined 2%.

Exchange rates benefited both a consolidated and tech-focused revenue by 2 percentage points this quarter.

Dice revenue in the U.S. declined 10% with the number of recruitment package customers ending the quarter at 6,200. The renewal rate on count of annual recruitment package customers remained at 65%, but we had a revenue renewal rate in the mid-70%, which is a few percentage points higher than Q1 of 2017.

Average monthly revenue per customer was $1,112 and 96% of our contracts were annual, both are consistent with our recent trends.

For eFinancialCareers, revenue was up 9% versus prior year but all due to favorable foreign exchange.

Brexit did not seem as disruptive as anticipated as we saw improvement in the U.K. market with our bookings increasing 3% year-over-year.

ClearanceJobs has continued a strong performance, turning in a 20% year-over-year increase in revenue. The market for security-cleared professionals continues to be highly competitive, resulting in a difficult hiring environment for our customers, but our leadership in that marketplace continues to provide an extremely compelling value proposition for our customers.

Moving onto our other businesses. At Hospitality, we saw bookings growth of 2%, riding on its solid brand equity in that space. Revenue declined 5%, but that was mainly due to timing of credit usage. The remaining Rigzone careers business continues to improve in line with the macro environment, with revenue for the quarter growing 8% year-on-year.

The new revenue recognition standard, which we adopted on January 1, did not have a material impact on revenue, but it did change our accounting for commissions. Under the new guidance, commissions are now capitalized when they are earned and amortized over the expected average life of the contract.

On January 1, we did a catch-up adjustment to capitalize prior year's commission related to contracts that were still in force at that time.

Our commission and amortization expense was $1.3 million lower than the commissions actually generated in the quarter. The difference for the remaining quarters of 2018 should be much less significant as the capitalized balance growth and amortization converges with the level of commissions generated. Operating expenses before depreciation, amortization, stock-based compensation and disposition related and others costs decreased 1% year-over-year, even as we continued to invest in marketing and product innovation. We continue to find efficiencies in our business stemming from our simplified structure and careful management of other discretionary and support expenses and we're taking a measured pace in our hiring cadence. Excluding the divestitures and unusual items I mentioned earlier, adjusted EBITDA was $9.7 million for the quarter for a margin of 23%.

Depreciation and amortization expense declined approximately $300,000 from last year, mainly due to the divestitures. Stock-based compensation was flat with the prior year, while interest expense declined 31% due to the lower average debt.

Our effective tax rate for the quarter was 44%. This rate exceeded our ongoing effective tax rate of 25% due to discrete -- to a discrete $1.3 million tax impact of the share price change on our stock compensation expense that occurs on the share price change between the grant and divesting dates.

Net income for the quarter was $3.5 million or $0.07 a share. The items affecting comparability with our prior periods that I mentioned earlier along with the discrete tax item on the stock-based comp had a favorable impact of $0.01 on earnings per share.

We generated $6.9 million of operating cash flow in the first quarter, a decrease of $7.6 million from last year. The decrease is due about $3 million from lower earnings and about $4.5 million from changes in working capital, primarily due to some lengthening of customer billing terms and the timing of payments to vendors.

Our balance sheet remains healthy with cash of about $16 million and debt down to $38 million. Deferred revenue at the end of the quarter was $78 million, down $5.5 million from year-end. Divestiture has caused $2.3 million of this decline, with the remaining due to booking -- lower bookings from our tech businesses.

Looking ahead, our outlook for 2018 is largely unchanged from what we provided in February. We're assuming that high demand for tech professionals and current competitive dynamics will continue. This outlook is based on similar levels of revenue renewal rates continuing at Dice, favorable market dynamics for CJ and a stable business for eFinancialCareers all the while maintaining similar spending and margin levels.

Our continued investment in marketing and product will be offset by efficiencies in other areas. Depreciation, amortization, stock compensation and interest expense should be consistent with first quarter run rates. The tax rate for the remaining quarters this year should be approximately 25%, and the diluted share count will be approximately 51 million.

I'd now like to provide some context around the $7 million share buyback program we announced today. First, let me reiterate our capital allocation policy continues to prioritize investments in our core business, more so now, as we work with Art on a fresh assessment of initiatives that can help return our business to growth.

That said, there are current events, which have influenced our decision to implement a plan at this time. One, we have already made good progress in divesting 3 of our 4 noncore businesses, which has provided us with additional capital. Two, over the last few weeks, our stock has been -- has seen significant volatility, volume and pricing pressure, particularly since the announcement of our removal from the S&P 600 Index. And three, our current low level of debt and additional capacity under our credit agreement, coupled with ongoing cash flow generation, reduces our risk of participating in the market during this period of technical shareholder turnover. With these events as a backdrop, we believe that using our portion of our capital at this time to repurchase our shares offers a compelling return opportunity for our shareholders while taking very little from our capacity to support our strategy to return to growth and keep our options open. So to recap, the first quarter saw continued growth from ClearanceJobs, stabilizing at eFinancialCareers and encouraging renewal rates at Dice. We still have work to do at Dice, but the progress we're seeing in our product improvement efforts gives us confidence in turning the trends in the near future. During this period of change, we'll be prudent in prioritizing our spending to initiatives with a clearer path to solving client needs. And we'll continue to be sharply focused on maintaining profitability. Before closing, please note I'll be presenting at the Needham Emerging Technology Conference on May 15, in New York, and the B. Riley Investor Conference on May 23, in Santa Monica, and both conferences will be webcast and available on our company website. As always, I thank you for your interest and now turn the call back to Art.

Thanks, Luc. I want to thank all of our 550 employees worldwide for their hard work in this past quarter. I look forward to learning from all of you in the weeks ahead. With that, I'll turn it over to your questions.

(Operator Instructions) And this morning's first question comes from Kara Anderson with R. Riley FBR (sic) [B. Riley FBR].

This question is for Art. Can you speak to your specific goals this year and next, and can you talk about where you expect to focus your efforts first? And second to that, perhaps it's too soon to say, but is there anything that you have identified initially that you think needs more focus or needs to be rethought in terms of the strategy?

I really appreciate that question, Kara. I've committed to the board that I'd spend the next 90 days really having a thorough review of all of the functional areas of our business, our brands and talking as much as I can to customers and prospects and so I'm going to be doing that. And very deeply involved with all those different communities that are relevant to DHI.

As I look at the rest of this year, the 2 main drivers for me are going to be a real deep focus on the sales program, how to make that -- make sure that, that is really an efficient engine for growth as well as where we are with product development. As I kind of explained at the very beginning of the call, we really do have this innovation test bed in ClearanceJobs that allows us to essentially put innovation into a community that is very receptive to new ideas. We want to take those innovations that we believe that we can bring out to other brands and make sure that we are fast followers with those brands. So I'm going to be spending a lot of time really understanding the context of where we stand competitively in the market for product innovation and using ClearanceJobs as a launching point for making sure that we are best in breed across all of our brands.

Great. And then maybe this one's for Luc, but so you guys have made a fairly consistent ARPU for the Dice customers for the last 12 months. Can you talk at all about your pricing strategy, how it's evolved over the past year or, I guess, couple of years to sort of maintain that, I guess, level?

Yes, I'd say our pricing has been relatively consistent. I -- we have introduced pricing performance -- performance-based pricing, but still within -- that performance tends to be within the customers' expected use. And it's kind of held steady on that basis. We've also met some competitive -- just to be more competitive and to get customers a try, we will play with billing terms, but in terms of the pricing itself, we still price according to our main recruiting package. And that's still very much consistent.

Great. And then, can you talk at all, and maybe you can't, but I'll try anyways, about how long you've been engaged with the potential buyer of Hcareers and sort of how that's progressing?

Well. I can tell you it's progressing, it's progressing well. We've had -- we have strong interest in it. And I can tell you, it's been long enough that we're basically working with a particular potential buyer, but more than that I can't give you more detail than that.

(Operator Instructions) Okay. As there is nothing else at the present time, I would like to return the call forward to Rachel Ceccarelli for any closing comments.

All right. Thank you, Keith. We appreciate your interest in DHI group. If you have follow-up questions, you can call the Investor Relations line at (212) 448-4181 or email, ir@dhigroupinc.com. Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.