Q3 2020 DHI Group Inc Earnings Call
Good afternoon, everyone and welcome to the D.H.I. Group incorporated third quarter 2020 financial results Conference call.
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At this time I'd like to turn the conference call over to talk early with M.K., Our Investor Relations. Sir. Please go ahead.
Thank you operator, good afternoon, and welcome to D.H.I. group's fiscal 2023rd quarter financial results Conference call.
With me on today's call are de HIV, CEO Art Daly, Chief Financial Officer, Kevin Boston.
Before I turn the call over to art I'd like to cover a few quick items.
After near and Dear <unk> issued a press release announcing its fiscal 2023rd quarter financial results. This release is available on the company's website at the H.I. group Inc. Dot com. This.
This call is being broadcast live over the Internet for all interested parties and the webcast will be archived on the Investor Relations page of the company's website.
I want to remind everyone that during today's call management will make forward looking statements that involve risks and uncertainties. Please note that except for the historical information statements on today's call may constitute forward looking statements within the meaning of section 21, Yeah. The Securities Exchange Act of 1934.
When used the words anticipate believe expect intend future and other similar expressions identify forward looking statements. These forward looking statements reflect the HIV managements current views concerning future events and financial performance and are subject to risks and uncertainties and actual exam.
Its may differ materially from the outcomes contained in any forward looking statements.
Factors that could cause these forward looking statements to differ from actual results include delays in development marketing or sales the adverse impact on uncertainties surrounding the COVID-19 pandemic and other risks and uncertainties discussed in the company's periodic reports on form 10-K, and 10-Q and other filings with the Securities and Exchange Commission.
D.H.I. undertakes no obligation to update or revise any forward looking statements.
Lastly, during today's call management will be referring to a specific financial measures, including adjusted EBITDA adjusted EBITDA margin and net debt that are not prepared in accordance with the U.S. GAAP.
Information about and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available at our earnings release and on our web site at H.I. Group Inc. Dot com in the Investor Relations section I now turn the call over to art Daily C.L.D.H. I agree.
Thank you Todd good.
Good afternoon, everyone and welcome to our fiscal 2023rd quarter earnings Conference call as always we appreciate your interest in DHR.
Let me first start with a quick update on our operations status as it relates to the COVID-19 pandemic.
Our foremost concern at DHR <unk> is to ensure the health and safety of our DHR community.
As such the majority of our employees continue to work from home during the quarter using the best possible remote communication and collaboration tools.
Our team members, including sales and support marketing and product development continues to be highly effective.
We currently have several office is open though we have made the returned to office optional for all of our employees.
We are looking forward to having more of our employees back in the office when it's safe, but rest assured we are taking significant precautions to make sure. We maintain the safety of our employees whether they are in the office are working from home.
Now lets jump into our view of the quarter, while the pandemic continues to challenge the way, we all live and work we actually saw job postings stabilize during the summer although they were lower in total than the year before.
The sentiment is that many companies paused their hiring during this time as they reformulated their hiring plans based on their view of the economic recovery to come.
However in September we saw sentiment change for the better as evidenced by a notable uptick in job posting as well as an increase in our bookings.
Based on our burning Glaspey there are over 2200 companies that have more than 20 open tech job postings right now companies like Amazon, Microsoft and JP Morgan Chase have over a thousand active tech jobs posted today.
Both the staffing industry analysts and texture of alliance industry research firms that focus on tech centric staffing and recruiting firms are forecasting a bounce back in the eighties staffing market in 2021 to almost pre pandemic levels. The.
Yeah, sorry, eight is forecasting year over year market growth of 7%, which would get the market back to 98% of 2019, I T staffing revenue levels, representing an almost complete rebound.
As I mentioned last quarter. Our report released by Microsoft in July predicts that the worldwide digital jobs will grow from 41 billion in 2020 to 190 million in 2025.
Of the 149 million new digital jobs to be created 98 million are forecast to be in software development.
It's clear that our collective future will be more online and businesses will accelerate their efforts to digitize. These efforts will of course require technologists.
As we continue to execute on our plan to create the best Tech focused career marketplaces, using our technology skills data model, we stand ready to capitalize on these trends.
Now, let me provide some detail regarding our product development efforts during the quarter our product development team continued to deliver its usual high pace of product innovation.
With the release of dice Intel search based job alerts job alerts are automatically generated based on the specific skill set and location found in it candidates profile. This creates a virtuous circle that encourages candidates to register and keep their profiles up today.
This new feature illustrates how our patent pending tech skills data model can be used in several high impact use cases within our platform.
Thanks for crude or profile, which we delivered last quarter experienced the fastest adoption rate. The company has ever seen from any of its product releases in the past two years.
During the third quarter, one third of all dice recruiters completed their new dice recruiter profile.
Recruiter profile allows our clients to enrich their profiles with photos personal information details about corporate brand and culture news and latest hires upcoming events and future hiring needs all of which create more transparency and personalize the recruiter behind the roll.
Thanks for your profile was the first major release in Dices transformation from a job board to a full scale career marketplace.
With the dice marketplace, we're creating a trusted environment, where recruiters and candidates can learn much more about each other to facilitate more effective career discussions.
During the quarter, we also launched Careered clearance jobs client team dashboard, which allows clients to have a full view of the recruitment team activity on the site linking activities to successful hiring patterns clearance jobs continues to be DHR test bed for key market leading features.
We also launched new features on E financial careers call follow voice and video.
A follow feature allows candidates to fall recruiters and get a new speed of their content on a weekly basis.
Recent video allow financing tech professionals and recruiters to connect virtually with video and voice, calling as well as instant messaging through the FC platform all of which are highly relevant in the work from home environment.
These capabilities were delivered as we announced the completion of the first iteration of the fully functional FC marketplace, a huge milestone for the company.
Yes, the follow CJ as the second brand to complete the transformation from job board to full scale career marketplace.
We have many new product releases planned for the fourth quarter.
Dice is completing the design for its own messaging system with an expected launch at year end.
Recruiters and candidates will be able to message each other within the platform and the same pattern as Facebook messenger.
This is the second critical ingredient ingredient for full marketplace capability and creates in platform engagement and stickiness.
Protecting our clients and candidates information is incredibly important to us therefore in the fourth quarter Dice has already released a new authentication and authorization system, which moves it to an industry standard secure lock in protocol. This feature is a stepping stone to multifactor authentication.
Second in early Twentytwenty one.
We are also working on delivering calendar and schedule integration for clearance jobs, which will allow for recruiters and candidate to seamlessly schedule meetings and communicate in general from a system built into the platform and will connect to the user's need of email application last.
Lastly, FC is already released Intel search based job alerts in the fourth quarter similar to what I just described for dice.
Now, let me touch briefly on our sales performance for each Brad before I turn it over to Kevin.
As I've said before I believe we're experiencing a checkmark shape recovery versus a V shaped recovery.
As I mentioned earlier, we saw a notable uptick in sentiment and bookings in September we had several sales teams reach or exceed their pre pandemic bookings production for the quarter as a result of the rebound, including both CJ is new business and account management teams as well as Dices staffing and Rick.
Adding new business team renewed.
Renewal rates for all account management teams improved during the month.
Nice commercial accounts continues to be affected by the current environment due to the uncertainty around hiring plans. As an example, we have worked with one very large enterprise that has dramatically changed our hiring plan four times in the past four months. The good news is that our sales teams pipeline of deal activity has come.
Tend you to grow despite sales cycles lengthening.
We continue to see increased engagement from candidates and the current work from home environment. In addition on the client side. We saw an increase in marketing qualified leads through the contact me form fills on our dice site, which is a leading indicator of pipeline growth.
The rebound in dice is staffing and recruiting new business highlights. The dice is a necessity for staffing and recruiting firms focused on tech and as I mentioned before the need for technologists is expected to grow strongly in the new post pandemic economy.
Due to the success that we're seeing in CJ and Dices staffing and recruiting new business teams. We have shifted several sales reps from Dices commercial accounts team to these two teams with the mantra sell to those who are buying now.
Clearance jobs has been relatively unaffected by the pandemic as its performance is generally correlated to the US department of defense budget, which remains relatively predictable.
We continue to work hard on expanding CJ addressable market through direct sales to us government agencies and expect clearance jobs to add more government customers as we close out the remainder of this year.
Finally, he financial careers remains our most challenged brand it is still being affected by the protest in Hong Kong uncertainty around to hard Brexit and its largest market the UK and the expected longer recession for the global banking industry as credit quality remains uncertain in under control.
Tenuous reassessment.
There is no question that the uncertainty in the banking industry has weighed down FCS performance to date and we'll continue to do so for the foreseeable future.
As I conclude my remarks, I want to reiterate that we are successfully executing on our plan to build career marketplaces for matching tech professionals with employers and we're doing so while exceeding our adjusted EBITDA targets.
We believe we have created a better online platform than our competitors for matching companies with the highest quality tech professionals and believe we can capitalize on the millions of new technologists jobs expected over the next five years, while this growth won't happen overnight and COVID-19, certainly presents uncertainty.
We are confident in our business plan and the continued progress we are making towards achieving our goal of returning to growth.
With that let me turn the call over to Kevin who will take you through our financials and then we'll take any questions you may have Kevin.
Thank you art and good afternoon, everyone.
I'll start by going through the financial results, then add a few comments about the business.
For the third quarter, we reported total revenues of $33.3 million, which was down 2% from the second quarter and 11% year over year.
Nice revenue was $19.8 million in the third quarter down, 3% sequentially and 13% year over year.
We ended the third quarter with 5300 dice recruitment package customers, which is down 3% sequentially and 13% year over year.
Our average monthly revenue per dice recruitment package customer was down 1% versus the year ago quarter to $1122 or $13464 on an annual basis.
Over 90% of our dice revenue is recurring incomes from recruitment package customers.
Our dice customer renewal rate was 63% for the third quarter up from 57% last quarter, but down three percentage points year over year.
Revenue renewal rate was 66% up five percentage points from last quarter, but down 10 percentage points when compared to the same period last year.
While we did see lower in period renewal rates that is customers renewing prior to or at contract termination. We are maintaining an ongoing dialogue with these non renewal customers with the expectation that they will re sign when there is further recovery in the economy.
As we mentioned last quarter, we hired a new leader for our client success organization, who has implemented new processes around onboarding and ongoing touch points that we believe should have a positive impact on both customer and revenue renewal rates.
As we look at dice our strategy continues to be on larger customer relationships. We believe this will put us in the best position for stability and growth.
Currently approximately 13% of our customers generate 50% of our recruitment package revenue, though no one customer makes up 1% of revenue.
We think this is a good balance of a strong stable revenue base without having a significant customer contract concentration risk.
Clearance jobs third quarter revenue was $7.3 million, an increase of 3% sequentially and 16% year over year. This continued solid double digit revenue growth year over year is reflective of clearance jobs strong innovative products and competitive differentiation as well as this.
Somewhat insulated market it serves.
Third quarter revenue for Efinancialcareers was $6.1 million, which was down 1% sequentially and down 25% year over year, when excluding the impact of foreign exchange rates as expected cobot negatively impacted our performance for FC during the quarter in the UK, which is.
Our largest geography by revenue for FC we were impacted by the cobot shutdown as well as the UK furloughs, which were extended through October of this year.
In the APAC region FC second largest geography, we continued to experience difficulties, primarily due to the impact of the Corona virus pandemic.
Turning to operating expenses third quarter operating expenses were $61.8 million, which includes noncash impairment charges of both the dice trade name of $8 million and goodwill of $23.6 million, both of which I will address in a moment.
Excluding the impairment charges operating expenses were $30.2 million, representing a decrease of $1.7 million or 5% year over year.
This decrease in operating expenses was primarily the result of the comprehensive cost management exercise, which began in late March and continues currently as well as more efficient third party marketing spend.
Income tax benefit for the third quarter was $1.5 million, resulting in an effective tax rate of 5%, which includes the impact of the noncash impairment charges.
This rate is lower than our expected statutory rate of 25% due to nondeductible impairment charges and the allocation of loss between jurisdictions.
As I mentioned during the third quarter, we recorded a noncash impairment charges related to the dice trade name of $8 million and goodwill of $23.6 million the.
The impairment charge for the trade name was primarily driven by a decline to the royalty rate used in valuing the dice tradename and assumption driven by the impact of COVID-19.
$23.6 million goodwill impairment is the result of the impact of the pandemic and the expectation that a broader recovery will extend into 2021, whereas previously we expected the recovery towards the end of 2020.
Including these noncash impairment charges, we recorded we recorded a net loss for the third quarter of $27.3 million a loss of 57 cents per diluted share compared to net income of 4.4 million or eight cents per diluted share a year ago.
This quarters net loss was negatively impacted by $29.3 million of charges substantially from the noncash impairment of goodwill and intangible assets.
Last year's net income was positively impacted by 500000 from discrete tax items.
Adjusted diluted earnings per share for the quarter was four cents versus seven cents last year.
Adjusted EBITDA for the third quarter was $7.6 million a margin of 23%, which was consistent with the second quarter of this year and the third quarter of last year.
As we stated on our last call. Our goal is to manage the business to approximately 20% adjusted EBITDA margins.
We continue to focus on supporting our customers as well as investing in sales marketing and product while also being equally mindful of the overall cost structure of the business.
With this our current cost structure has become our new normal for how we think about headcount marketing and other third party spend.
We generated $4.4 million of operating cash flow in the third quarter compared to $4.6 million in the prior year quarter.
From a liquidity perspective at the end of the quarter. Our total debt was $37 million, we had 26.8 million of cash, resulting in net debt of $10.2 million.
Even with the incremental borrowing we did in the first quarter, we still have significant borrowing capacity available to us under our credit facility.
We do expect to begin reducing our debt outstanding in the coming quarters, as we have better visibility into cash flow, notably around customer payments.
Deferred revenue at the end of the quarter was $41.9 million compared to 47.2 million in the second quarter and 51.1 million in the year ago quarter. This is due to the impact of COVID-19, more contracts, having monthly or quarterly payment terms and the normal seasonality of.
Bookings.
When we add the unbilled portion of our contracts to deferred revenue our committed contract backlog at the end of the quarter was down 12% from the end of the third quarter last year.
During the quarter, we repurchased approximately 349000 shares for $854000 or $2.45 per share.
In total we have used approximately 1.4 million of the current $5 million buyback program, which runs through may of 2021.
We continue to believe the buyback is a recognition of the strength in the long term prospects of our business consistent with our previous programs. We will continue to evaluate investment opportunities in the business against buying back shares as you know we also use the buyback program as an opportunity to offset the impact of our employee equity.
Incentive plan.
As we look ahead bookings are improving for the company as a whole.
As art mentioned for dice, we saw notable uptick in job postings and bookings in September as companies increase their use of technology in this environment.
We are seeing strength in our staffing and recruiting business as these firms realize they need our technology to effectively do their job.
With regards to clearance jobs, we expect them to continue to grow because their success is correlated to the US department of defense budget, which relatively speaking has been immune to the environment, we find ourselves in.
For Efinancialcareers careers, we continue to expect significant headwinds as our two largest regions. The UK and APAC continued to be impacted by coated the ongoing geopolitical issues in Hong Kong as well as a potential impact hiring in the banking sector.
Looking forward, we believe we have the right ongoing cost structure in place to operate the business and to support our customers. While at the same time continuing to invest in our business to drive long term revenue growth.
I'm not providing specific guidance, we continue to manage the business to margins in the 20% range.
Let me sum up by saying that while we continue to find ourselves in very challenging times, we feel our business model provides us some protection and predictability and we are confident in the investments we have made in innovation and sales. We remain focused on the continued execution of our business plan and look forward to reporting on our progress as.
We finished 2020 and enter into 2021.
And with that let me turn the call back to art.
Thanks, Kevin I'd like to close by once again thanking all our employees around the globe for their hard work. This last quarter. It is a pleasure to be part of such a great team with that we're happy to take your questions.
Ladies and gentlemen at this time well begin the question and answer session tasks.
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At this time, we will pause momentarily to assemble the roster.
And our first question today comes from Amman, Gillani from B. Riley Securities. Please go ahead with your question.
Hey, guys. Thanks for taking my question.
I guess first question.
Given that FC continues to have declining revenues would surely low visibility.
Have you considered potentially spinning off or divesting that piece of the business.
Oh come on I appreciate the question and yes, you certainly our most challenged business and it continues to face those significant headwinds that we indicated and will for the foreseeable future. Because there is no question that the banking industry is going to be in a longer term recession than many of the other in industry sectors.
Across the globe when we compare you see to CJ, which is continuing to grow really nicely as well as dice, which we expect to benefit from the expansion of tech jobs in the United States over the next five years I think it's fair to say that any continued per or poor performance by sea would offset the positive perform.
Since cgeight and dice and master growth effectively. So we are definitely looking closely at the FCC business and evaluating all our options quite frankly.
So I'd say the answer is yes.
Got it thank you and.
Maybe bit cleaner clarity how.
Like how you expect that recovery of Twoq Q lows in renewals and bookings.
And when do you think.
Hey can begin to inflect backup sequential growth.
So you know each team within the individual brands has its own dynamics I think we saw in October more so than the earlier part of the summer that we.
We're we're growing our renewal rates from a revenue perspective, so we look at revenue and renewal accounts themselves.
If we think about the business broadly speaking.
Especially for dice the largest brand we have a large amount of our revenue tied to staffing recruiting and consulting agencies.
I think that they feel better about their future, we're seeing those renewal rates improve.
We've seen many customers that paused on their subscriptions with dice come back, especially at the end of the quarter.
And new business I would say is the bigger challenge across all of our brands and that makes sense because if it's a new relationship. The client is has to be pretty firm about their hiring plans for the future and this is still a period of time, which is uncertain for many industries.
About their hiring plans, but in general we saw a better end of the quarter than the beginning of the quarter and we feel more confident moving into 2021, obviously when I talk about these kind of figures I'm really talking about bookings and if we book a dollar of revenue.
Today that has to be divided by 12 into the next subsequent 12 month period. So it doesn't reflect itself in revenue immediately but over the long run. So these the firming up of bookings, we expect to essentially allow us to have better revenues towards the end of 2021.
And that's how we would fundamentally look at the situation as it's evolving today.
Got it Okay and then just last question for me can you talk about some of the trends youre seeing in renewal rates in October and started November relative to what you saw in the third quarter.
Yes, I would say that in terms of renewal rates themselves.
October feels like it's another month that is softer than well I should say.
It's a little bit softer than September, but it's still on the same trajectory, meaning that we feel like we are moving towards that check mark shaped recovery in bookings and there are certain teams that are just doing fantastic I mentioned them in my portion of.
The earnings call, we've seen the CJ new business team exceed their pre pandemic level bookings and we have seen the account management team do the same the staffing and recruiting and consulting new business team has also exceeded what they were producing at the beginning of January and February of this.
Sure. So there are certain teams that appear to be acting as an possible engine for growth Thats. The reason why we transferred sales reps to those teams with the idea that we just want to facilitate more bookings wherever the bookings are taking place right now and the great thing about our economic skis leadership of our sales program.
Is that we can be that nimble and take advantage of the trends that we're seeing real time. Another important thing that we're doing as part of our strategy is using the burning glass feed that feed that shows how many tech postings our open each night across.
Across the United States and were being very targeted towards going after those particular clients that we don't have today that have a large number of postings and and trying to sell the value proposition there.
Got it thank you I'll pass it on.
Thank you very much on appreciate the questions.
Our next question comes from Josh Vogel from Sidoti and company. Please go with your question.
Thanks, Good evening, guys hope you're doing well.
Thanks, Josh.
My first question and second quarter in a row.
Talking about how you did see some clients pause subscriptions, but starting to come back.
Are you are hoping for a win back there.
So maybe not so much any wonder plus subscriptions that came up in Q3 EBITDA those that.
Were paused in Q2 is that we are starting to see some of those subscriptions come back.
Yes, and in fact.
The real key to understanding the dice business, especially is that a lot of our customers are in the staffing recruiting and consulting category and we believe that you fundamentally can't do your job unless you have dice as a tool if you're looking for technologists, so when they paused.
In Q2, they could still rely on the contacts that they had essentially harvested from days over the course of the previous periods of time, but at a certain point that data becomes stale the information about the candidates become.
Unusable from a practical perspective, so we believe that Q3 was an important quarter for those staffing recruiting agencies to make a decision as to.
How they view their future, especially moving into 2021, and how they would be able to essentially use dice and other recruitment tools to ensure they are getting a flow of candidates to their clients.
I appreciate the insights there.
Yes, some encouraging data points put out by.
Some of the industry research firms like Sian.
Kind of thinking about where they see the market next year, and then kind of maybe building off one of the prior questions thinking about getting back to sequential growth in dice, but is 7% growth a number that we can maybe try to benchmark you against I know that scrip.
In models different than a straight recruiting model, but how how can we.
What can we deduce from taking that data.
Went from Sian and comparing it to your business.
Yes, I think it's a good benchmark I think that's the right way to even frame it out and in fact, it actually correlates to some other studies that we've seen where the online recruitment.
Tools market as a whole historically has been growing or I should say not historically, but it has been projected to grow with the 7% CAGR over the next five years, we believe that the tech sector part of that overall market is growing faster, but 7% is a pretty good benchmark.
It just happens to be the same as.
Sideways figure for how they look at the rebound we have good close relationship with S&P and we sat down with the head of research and they're not predicting.
The month by month progression for that I think thats, a little bit too aggressive in today's uncertain world, but they feel confident that we will get back on track and that the ITC staffing sector itself is becoming healthy a healthier than it was at the beginning of the pandemic.
All right great.
[music].
I know that CJ is correlated to the defense budget, but I.
I don't have statistics from prior prior elections, but.
Does does whoever ends up in the White house potentially have an effect on the prospects of clearance jobs in your opinion.
I think it does over the long term and it really comes down to whether or not the president who.
Proposes that the budgets associated with all forms of.
The government has a real bullish view of the defense the need for defense and so my view would just based on.
Even bidens background and experience is that he is.
Pro Defense clearly President Trump today is pro defense and has sequentially increased military budgets that the budgets I think that you can say that both of them have a common view that it's an uncertain world that we live in and we need to be strong on defense, but if.
One president in the future was to be.
Less aggressive about defense posture and that represented itself in smaller defense budgets I think that would affect CJ theres no question about it and it would work in the reverse in other words, if someone did lowered the budget.
Okay and.
And just one more and I'll, let someone else.
Ask some questions.
Gross margin has been coming in.
Last couple of quarters and I was just curious is that due to pricing mix or is there something else going on there.
Kevin do you want to address that yes, well I think it really comes down to.
US being very cost conscious about where we spend our money on.
We're very careful about hiring backfills, we're very focused on making sure that our marketing spend is getting the appropriate IR I don't think theres any way.
One particular area, but rather just cost containment around the entire income.
Income statement and that that mentality as across the company. So I don't think it is any one particular initiative or one particular line item just us being cost conscious across the whole business.
And clearly we are seeing a little bit of benefit when it comes to digital advertising rates.
Which have come down it's a little bit of a less competitive environment. So that's helpful as well.
Sure sure.
Well, thanks for taking my questions guys.
Thank you Josh I appreciate it.
And ladies and gentlemen at this time, we'll conclude today's question and answer session I'd like to turn the conference call back over to art Daly for any closing remarks.
Thanks, everyone for your interest in DHR group and thanks for joining us on our call today and have have yourself a great day.
Ladies and gentlemen, with that we will conclude today's conference call. We thank you for attending you may now disconnect your lines.
Yeah.