DHI Group, Inc.
Q4 2017 Earnings Call Transcript

Published: 7 Feb 2018

[Operator:]

Good morning and welcome to the DHI Group, Inc. Fourth Quarter and Full Year 2017 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I'd now like to turn the conference over to Rachel Ceccarelli, Director of Corporate Communications. Please go ahead, ma'am.

[Rachel Ceccarelli:]

Thank you, Keith, and good morning everyone. With me on the call today is Mike Durney, President and CEO of DHI Group Inc.; and Luc Grégoire, Chief Financial Officer. This morning, we issued a press release describing the company's results for the fourth quarter and full-year of 2017. A copy of that release can be reviewed on the company's website at dhigroupinc.com. Please note that the press release can be reviewed -- please note a presentation which will be posted after this call also available for those following the webcast. 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 certain 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 non-core businesses, and the possibility that any such divestiture does 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 to be filed with the SEC next few days and Quarterly Report on Form 10-Q in the sections entitled Risk Factors, Forward-looking Statements, and Management's Discussion, 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 can also include certain non-GAAP financial measures, including adjusted EBITDA, and adjusted EBITDA margin. For details on these measures, including why we use them, and reconciliations to the most comparable GAAP measures, please refer to our earnings release has been furnished to the SEC on Form which is also available on our website. And now with that, I'll turn the call over to Mike.

[Mike Durney:]

Great, thanks, Rachel, and welcome everyone and thanks for joining us this morning. We were incredibly busy in 2017 and the changes we put in place through the year with refocusing our efforts around our tech-first strategy creating a functionally aligned org structure and having our senior leadership team fully staffed, began to show signs of progress in the fourth quarter with a number of accomplishments. We're gaining momentum and although it's fair to say change won't happen overnight, we're seeing a movement in the right direction today. In the fourth quarter, we took another step towards our tech-first strategy with the sale of Health eCareers. In December, we sold that business for $15 million and recognized a pre-tax gain of $6.7 million. I'll talk about where we are with the other brands later on. Significantly, we finally had the functional team in place for a full three months and the early signs of operating results from the organization working towards common goals and initiatives are very encouraging. Much like the markets, we serve; DHI has seen a tremendous amount of change in the past years, particularly in 2017. In May, we realigned our organization to streamline management and decision making and to focus on tech initiatives. There were certainly challenges as team members became accustomed to a functional structure, we relocated people, and we brought on a new Head of Sales, but we made great progress. The new tech first and functional org structure has brought teams together, help us focus on initiatives that will move the business forward, and created an overall stronger sense of collaboration. We have a clear roadmap build to pursue projects that matter most and we've organized these priorities into three buckets

[Luc Grégoire:]

Well, thank you, Mike, and good morning everybody. Today, I’ll review the key points of our fourth quarter financial performance and comment on our expectations for 2018. But before I get into our operational review, let me quickly review a number of unusual items that impacted us this quarter. The sale of Health eCareers on December 4th for $15 million and a gain of $6.7 million which we included in other income and this period's results includes one less month of Health eCareers than last year's call. Also included in other income is a $3.3 million restitution award in the all pro related legal matter. We incurred this quarter $2.5 million in disposition and other related costs related to our ongoing divestiture process and the implementation of our strategy. We had many discrete items that significantly impacted and reduced our income tax rates during the quarter, including a lower taxable gain on disposition, research credits, and the reversal of tax uncertainties. My commentary today regarding year-over-year performance will exclude these items which impact comparability with prior period results. Now onto our business review. For the fourth quarter results were consistent with our 2017 outlook that trends would improve towards the end of the year. Total revenue of $50.9 million declined 7% against last year or 4% on a comparable basis when you exclude the impact of the sale of Health eCareers in early December. Our tech-focused segment revenue declined 5% and corporate and other revenue declined 3%. Exchange rates benefited both total company and tech-focused revenue by one percentage point this quarter. Billings for the quarter declined 1% for tech-focused and 3% for corporate and other segment. The improvement to the rate of decline compared to earlier quarters is a combination of performance and early timing of contract renewals. Exchange had a positive impact of 1% on billings growth. Within our tech-focused segment, Dice U.S. saw improvement to its billing trends down 8% against last year as compared to double-digit declines that we've seen in earlier quarters. ClearanceJobs had a strong finish this quarter with 25% billings growth. The billings trends also improved eFinancialCareers with growth of 13% or 7% excluding exchange, driven by growth in Asia and the EU regions, while the UK was slightly lower than the prior year. On revenue, Dice U.S. declined 10% with recruitment package customers at 64.50%. The renewal rate of annual recruitment package customers remained at 65%. However our dollar retention rates among renewing customers improved this quarter to a level that we haven't seen in six quarters. Average monthly revenue per customer was $1,115 and 96% of our contracts were annual, both of these in line with recent trends. Dice customers would open web access grew 51% over last year reaching 39% penetration rate. Search API integrations increased 50% year-over-year to over 950. As Mike mentioned, we're progressing well in our product development roadmap and starting to put out some new features on Dice, while it’s still early initial results seem to be confirming we're on the right path. Moving to eFinancialCareers revenue was flat versus prior year, but down 5% excluding foreign exchange. We saw continued Brexit related softness in the UK, albeit not as much as anticipated and had improved trends in the EU and Asia. ClearanceJobs completed a very successful year finishing strong with Q4 revenues growing 23% year-over-year as our value proposition continues to be compelling in that very tight market. Prior to its sale, Health eCareers results for October and November were in line with the same period last year. In the other businesses, revenue declined 3% with 2% growth for Hospitality Careers and partially offsetting a high-single-digit decline at Rigzone which is showing signs of stabilization particularly in North America which experienced 25% billings growth year-on-year this quarter. Operating expenses before depreciation, amortization, stock-based compensation, and disposition related and other costs increased 1% even as we continue to invest in marketing and product development. We continue to find efficiencies in our business stemming from simplified structure, productivity initiatives such as our Cloud Migration project, and from discontinuing unprofitable ventures like getTalent and our local China presence. These efficiencies have supported our increased marketing and development without unduly impairing our margins. Adjusted EBITDA of $11.4 million for the quarter included the restitution award of $3.3 million in the all pro related legal matter, and $1.5 million of our disposition-related costs. Excluding those items, our adjusted EBITDA margin was 19%. Depreciation and amortization expense declined $400,000 from last year, mainly due to discontinuing getTalent and some intangibles having become fully amortized. Stock-based compensation was down 3% due to forfeitures and lower grant values. Interest expense declined 25% compared to last year due to lower debt which finished the year at half of last year's level. Our effective tax rate for the quarter was minus 4% and plus 18% for the year. This favorable rate was affected by the many discrete items in the quarter which I listed earlier. The enactment of U.S. tax reform did not significantly impact our 2017 tax rate as the applicable rate to the deemed repatriation -- or applicable tax to deemed repatriation of overseas earnings was offset by the reduction of our deferred tax liabilities for the lower future tax rates. Net income for the quarter was $11.8 million or $0.24 a share with a favorable impact of $0.18 from the items affecting comparability. We generated $7.2 million operating cash flow in the fourth quarter compared to $8 billion last year. The operating cash flow for this quarter includes $3.3 million of restitution awards. This along with proceeds from the Health eCareers sale and repatriation of $8 million of overseas cash enabled us to reduce our revolver by $27 million this quarter, down to $42 million. Deferred revenue at the end of the year was $84 million which is down $1 million from the prior year, but up nearly $2 million excluding the impact of the Health eCareers divestiture as longer average contract terms mitigated the impact of slightly lower billings. Looking ahead at 2018, we anticipate continued strength in the tech-recruiting market with similar competitive dynamics. We're still assessing the impact of the new revenue recognition accounting principles but don't expect these to significantly impact the results upon adoption. This year, either for reported revenues or the requirement to capitalize a portion of our commission to expenses, we'll be providing more detail on this transition in our upcoming Form 10-K filing. We've began 2018 with a more focused organization and clarity of mission to develop solutions that addresses the unmet needs of the tech professionals and recruiters. The early results are encouraging and continued development, together with sustained marketing and an intensified sales effort should start showing improvements and are translated this year. Based on what we're currently seeing, we expect modest improvement to the Dice U.S. rate of revenue decline as experienced in the fourth quarter of 2017. Billing strength should start improving later in the year and continue through 2019. We expect ClearanceJobs customers will continue to value our product in the very tight clear professional market and are planning on continued revenue growth although not at the current level of over 20%. For eFinancialCareers, we expect revenues to be in line with 2017 as Brexit headwinds are offset by opportunities we see for growth in Asia and the EU. Excluding items that impact comparability, we expect to hold 2018 adjusted EBITDA margin percentages in line with 2017, while maintaining our current marketing and product development intensity and focusing on efficiency and simplifying our organization. Using our fourth quarter 2017 expenses as a baseline adjusted for the divestitures, we expect a double-digit percentage increase in product development and to maintain sales and marketing flat against 2017. Cost of revenue and general administrative costs will decline in 2018, driven by efficiencies that we're achieving in those areas. And please refer to our Investor Relations website for historical P&L's for the divested businesses of Health eCareers and BioSpace. Below the line, depreciation and amortization should decrease modestly as the impact of implementing our product roadmap is offset by reduced capital spending to Cloud Migration, getTalent, and divested non-tech businesses. Interest expense should also decline due to a lower average debt balance and continued paydown of our revolver. The tax rate should be approximately 25% benefiting from the 14 percentage point reduction coming from tax reform. Share counts should increase a few percentage points during the year from employee stock compensation. In the near-term, we plan to continue applying free cash flow to reduce our revolving debt, maintaining our liquidity reserves as we continue to position ourselves for returning the business to growth. We'll continue to evaluate this policy as we progress down our strategic path. To recap, we started seeing some improvement on the top-line rate of decline through the second half of 2017 and based on what we're currently seeing 2018 top-line trends should be similar to the fourth quarter of 2017. While we have conviction that our strategic initiatives will be effective, we remain prudent in our capital allocation. We're already seeing progress along our tech-focused strategy and we're keenly focused on preserving profitability. As always, I thank you for your interest and now I will turn the call back over to Mike.

[Mike Durney:]

Okay, thanks, Luc, and thanks again to everybody for listening. I know, I said earlier that we have the team in place and I think given the performance of the business at the end of last year, with having the senior team in place, and credit to the employees who have worked on the businesses that we have been divesting to continue those business going and the employees in the tech-focused business, many of them have new roles in the organization. I think the fruits of that in the fourth quarter and the beginning of 2018 have been pretty significant and I think the team is excited about where we're headed. And so with that, we'll turn it over to questions.

[Operator:]

Thank you. At this time, we will now begin the question-and-answer session. [Operator Instructions]. And the first question comes from Kara Anderson with B. Riley FBR.

[Kara Anderson:]

Just a little housekeeping, did you say what revenue -- the revenue decline looks like excluding health care and FX?

[Luc Grégoire:]

The revenue decline excluding yes I did. It was one point coming off of --

[Kara Anderson:]

Sorry that was one point for the FX and what was the health care impact?

[Luc Grégoire:]

Give me a second.

[Kara Anderson:]

Okay.

[Luc Grégoire:]

So it's 4% on a comparable basis when you exclude Health eCareers. And there's 1% helping it, so that's 5% decline.

[Kara Anderson:]

Got it. Thank you. And then, can you elaborate on the decision to sell the data services piece of Rigzone by retaining the careers services piece? And why that makes sense with your tech-first strategy?

[Mike Durney:]

Sure. So I think the data services business, we've always liked that business but it really is the farthest of field from what we do. We acquired it, when we acquired Rigzone. In the first place there was a fair amount of interest in that business because it's so discrete; and it fits nicely into potential acquirers' portfolio. So in the end, we thought it was easier to sell them separately. On the careers business, we had a number of indications but they really didn't value what we think is the potential of that business, as the market starts to turn and we actually have started to see a turn in that business certainly more so in North America than outside North America. So while from a tech-first standpoint, it doesn't fit nicely, it is the closest to the tech-first strategy of the businesses we decided to divest because there's a fair amount of technology roles embedded in the Rigzone business, in energy, generally. So that's why we decided to keep it, it's just we see a turn coming and we want to ride the turn.

[Kara Anderson:]

So just for clarification, is the intention to keep it indefinitely or you think that you will look to sell it down the road may be as things turn a little bit?

[Mike Durney:]

I think the intention is to keep it indefinitely as indefinitely is used broadly which means you never know in the future, but the intention is to keep it now.

[Kara Anderson:]

Got it. And then recognizing that downloads are growing for the Dice App, can you speak to the utilization of that app and whether you find that an important metric?

[Mike Durney:]

Yes. The utilization has grown; it has grown slower than the download growth. But we really haven't pushed from a marketing standpoint the usage as we developed more and more tools and we gather more and more data. So I think going forward, you'll hear more specifically around the metrics not only of downloads but also usage of the service.

[Kara Anderson:]

And then I guess last one from me is on the recruitment package customers, what are the reasons you're hearing that people are leaving or cancelling their package and whether or not those are just moving to a different pricing model, could you comment on that?

[Mike Durney:]

Sure. So we hear a variety of reasons. The most common when we actually survey customers leaving us is no need but we certainly know that no need is a broader sense. I think the most common reason is that many of our customers or most of our customers have needs that are broader than tech and many of the ones that choose not to renew with us decide to consolidate their spending with others who are broader. So we tend to have higher renewal rates. I'm sure this is no surprise but have higher renewal rates on customers who deep focuses tech as opposed to those who have broader needs. But I think over time, as we develop more tools that are tech specific, the value to them -- to customers will be somewhat unique as compared to what journalists can provide.

[Operator:]

Thank you. And the next question comes from Jafar Azmayesh from 1776 Holdings LLP.

[Jafar Azmayesh:]

Good morning. A few questions from me. The first one what was the getTalent spend in 2017 and what are the China savings?

[Mike Durney:]

So the getTalent spend in the first half of 2017 from an operating standpoint was probably about $2 million plus CapEx which was probably a million or so using round numbers. So that's through August when we decided to get out of that business. And China is -- the net loss on China was several hundred thousand dollars a year. So what we've done is we moved the caring -- taken care of those customers to Hong Kong. So there is a number of customers that we now can serve because we don't operate in China, we don't have a license to operator in China but there are number of those customers that we have saved and continue to serve out of Hong Kong because they have services that they can provide outside Mainland, China. So it was a couple of hundred thousand dollars of annual loss.

[Jafar Azmayesh:]

Got it. The BioSpace losses now if I'm understanding this correctly shifts off of our books and what were those losses last year?

[Mike Durney:]

It's around a $1 million; we have the details on the website. So, yes, that that business is now transferred to the management team of BioSpace and so we don't have that anymore as of January 31st.

[Jafar Azmayesh:]

Okay. And you're forecasting flat EBITDA margins flat next year. You also mentioned you're changing accounting policies for reasons hopefully that will be detailed in the 10-K where you're capitalizing items like commissions. So in essence you're forecasting down EBITDA margins on a apples-to-apples basis; is that correct?

[Mike Durney:]

That's correct. And we're not changing our policies just to be clear. There is a new accounting principle that comes into effect for all companies January 1st that specifies or prescribes more how to recognize revenue, it doesn't change our revenues very much. It will impact a bit on the commissions initially as we adopt because you're deferring -- you’re deferring commissions over the contract life or over the customer life if it’s a new customer but you’re also catching up, you’re taking previous expenses and capitalizing those at the start of the year. So there’s going to be in and out that we’re still evaluating. So we’ve kept that out of what we’ve talked about this morning, certainly not our choice.

[Jafar Azmayesh:]

Got it. And then with regards to the debt paydown, so now we're at about $29 million net debt against $49 million of EBITDA. Can you shed light on what the liquidity prices is that you guys are seeing that we're not seeing and what if any conversations you’ve been having around retiring for instance a third of the equity could have been retired this year well within your credit agreement and it shows in the paydown debt. Can you help us understand what the liquidity danger or crisis is that we're not seeing in our --

[Mike Durney:]

Yes. I don’t think we’re managing a -- we’re seeing a crisis. I think we’re being prudent in applying the result, we want to make sure we have all that we need to support the strategy and the improvement of the business and in the meantime we can reduce our loan which is a revolver loan, so that liquidity remains for us. So we're basically keeping our reserves for pushing our strategy. But to be clear, there is no liquidity crisis, we're profitable business, have a strong balance sheet, just being prudent managers.

[Jafar Azmayesh:]

Okay. You have $159 capacity, which I understand take all of it down but there is still plenty of room on it to do whatever it is you need to do to support this strategy unless there is a major acquisition which you stated numerous times is not on the payroll? So that argument is difficult to wrap head around in any regards. In your clearance business, can you talk about it sounds like a strong franchise, can you talk about what you've done in terms of pricing there, have you taken significant pricing gains year-over-year or quarter-over-quarter in any sense?

[Mike Durney:]

Yes. We certainly have -- we have pushed pricing up and the business continues to grow at a tremendous rate and we think about continuing to grow maybe not at the same rate it has. But there is a balance that we manage, all the time we spend a fair amount of time on this, as the government slows to a crawl, the approval process there are fewer and fewer new candidates that are entered into the pool because there is just a limitation, we’ve talked about this all the time that it’s an interesting business and that both supply and demand is driven by the same entity which is the U.S. Government. So we are pretty cautious about pushing pricing too high given the fact that the government is restricting how many new candidates we get and to extend the people pay more and more for the service and don’t see newer candidates at the same rate they did before because the government is restricting who they give security clearance to, we have to find that balance. And some would say, it’s a good problem to have I think we believe it’s a pretty good problem to have, but it is -- there is a supply demand imbalance in security clearance and we have to manage it. So the simple answer is yes, we have pushed our pricing but we are very sensitive to pushing pricing too high when because the government restrictions on clearance is we can’t provide more candidates.

[Operator:]

Thank you. And as there are no more questions at the present time, I would like to turn the call over Rachel Ceccarelli for any closing comments.

[Rachel Ceccarelli:]

Hi, thank you, Keith. We appreciate your interest in DHI Group and if you have any follow-up questions, you can call Investor Relations at [phone] or email [e-mail]. Thanks everyone.

[Operator:]

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