DHI Group, Inc.
Q4 2015 Earnings Call Transcript

Published: 3 Feb 2016

[Operator:]

Good morning and welcome to DHI’s Fourth Quarter and Full Year 2015 Earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Jennifer Milan, Director of Investor Relations. Please go ahead, ma’am.

[Jennifer Milan:]

Thanks and good morning everyone. With me on the call today is Mike Durney, President and Chief Executive Officer of DHI Group Inc., along with John Roberts, our Chief Financial Officer. This morning, we issued a press release describing the company’s results for the fourth quarter and full year 2015. A copy of that release can be viewed on the company’s website at dhigroupinc.com. 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 by the statements herein due to changes in economic, business, competitive, technological and/or regulatory factors. 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 in the sections entitled Risk Factors, Forward-looking Statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations. The company is under no obligation to update any forward-looking statements except as required by the federal securities laws. Today’s call also includes certain non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA excluding Slashdot Media, adjusted revenues, adjusted revenues excluding Slashdot Media, net income excluding Slashdot Media, net income excluding impairment of goodwill, diluted earnings or loss per share excluding impairment of goodwill, adjusted EBITDA margin, free cash flow, and net cash to 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 to the SEC, both of which are available on our website. Now I’ll turn the call over to Mike.

[Mike Durney:]

Great, thanks Jen. So welcome to the DHI Group fourth quarter earnings call. I want to start out with a summary of the areas of human capital management sector, where we compete and where we think we can play a role, and then summarize how we’ve organized ourselves to adjust to those markets. Then I’ll give an update on the progress we’ve made on our strategic goals and where we think our business is today, and then John will provide detail on the fourth quarter financial results and our first look at 2016. At the end of our remarks, we’ll be happy to take questions. As we look back on 2015, a lot was accomplished in building a stronger foundation. We improved our existing products and introduced new ones. We tooled our sales and marketing organizations of some of our brands and enhanced the overall value we provide to customers. We had a lot to do internally to move the organization forward, and we have made progress on that front. I’m excited to look ahead. As I think about 2016 and beyond, I see the foundation laid for the next iteration of our company. As we outlined at investor day, there are three areas where we can compete to win from a strategic perspective. One is talent acquisition, two is sourcing management, and the third is career management. I’ve said many times that there is a shift happening in recruiting and hiring. Customers continue to look to non-traditional ways to find and interact with professionals, and as we start to provide them with innovative tools, they’re responding. In addition, companies realize that they need to do more than just advertise a job listing when the opening become available and expect the best response to be solely applications to that job at that time. They’re realizing more and more that for skilled talent, you need to have an ongoing dialog with a pool of candidates and be prepared to interact with them in a variety of ways. Our new products and services address that need. We’ll continue to focus on the core area of talent acquisition, which is our historical foundation, yet we’ll offer a broader range of services to be a partner to our clients and have even more of an ongoing relationship with them. While we have always been in the sourcing management area with database access and expanded that initially with Open Web, we’re now developing other initiatives. Lastly, we’ve always been focused on career management, but we’re working on new products that bring us into that area more significantly. During the past few months, we’ve worked on aligning our organization for future success in those three areas. At the core are the seven talent acquisition brands. In addition to the tech and clearance and healthcare segments, we’ve combined the other four brands - EFinancial Careers, Rigzone, HCareers, and as of the first of the year, Biospace, into one group that reports to one leader. We believe this new structure will allow us to leverage our products and our functional capabilities across all of our global industry brands. The initiatives that we identify as priorities will be addressed once in this group instead of four times. We’ll take a strategic initiative and deploy it through the four brands efficiently once. It will also enable brands that currently operate only in North America - Biospace and HCareers, to address their international expansion opportunities more quickly. We want to work smarter, and we believe this structure will boost efficiency while ensuring we go to market more effectively. Also during the fourth quarter, we finalized plans to structure our new growth initiatives, including our projects addressing sourcing management, into one place under our newly formed BrightMatter Group. BrightMatter focuses on developing and bringing new products and services to market. Building on the innovation we’ve done within our core product portfolio in recent years, BrightMatter will be where we test, iterate and explore the latest in recruitment marketing. These next-generation recruitment products will both support our core talent acquisition brands and expand our market opportunity. We have a pipeline of new products in development that are applicable across all current DHI verticals and can help get us into new sectors. This new operating structure puts all of our most promising new product development efforts in one place, including Work Digital, Open Web, and getTalent, which we previewed for you at our investor day in June. In the area of sourcing management, getTalent moves us up the HR value chain. getTalent is the new SaaS talent sourcing platform designed to help HR organizations easily pipeline and engage candidate leads who are in the pre-apply phase. While very early, we’ve had meaningful conversations with customer prospects about getTalent, and based on the survey we recently conducted, about three-quarters of respondents say that building a bench is more important today than a year ago. We expect to introduce the full commercial version of the product in the next couple of weeks. Although the sales cycle for SaaS products is longer than for our traditional products, getTalent addresses a real need in the market and is just one new product we’re working on to build our product portfolio and expand our market opportunity. We’ve posted on the Presentations and Events section of our corporate site some background about the product and a brief description of its unique value proposition in the market. BrightMatter is also focusing on recruitment marketing with tools that leverage BrightMatter data to strengthen our value proposition with next-generation recruitment advertising solutions. New tools will be aimed at helping employers reach highly targeted candidates at scale, including across social channels. Conceptually, the way to think about what we’re doing is we’re migrating the targeting of recruitment messaging from general recruitment branding and job advertising at broad groups of candidates, to targeting candidates who have certain skill sets or interests and now moving to targeting specific people based on the data we have accumulated. It takes recruitment marketing down to specific individuals. In the area of data services, BrightMatter will be working on a number of new product applications to extent our data expertise and analytics, where the highly specialized data that we have on professionals will be foundational to many of the new products and services we’re working on. Customers are hungry for new tools that will make the recruitment process more efficient. The areas of focus for BrightMatter position us to address companies’ needs in innovative ways, open up new avenues for growth in areas we don’t play in today, and further evolve DHI to compete to win in the future. We’ll be talking about our progress in these key initiatives in coming months. These initiatives will entail specific, finite, measurable amount of investment which John will speak about more in a moment, but we’re expanding our addressable market, our ability to track new customers, and positioning us for the next phase of growth. Now that I’ve covered new initiatives, I’d like to highlight some of our accomplishments in 2015 against our strategic plan for our core talent acquisition brands. In the area of improving the efficiency and effectiveness of our core products and services, adoption of Open Web continues at Dice. We remain focused on improving the product and overall user experience of Open Web and in Q4 introduced a new version of the Open Web Chrome extension with advanced Likely to Switch functionality. We first out rolled out the Likely to Switch feature, which provides an efficient way to identify actionable candidates in the second quarter of 2015, and we’ll continue to build upon this service. As success with Open Web at Dice continues, we added 64 net new customers in the U.S. during the fourth quarter, and the number of customers subscribing to Open Web through Dice under annual contract has increased 67% since the end of 2014. In the fourth quarter, we passed the two-year anniversary of launching Open Web as a paid-for service. We’ve recently seen a slight increase in the retention rate of customers using Open Web, which we attribute to a combination of customers becoming more comfortable using the tool in pursuing passive candidates, together with the enhancements I just talked about, like Likely to Switch and the Chrome extension. Also at Dice during the fourth quarter, we continued to expand the number of applicant tracking system integrations with key customers. Integrating the Dice search API into the customer workflow improves the user experience and our ability to demonstrate ROI to customers, and has driven meaningful increases in the number of resume views by Dice customers who are participating. At Rigzone, recruitment in environment and energy continues to be terrible, and while the oil and gas market is declining, we’re focusing on building and improving the overall platform, refining the user experience and increasing engagement. For example, during the fourth quarter we leveraged the skills knowledge base product from Work Digital to introduce suggested skills to search that are specific to the oil and gas industry. Skill suggestions help customers identify adjacent skills for a position they’re looking to fill, which expands the candidate pool and make resume search much more efficient. As demand for qualified healthcare professionals climbs and companies compete for talent, our healthcare vertical is finding new ways to attract customers and drive engagement with new services. In healthcare, where we introduced a number of new products to supplement the core product portfolio at Healthy Careers during 2015, we continue to see benefits from the improvements we’ve made to both the product and the organization. Spotlight was one of the product introductions made in the third quarter of 2015. This is a new employer branding product suite that features rich engaging content. Spotlight includes customer-generated recruitment marketing content but also includes things like employee-generated reviews through an association with great places to work. Though it’s very early for Spotlight and the revenue contribution is relatively small, we’ve expanded the number of licensed customers and feedback remains encouraging. These are just a couple examples of the work we’ve been doing to enhance our suite of products and services. Another area we have focused on is developing deeper, higher value relationships, and we also made progress in this area during the fourth quarter. At Rigzone’s data services, for example, we launched another new product called RigEdge, which provides industry decision-makers with competitive analyses of rig fleets to help them determine rig capabilities. While not immune to general energy market conditions, these data services tools are another way that we’ve expanded our relationship with customers and demonstrated the value of our highly specialized data. In a year where recruitment revenue is down significantly, revenue from the data services business was up low double digits year-over-year. In our healthcare vertical, we introduced pay-for-qualified-apply pricing model in a pilot in Q4, which has generated a lot of positive feedback. We’re addressing the growing popularity of pay-per-view and pay-per-click with a first of its kind pricing model that demonstrates the strength of our highly qualified audience. The model clearly provides ROI to customers, providing greater control over spending and making recruiters even more efficient. As we continue to learn from customer feedback, we’ll evolve and scale the model to other verticals over time. Looking in 2016, we haven’t seen meaningful changes to recent trends in terms of the environment for most of our verticals, though the environment for our energy business declined further in Q4 and remains very difficult. A number of recent developments in the marketplace have put more downward pressure on oil prices and with that, hiring at many oil and gas companies remains halted. We’ve seen the negative impact on our business continue into the first quarter of 2016. As for our other verticals, I’m pleased with the product enhancements that we’ve made at Dice, but clearly there is more work to do. The sales organization is in place and we’ve made some changes to our marketing organization and approach as of the first of the year, so I’m optimistic that our messaging to professionals, paying clients and prospects will improve. ClearanceJobs has performed remarkably well due to a combination of external factors, like the government slowing down the granting or renewing of security clearances, and our own initiatives including a revamp of the entire site and the initiation of pay-for-performance pricing. EFinancial Careers has settled into a groove with decent billings and revenue performance, somewhat masked by the strength of the U.S. dollar. There are some markets where the financial service environment is not great, but we have performed well and we have seen growth in several markets, including North America. The hospitality business has performed well with its traditional reliance on our job posting product, but we have to make further improvements to the overall site, including database access, and we believe global expansion is the key to reinvigorating growth in this segment. Moving to healthcare, I’m really happy with our new product initiatives. 2015 was a year of experimenting and learning while still growing the core business quite well. I think we have the foundation in place to really expand that business, and I’m looking forward to 2016. Biospace today is a tiny business for us. The characteristics of that industry are really attractive. We need to improve the product to build that business meaningfully, but the opportunity is there. So we made a lot of progress on our strategic plans in 2015, but we still have a lot of work ahead. I believe we’re more focused and better positioned to further evolve the company with the planned introduction of a number of next-generation recruitment products and services in 2016. Today, DHI is a strong diversified company as the market to source, attract and manage talent adapts to companies’ needs. We’ll be at the forefront of providing innovative tools and value to customers. With our organizational changes and exciting pipeline of products, DHI is well positioned in the years ahead to be a talent focused, global digital media company connecting professionals with career opportunities around the world. In closing, I just want to thank all of our team members and recognize all they’ve accomplished. It’s our people that drive the innovation we’ve been implementing across all our businesses. Their dedication and passion enabled us to achieve a tremendous amount in 2015, and it’s these qualities that will allow us to build on all our progress in 2016. With that, I’m going to turn it over to John.

[John Roberts:]

Great, thanks Mike. I’ll review the details of our fourth quarter financial performance and then we’ll open the call up to questions. As we announced last week, we completed the sale of the Slashdot Media business so where appropriate, I will be speaking to our financials excluding that business. Overall, we continue to make progress on our operations during the fourth quarter despite significant declines within the energy market and the negative impact of foreign currency translation. This progress builds on the work we have completed throughout the year and continues to reinforce our foundation as we move into 2016. For the fourth quarter, I want to highlight a few areas that are important to our results

[Operator:]

[Operator instructions] The first question comes from Youssef Squali with Cantor Fitzgerald.

[Youssef Squali:]

Yes, good morning. Hi guys. Maybe can you just go back to the Open Web comment that you had. I think you mentioned that the Dice Open Web increased 67% on the year, so can you just remind us what the penetration of Dice’s customer base is with that product? And just to be clear, there is no price change - the increase in ARPU is just a mix shift, correct? And then I have a follow-up.

[Mike Durney:]

Yes, so Open Web is in the ballpark of 1,000 customers, total customers on our base of 7,600, so you have a penetration of about 15%, somewhere in that range. And I’ll take the revenue just because I’m speaking - the impact to revenue is--you’re right, there’s no pricing change. It’s a combination of customers taking Open Web, right, so that generates between $3,000 and $5,000 and up for the 1,000 customers that have it on an annual basis, together with customers on average buying greater levels of service than they have in the past. Those are the two drivers.

[Youssef Squali:]

Okay. Any idea over time how--what kind of penetration can you get to, now that you’ve had the product for over a year?

[Mike Durney:]

So I think it can be meaningfully higher than the 15% it is today, although there is a significant number of customers if you look out over 12, 24 months who will not spend the time and invest the energy in sourcing. It’s just the nature of how they use the product, so it will never be, I would say, greater than 15% but we think there’s a fair amount of room to run. I think the bigger issue for us is it opens up avenues to get new types of customers, so we can focus on the penetration of the existing 7,600 but I think more importantly over time, it opens avenues to get other types of customers.

[Youssef Squali:]

Thank you. On the new products, I think you said getTalent will be launched within the next few weeks. Can you maybe just help us understand the value proposition there and how it’s priced?

[Mike Durney:]

Sure. So getTalent is a SaaS-based product, and it’s really designed to give companies a place to accumulate and aggregate their sourcing leads from a variety of places, so one of the places obviously is from our seven core talent acquisition brands, also from Open Web, together with other places that may have gotten from other sources online, from job fairs, career fairs, their own website. The value proposition essentially that we provide is to give companies an avenue for marketing their companies from a recruitment and employment standpoint, together with jobs through a variety of channels, and one of the unique value propositions we believe we have is most of the other services, if not all of them, focus on email, and we are focusing on a number of different avenues for communication. The other unique value proposition is using our Fresh Start product where we take the Work Digital data, we can take sourcing leads that companies have from other places that they may have accumulated over a period of years and update those based on having fresher data and provide that value of now having a new way of accumulating skill sets and interests and communication methods with those candidates.

[Youssef Squali:]

And how is it priced?

[Mike Durney:]

So we’re working on the pricing now. This is a product--if you look in the marketplace today, the products that exist go anywhere from $50,000 to $200,000 a year. We are focused initially on a subset of that whole market, so you can think about it in a range of somewhere below $50,000 to $50,000 and above. We’re still working on the pricing - we’ll have introductory pricing, so we don’t want to set any expectations from a revenue standpoint today until we are into the market, but that’s the range that the market is today.

[Youssef Squali:]

Great, thank you.

[Operator:]

Thank you. The next question comes from Doug Arthur with Huber Research.

[Doug Arthur:]

Yes, just really one question on the guidance. John, you talked about the impact of currency mostly on finance. You had 10% constant currency growth in the fourth quarter. You’re guiding toward down 1 to 2% up for ’16, so any sense of what that would look like on a constant currency basis, because it seems like you’ve got decent momentum there.

[John Roberts:]

Yes, I think we do have decent momentum there, and you see that--as you noted, reflected in a constant currency growth in the fourth quarter. Based on where rates are today and looking out to forward rates, which are a little hard to predict certainly as you move out into the second half of the year, we think the overall FX impact on revenue for the year based on today’s conditions is going to be about $2 million in the year. It could be a little bit higher than that, but around there, and the majority of that is within the finance segment.

[Doug Arthur:]

Okay, so I guess another way of asking the question is are you--given what’s going on in the market globally, is there a little bit of caution built into those growth rates, or not?

[John Roberts:]

No, I don’t think so. I think what we see now, we expect to continue through 2016. I mean, if you look at the rates and kind of what’s happened just recently in Q4, we saw more of an impact in Q4 due to currency than we expected certainly going into the quarter. Again, the primary rate that’s important to us is the GBP to the dollar, so if you just look at what’s happened there in Q4, you can look at a pretty dramatic impact.

[Doug Arthur:]

Okay, great. Thank you.

[Operator:]

Thank you. The next question comes from Tracy Young with Evercore ISI.

[Tracy Young:]

Hi. On that Spotlight branding product that you’ve rolled out for the healthcare sector, could you talk a little bit about that and what you think the proposition is there? Then in terms of the reorg for the global brands, should we expect more reorg on the financial side as well? Thanks.

[Mike Durney:]

Sure. So let me answer the second one first. When we talk about the organization, what we’ve essentially done is taken those four brands and put them into one organization, with the head of that group, head of sales and head of marketing, head of client services, head of product and head of technology for those four brands as one unit. So I don’t think you’ll see reorganization specifically in any one of the verticals. I think you’ll see the best people taking on leadership roles that stand before, so that will have a natural impact throughout the organization in terms of people and headcount but I don’t think you’ll see reorganizations. So I’ll leave it at that and see if that answers the question when I go back to the first one. So on the Spotlight product, Spotlight generally speaking is really focused on the concept of recruitment marketing, so we are helping companies in the healthcare sector, which is a sector that historically has been relatively far behind in terms of maturity in digital recruiting, so we’re really pushing that sector forward in promoting hospitals and other medical organizations and recruiters as places to work, places to be recruited for, so there’s different elements of the Spotlight. One is very simply just creating a section on the site that helps companies purely market their organizations as opposed to posting jobs purely. The second I mentioned briefly - employee reviews, and association that we have with the organization Great Places to Work, we can publish on an aggregated basis reviews of companies as a place to work through our association with them. We’re also adding other elements - native advertising elements, videos, blogs, and other things that companies can do in association with us to further promote themselves as a place to work. I hope that answered the question on the first one.

[Tracy Young:]

Yes, thank you very much.

[Operator:]

Thank you. Once again, to ask a question, please press star then one on your touchtone phone. The next question comes from Randy Reece with Avondale Partners.

[Randy Reece:]

Good morning. First of all, I wanted to try to get a handle on what you think the sequential trend in energy is going to be this year, what you’ve assumed in your guidance, if you think it’s going to bottom out at some time in the middle of the year or just continue to taper down.

[John Roberts:]

So Randy, from an overall standpoint, and you can see it in the growth rates that we have in the guidance, from an annual standpoint we expect energy to go down 35% or so roughly again from ’15 to ’16. If you look at the trend through the quarters in terms of what’s implied in the guidance, based on what we have out there for Q1, that would assume some level of relative stability as we move through 2016, but the market is still very tough, as we’ve said. It’s volatile, it’s harder to forecast than the other segments for sure, so it’s hard to sit here and say we’re calling a bottom in the energy market. But the guidance does not assume that it goes down dramatically on a quarterly basis from where it sits right now.

[Mike Durney:]

I think just to supplement that, I think from a usage standpoint - again, to build on John’s timing, we’re not trying to predict the timing - there is a point where recruitment activity will bottom, almost no matter what the price of oil is. It went from $100 to $80 to $60 to $40 to $30, it’s been below $30. At $20 and $15, there is still some level of recruitment, so the bottom from an activity level standpoint will come relatively soon - not predicting when. I just want to make that clarification. The size of contracts certainly impacts revenue performance, but there will be some recruitment activity and we believe we’re getting close to the bottom.

[Randy Reece:]

For this segment that you’re calling BrightMatter, you’ve identified a $7 million to $8 million drag on adjusted EBITDA this year. Can you give a number for what that was in 2015?

[John Roberts:]

Yes, so it’s about an additional $5 million negative impact to EBITDA in ’16, so think about it as another roughly $5 million of investment in ’16.

[Randy Reece:]

So that’s a concerted step-up in spending?

[John Roberts:]

It is.

[Mike Durney:]

Yes, and it’s designed around a handful of specific products which we’ll bring to market and evaluate what they do. The getTalent--you know, we’re right on the cusp because we’re ready to bring getTalent to market. I’m optimistic that that product will be a meaningful part of our business in a couple of years - not giving guidance, not saying when because it will take some effort, but there’s a place in the market for that product, and when I look at the business and how the business unfolds over the next couple years in terms of our seven core talent acquisition brands, and then the other things we’re doing, getTalent should be a meaningful part of the overall company, so that’s how we’re thinking about the investment. But we’ll monitor it and we’ll assess the market as we go along.

[Randy Reece:]

If you could give us a sense of what the additional spending is going to, how much of it is, let’s say, product development expenses and how much would be building the sales and marketing effort, and are there any other expenses beyond those?

[Mike Durney:]

Sure, so most of that is building the product and initially bringing it to market, so the marketing effort and promotion around it. From a sales standpoint, what we’re planning on doing is having a dedicated sales force of a handful of people and leveraging the 200 sales people we have across the talent acquisition brands globally, so we may go to market with them in supplementing what we do in those core brands, and we may use some of those people more, dedicated more full-time to getTalent. It really depends on how the market adapts to the product, but the majority of where we’ve made the investment decision in 2016, coming out of 2015 and into ’16 is to literally build the product.

[Randy Reece:]

All right, very good. Thank you.

[Operator:]

Thank you. This concludes our question and answer session. I would like to send the call back over to Jennifer Milan for any closing remarks.

[Jennifer Milan:]

Thank you for your time this morning and for your interest in DHI. Management will be available to answer any follow-up questions you may have. Please call Investor Relations at 212-448-4181 to be placed in the queue. Have a great day everyone.

[Operator:]

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