Highlights from Virtual Investor Meetings

We hosted virtual investor meetings with DHI Group’s (DHX) CEO Art Zeile and CFO Kevin Bostick. Key takeaways from our perspective included an expanding addressable market opportunity, an update on the current selling environment and potential tailwinds for ClearanceJobs heading into FY ‘23. Considering these factors, we believe DHI Group remains poised for continued strong growth and profitability both in the near-term and beyond. We note that the company’s growth rate and adjusted EBITDA margin already reflect the “rule of 40,” and despite a string of beat and raises thus far in the year, shares of DHX are down nearly 18% year-to-date. Although this is relatively better than the respective 30% and 20% declines in the Nasdaq and Russell 2000 over that same period, the company’s execution has warranted a far more favorable response, in our opinion. We therefore maintain our view that shares are significantly undervalued. Our price target remains $10.50 based on a FY ’23 EV/Sales multiple of 3x.

DHI Group has two distinct platforms, Dice and ClearanceJobs, enabling employers to find and recruit technology workers with specific skillsets and security clearances. For Dice, management has executed a successful turnaround and returned the business to growth by targeting the nearly 87,000 commercial entities with the scale and technology hiring requirements to quickly realize value from a Dice recruitment package. We note that at Dice’s current average revenue per customer, this yields an addressable market opportunity well in excess of $1 billion. Interestingly, a recent reassessment of the market has shown significant growth in the number of organizations pursuing digital transformation initiatives post-pandemic, thereby increasing Dice’s commercial prospects by over 25%. As for ClearanceJobs, significant opportunity remains with some 10,000 defense contractors to be targeted and average annual revenue per customer now in excess of $19,000. DHI Group’s recent launch of a new corporate branding product, which carries an entry level average selling price of $10,000, also has the potential to materially increase the value of each customer relationship. The new offering is already available to ClearanceJobs customers and is expected to be rolled out to Dice customers in Q2 ‘23.

In regards to the current selling environment, we note that DHI Group is now in its most critical selling period, which spans the months of December and January. As renewals in this quarter and next generally comprise 55%-60% of the company’s bookings, we were encouraged to hear that no changes in renewal patterns have been observed thus far despite the heightened macro uncertainty. In fact, management believes that the strong revenue retention rates seen of late can be sustained moving forward. We surmise that this confidence is driven in part by customer acceptance of built-in pricing escalators in over 90% of contracts.

As far as new business bookings, sales cycles have lengthened somewhat but this may be partially due to DHI Group’s pursuit of larger customers. Anecdotally, the company has successfully closed a couple of larger deals with a government agency and a cloud services provider. Per management, demand for technology workers outside of the technology sector remains robust with verticals such as aerospace and defense, consulting, banking and finance, and healthcare all performing well. Looking forward, budgets still need to be approved, but management sees no reason to pare back investments in sales and marketing heading into the new year. We expect the pace of investments next year to mirror this past year, leaving the company well positioned to sustain strong bookings and revenue growth in the mid-teens to 20% range.

Also pertinent to consider for FY ’23, the U.S. Congress appears likely to approve an 8% increase in defense spending for the coming fiscal year. Historically, ClearanceJobs’ growth has been correlated with defense spending given the requirements for cleared personnel to support new and expanded programs. As the number of technology workers with security clearances remains in short supply, the uptick in demand should provide a favorable backdrop for ClearanceJobs. In a similar vein, the first phase of Amazon’s HQ2 in Arlington, VA is expected to be completed next year and could further exacerbate the war for talent in the region. Suffice to say, we believe ClearanceJobs is recession-proof and remains poised for strong growth in the year ahead.

Rounding out the discussions were management’s views on capital allocation. At present, valuations in the private markets remain well above those afforded to public companies, so any M&A activity in the near-term is improbable. Given DHX’s valuation and the lack of credit from the market to date for the company’s strong execution, management believes share repurchases remain the best use of cash. As such, consistent repurchases against the company’s existing $15 million authorization are likely to continue for the foreseeable future. Upon the program’s expiration in February 2023, we believe a new authorization could be instituted and would not be surprised by a more aggressive approach to buybacks should the stock remain near current levels.

Our report with model and disclosures is available here.

Disclosure(s):

K. Liu & Company LLC (“the firm”) receives or intends to seek compensation from the companies covered in its research reports. The firm has received compensation from DHI Group, Inc. (DHX) in the past 12 months for “Sponsored Research.”

Sponsored Research produced by the firm is paid for by the subject company in the form of an initial retainer and a recurring monthly fee. The analysis and recommendations in our Sponsored Research reports are derived from the same process and methodologies utilized in all of our research reports whether sponsored or not. The subject company does not review any aspect of our Sponsored Research reports prior to publication.