Highlights from Meeting with Management
We met with DHI Group’s (DHX) CEO Art Zeile and CFO Kevin Bostick at the LD Micro Invitational Conference in Westlake Village, CA. Top of mind for us was a multitude of headlines of late suggesting a recession is around the corner, if not here already, and a slowdown in hiring among the largest technology companies. From there we delved into potential areas of exposure in a downturn, leading indicators for the company and the path forward amid the uncertainty. The key takeaway, in our opinion, is a still robust labor market backdrop that should enable DHI Group to sustain the strong business momentum realized over the past year. As such, we believe the dip in shares yesterday creates an attractive buying opportunity. Our price target remains $8.50 based on a FY ’22 EV/Sales multiple of 3x.
As technology giants like Meta Platforms (FB) and Uber Technologies (UBER) are reportedly pumping the brakes on hiring, investors are understandably concerned that demand for technologists (and economic conditions more generally) may be softening. From DHI Group’s perspective, the war for technology talent rages on as evidenced by CompTIA’s report of another monthly uptick in technology job postings in May, as well as the supply/demand imbalance in Dice’s own data. Moreover, Staffing Industry Analysts projects IT staffing growth of 12% this year, more than double the rate projected for the U.S. staffing industry. Importantly, even as DHI Group’s Dice platform has seen rapid adoption by commercial organizations of late, recruiting and staffing organizations still comprise the majority of revenue. On the commercial side, less than 1% of revenue comes from VC-backed entities and direct exposure to technology companies is in the neighborhood of 10%. Per management, the Dice platform tends to resonate with mid-sized technology companies as well as large, non-tech companies that may not be as adept at attracting technology candidates as the tech titans, so hiring freezes for the latter are not indicative of the broader demand for talent. Finally, we note that while management has its eyes on several indicators of success for its business, the two leading indicators – unemployment rates in the technology sector and job postings – remain healthy.
In response to a number of “what if” scenarios, management highlighted the resiliency of its business in a downturn. Whereas large recruiting platforms like Indeed and ZipRecruiter (ZIP) derive a higher level of variable revenues aligned with performance metrics, DHI Group generates 90% of its revenue from subscriptions with annual or multi-year terms. With the early days of COVID-19 as a guide, clients representing less than 1% of revenue requested any sort of relief and less than 10% of that subset was provided with concessions. From an expense standpoint, marketing has been one of the more significant incremental investments as DHI Group has returned to strong growth but would naturally self-correct in a downturn as corresponding ad rates would decline. In this regard, the level of advertising activity could actually hold steady even as expenses come down if advertising rates were to fall. That said, advertising rates remain relatively stable as does DHI Group’s cost per marketing qualified lead. In fact, management noted that its LTV:CAC ratio has trended up due to the combination of more efficient marketing spend and higher retention rates. Of course, hiring on the sales front could also be slowed or stopped in a downturn, but consistent with management’s view that labor market conditions remain favorable, plans to onboard six to seven new reps per quarter remain intact.
Last but not least, DHI Group’s ClearanceJobs platform, which comprises roughly 30% of revenue, has far more correlation with defense budgets than with the U.S. economy. As such, the Biden administration’s proposed 4% increase in its national defense budget for fiscal year 2023 bodes well for continued strong growth at ClearanceJobs. Worth noting, defense contractors begin recruiting in advance of awarded contracts, and job statistics on ClearanceJobs are already hitting all time highs.
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.