Elevated Churn at Dice Hinders Outlook

DHI Group (DHX) reported mixed Q3 ’23 results. The performance was reminiscent of the prior quarter with both revenue and bookings trailing expectations but adjusted EBITDA coming in slightly better. However, macro headwinds continued to intensify, weighing on retention rates and new business bookings at Dice. Although ClearanceJobs again posted solid growth, the uncertainty arising from a potential government shutdown during the quarter also dampened demand. All told, the elevated churn at Dice and continued sluggishness in new business bookings prompted management to guide Q4 revenue below prior expectations. On a more positive note, workforce reductions enacted earlier in the year along with ongoing management of discretionary investments in sales and marketing still leave the company on track to achieve a 25% EBITDA margin exiting FY ‘23.

The elevated churn of late coupled with a steep decline in job postings for technologists paints an ominous picture as DHI Group heads into its key selling months of December and January. On the one hand, bookings headwinds related to unusually high consumption-related top-ups last year will abate in the coming quarters, suggesting retention rates and the rate of decline in bookings at Dice should improve on a sequential basis. However, we remain wary that even with a rebound in retention rates, the current cadence of new business will be insufficient to offset the lost revenue. We therefore reduce our revenue estimates for this year and next with the latter now reflecting a decline in the mid-single digit range versus our prior expectations for modest growth. Although we expect the company to sustain an adjusted EBITDA margin approaching 25% next year, the lower revenue base also results in a decrease in our FY ’24 adjusted EBITDA estimate. Finally, we introduce our initial FY ’25 estimates, which reflect a return to positive revenue growth along with additional margin expansion.

Reflecting the reduction in our estimates and a lower target multiple, our price target declines from $9.00 to $6.75. We note that our price target is now based on a FY ’24 EV/Sales multiple of 2.5x, whereas our prior target was based on a FY ’23 EV/Sales multiple of 3.0x. We believe the lower multiple is warranted at present given the uptick in churn and pushout in the timing of renewed growth at Dice. That said, our price target still reflects substantial upside from current levels, and we remain bullish on DHI Group’s long-term prospects. In our view, the company’s growing candidate pool coupled with secular demand for technologists will ultimately provide a strong tailwind for growth. This combined with a highly recurring revenue base and scalable operating model should fuel significant multiple expansion over time. 

Exhibit I: Reported Results and Guidance Versus Expectations

Sources: DHI Group; K. Liu & Company LLC; FactSet Estimates

Q3 revenue of $37.4 million (-2.8% Y/Y) was short of our estimate and consensus of $38.5 million. Relative to our model, the shortfall was wholly attributable to Dice, which generated revenue of $24.8 million (-9.4% Y/Y) versus our projection of $26.2 million. Worth noting, the revenue decline at Dice primarily reflects a substantial decrease in transactional revenue tied to ancillary services as Dice’s recurring revenue increased 5% Y/Y in Q3. ClearanceJobs revenue of $12.7 million (+13.2% Y/Y) was slightly ahead of our $12.4 million estimate.

Dice bookings totaled $19.1 million (-23.5% Y/Y), coming in well below our $21.7 million forecast, and ClearanceJobs bookings were $12.1 million (+5.0% Y/Y) versus our $12.5 million projection. Similar to last quarter, Dice faced a difficult comparison as the prior year period included significant contribution from customer upsells tied to overconsumption as well as high levels of transaction-oriented fees. As for ClearanceJobs, new sales bookings in the quarter were impacted by uncertainty over a potential government shutdown, prompting further delays in deal closures. Much like the bookings trajectory, all other key customer metrics for Dice reflected the challenging macro conditions and trended lower on a sequential basis. However, key customer metrics for ClearanceJobs generally compared favorably with our expectations.

Exhibit II: Key Metrics

Sources: DHI Group; K. Liu & Company LLC

Gross margin of 86.7% was slightly below our assumption of 87.0% due to the revenue shortfall. However, total operating expenses were below our estimate, primarily due to lower sales and marketing and general and administrative expenses than we projected. Due to the lower level of expenses, adjusted EBITDA of $9.4 million (25.1% margin) exceeded our estimate of $9.3 million and consensus of $9.2 million. EPS of $0.02 was a penny shy of our estimate due to a higher than modeled tax rate.

Cash at the end of Q3 totaled $3.7 million, while debt outstanding declined from $43.0 million to $40.0 million. In Q3, DHI Group generated $5.6 million in cash flow from operations and used $5.8 million for capital expenditures.

For FY ‘23, management reduced its revenue growth target from 3%-4% to 0%-1%, implying Q4 revenue of $35.1-$36.6 million. However, management maintained its prior expectations to exit the year with an adjusted EBITDA margin of at least 25%, implying Q4 adjusted EBITDA of $8.8-$9.1 million. Prior to revisions, we were projecting revenue and adjusted EBITDA of $38.6 million and $9.6 million, respectively, while consensus stood at $38.8 million and $9.7 million.

Exhibit III: Estimate Revisions

Source: K. Liu & Company LLC

Reflecting a reduction in our projections for Dice bookings growth, we lower our estimates for this year and next. We also introduce our estimates for FY ’25, which include revenue of $147.7 million (+4.7% Y/Y) and adjusted EBITDA of $35.3 million (23.9% margin).

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.