Focus Shifts to Margin Expansion Despite Q1 Beat
DHI Group (DHX) reported Q1 ’23 results ahead of our estimates and consensus. Revenues from both Dice and ClearanceJobs were slightly above our projections, and bookings were also a tad better than we projected as Dice surpassed our admittedly low hurdle for the quarter. Trends in other key metrics were similar to last quarter, reflecting churn among smaller customers, which in turn boosted average revenue per customer. Overall, we had anticipated a relatively slow start to the year due to softer macro conditions, and the company’s sales performance was largely consistent with our assumptions. The only surprise in the numbers from our perspective was the level of operating expenses, which came in below our estimates and drove a solid beat on both the adjusted EBITDA and EPS lines.
Although the Q1 performance appeared consistent with expectations coming into this year, management noted that sales cycles for potential new customers remain elongated. Internally, the sales organization has re-oriented its focus to existing customers and prospects in verticals exhibiting more resiliency to the macro uncertainty such as aerospace and defense. Nonetheless, management now assumes that bookings from new customers will remain depressed and is no longer factoring in any meaningful recovery this year. As such, guidance for Q2 calls for revenue growth of 4%-5% versus Street expectations for ~10%, and revenue in FY ’23 is now expected to grow in the 5%-6% range as opposed to the low-double digit increase previously contemplated. Given the headwinds on the top line, spending will also be curtailed, and management is now targeting an adjusted EBITDA margin of 25% exiting FY ‘23. All told, the revised outlook for FY ’23 implies adjusted EBITDA at or above prior Street expectations despite the reduction in revenue guidance.
We lower our top line estimates for this year and next, primarily reflecting a haircut in our non-recurring revenue expectations as well as a slower recovery in Dice bookings growth than we previously assumed. However, these declines were more than offset by a reduction in our operating expense estimates, resulting in an uptick in our adjusted EBITDA and EPS projections for both FY ’23 and FY ’24. Due to our lower growth expectations, our price target declines from $9.50 to $9.00 based on an unchanged FY ’23 EV/Sales multiple of approximately 3x. Considering the challenging backdrop, we believe the company is executing well and management is taking the appropriate steps to enhance shareholder value by committing to margin expansion, buying back stock and de-levering the balance sheet. We maintain our view that shares of DHX are significantly undervalued.
Exhibit I: Reported Results and Guidance Versus Expectations
Sources: DHI Group; K. Liu & Company LLC; FactSet Estimates
Q1 revenues of $38.6 million (+12.5% Y/Y) exceeded our estimate of $38.1 and consensus of $37.5 million. Both Dice revenues of $26.9 million (+9.2% Y/Y) and ClearanceJobs revenues of $11.7 million (+20.7% Y/Y) came in slightly ahead of our estimates of $26.7 million and $11.4 million, respectively. Bookings for both platforms were also consistent with our expectations. Specifically, Dice bookings were $37.6 million (+2.2% Y/Y) versus our $36.8 million projection, while ClearanceJobs bookings totaled $15.9 million (+15.0% Y/Y) versus our $16.0 million projection. As for other key customer metrics, revenue retention rates remained solid in the 90% range for both platforms, while trends in both ending customer counts and average revenue per customer mirrored the prior quarter. In this regard, DHI Group continued to see higher churn rates among smaller customers with annual contract values below $10,000, resulting in a lower customer count than we projected that was offset by higher revenues per customer.
Exhibit II: Key Metrics
Sources: DHI Group; K. Liu & Company LLC
Gross margin of 87.3% was just shy of our 87.5% assumption, while total operating expenses were below our estimate. Per management, the company is scrutinizing its expenses and has reduced third-party marketing spend to an extent. Regardless, Dice has seen a strong influx of new candidate profiles, and marketing qualified leads continue to grow. Reflecting the lower level of expenses, adjusted EBITDA of $8.1 million (20.9% margin) beat our estimate of $6.4 million and consensus of $7.0 million. EPS of $0.01 also beat our estimate of $(0.03) and consensus of $(0.02).
Cash at the end of Q1 totaled $5.4 million, while debt outstanding remained increased from $30.0 million to $46.0 million. Subsequent to quarter-end, the debt balance was brought down to $41.0 million. In Q1, DHI Group’s cash flow from operations was approximately breakeven, and the company used $4.8 million for capital expenditures. Additional usages of cash included the repurchase of approximately 743,000 shares for $3.5 million, or an average price of $4.76 per share, and the purchase of 899,000 shares for $5.3 million to cover income tax withholdings related to the sale of employee shares during the quarter.
For Q2, management guided for revenue growth of 4%-5% and an adjusted EBITDA margin of 21%, implying adjusted EBITDA consistent with our prior estimate and consensus despite lower revenue expectations. For FY ‘23, management reduced its revenue growth target from low double-digits to 5%-6%, but now expects to exit the year with an adjusted EBITDA margin of 25%.
Exhibit III: Estimate Revisions
Source: K. Liu & Company LLC
We lower our revenue estimates for this year and next to reflect lower levels of non-recurring revenue as well as a slower recovery in Dice bookings growth. The reduction in our top line projections was more than offset by lower levels of operating expenses, however, resulting in an uptick in our adjusted EBITDA and EPS estimates going forward.
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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.