Margins Expanding Amid Intensifying Headwinds
DHI Group (DHX) reported mixed Q2 ’23 results. Revenue was just shy of our estimate and consensus, but both adjusted EBITDA and EPS beat expectations due to lower operating expenses. Dice bookings growth was particularly challenged in the quarter as the prior year period marked a post-COVID peak in transactional fees and consumption-related upsells. In contrast, employers have exhibited far less urgency to fill open positions amid the current macro uncertainty. Bookings growth also decelerated at ClearanceJobs as negotiations over the debt ceiling prompted government contractors to pause hiring plans until funding for programs was secured. Other key customer metrics, including customer churn and dollar retention rates also fared worse than we assumed but remain within striking distance of the highs exhibited over the past year. Given the persistent declines in new job postings of late and the deliberate pace at which employers have been filling roles, the results were not particularly surprising and, in our view, reinforce management’s decision to shift its focus to margin expansion earlier this year.
Looking forward, Dice is likely to see depressed bookings until tech hiring reaccelerates, while ClearanceJobs should rebound given a robust sales pipeline and a favorable outlook for government spending on defense. From an expense standpoint, much of the $8-$10 million in annualized savings from DHI Group’s organizational restructuring in May has yet to be reflected in the results. Taking all these factors into consideration, management guided for flattish revenue growth in Q3 and an adjusted EBITDA margin of 24%. For FY ’23, management reduced its revenue growth expectations from 5%-6% to 3%-4% but maintained prior guidance for an adjusted EBITDA margin of 25% exiting the year. Overall, management’s guidance suggests both our prior adjusted EBITDA estimate and the Street’s remain achievable despite a slight haircut to revenue.
We lower our revenue estimates for this year and next, primarily due to a reduction in our assumptions for Dice bookings. For FY ’23, our adjusted EBITDA estimate remains intact on lower operating expenses but the headwinds on the top line led to a decrease in our profitability expectations for next year. We note that our model does not reflect a stepdown in expenses commensurate with the savings anticipated from the recent restructuring, which suggests management’s near-term guidance and our corresponding margin expansion assumptions could prove conservative. Longer-term, we expect growth to reaccelerate into the double-digits as tech hiring proves resilient, employers gravitate towards the company’s expanding candidate pool and DHI Group bundles new offerings with its core recruitment packages. Our price target remains $9.00 based on an unchanged FY ’23 EV/Sales multiple of approximately 3x.
Exhibit I: Reported Results and Guidance Versus Expectations
Sources: DHI Group; K. Liu & Company LLC; FactSet Estimates
Q2 revenues of $38.5 million (+4.0% Y/Y) were just shy of our $38.8 million estimate and the Street’s $38.7 million. Relative to our model, Dice revenue of $26.3 million (-2.1% Y/Y) was below our $26.9 million projection, while ClearanceJobs revenue of $12.3 million (+19.9% Y/Y) outpaced our $11.9 million estimate. Dice bookings totaled $21.8 million (-14.8% Y/Y), coming in well below our $26.2 million forecast, and ClearanceJobs bookings were $10.5 million (+8.1% Y/Y) versus our $10.9 million projection. Per management, Dice faced a particularly difficult comparison on both the revenue and bookings lines 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, the pipeline remains robust but new sales bookings in the quarter were impacted by the debt ceiling negotiations, which prompted government contractors to delay hiring decisions. Much like the bookings trajectory, all other key customer metrics reflected the challenging macro conditions and trended lower on a sequential basis. The lone exception was average revenue per customer in the ClearanceJobs segment, which continued its uptrend following rate card increases earlier in the year.
Exhibit II: Key Metrics
Sources: DHI Group; K. Liu & Company LLC
Gross margin of 87.1% was in line with our assumption. Total operating expenses were below our estimate, primarily due to lower product development and sales and marketing expenses. Of note, much of the $8-$10 million in annualized cost savings expected from the organizational restructuring announced in late May were not reflected in the Q2 results. Due to the lower level of expenses, adjusted EBITDA of $8.7 million (22.7% margin) exceeded our estimate and consensus of $8.1 million. EPS of $(0.00) also beat our estimate of $(0.06) and consensus of $(0.02).
Cash at the end of Q2 totaled $2.7 million, while debt outstanding declined from $46.0 million to $43.0 million. In Q2, DHI Group generated $8.1 million in cash flow from operations and used $4.4 million for capital expenditures. Additional usages of cash included the repurchase of approximately 920,000 shares for $3.4 million, or an average price of $3.69 per share.
Management’s Q3 guidance calls for flattish revenue growth and an adjusted EBITDA margin of 24%, implying revenue and adjusted EBITDA of $38.5 million and $9.2 million, respectively. Prior to revisions, we were projecting revenue and adjusted EBITDA of $39.8 million and $9.4 million, while consensus stood at $39.6 million and $9.1 million. For FY ‘23, management reduced its revenue growth target from 5%-6% to 3%-4% while maintaining prior expectations to exit the year with an adjusted EBITDA margin of at least 25%. The revised outlook suggests both our adjusted EBITDA estimate and consensus for the year need not change despite a $3 million haircut to revenue. Worth noting, the implied guidance for 2H ’23 suggests revenue will remain relatively flattish on a quarterly basis while adjusted EBITDA increases slightly each quarter. Considering that much of the cost savings from the company’s recent restructuring have yet to be realized, we surmise the current adjusted EBITDA outlook may prove conservative.
Exhibit III: Estimate Revisions
Source: K. Liu & Company LLC
We reduce our revenue estimates for this year and next to reflect lower assumptions for Dice bookings growth. For FY ’23, the reduction in our top line projections was offset by lower levels of operating expenses, resulting in no material change to our adjusted EBITDA estimate. While our FY ’24 operating expense assumptions also move lower, the decrease was not sufficient to offset the reduction in our revenue forecast, and our adjusted EBITDA estimate therefore declines in concert.
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.