DHI Group, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context
DHI provides specialized employment and recruiting services, with its remaining reportable segment focused on technology, security-cleared and financial-services professionals. The company completed its exit from most non-technology businesses during 2018 and ceased Dice Europe operations on August 31, 2018. Comparisons with 2017 are substantially affected by business sales and transfers.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $38.9 | $52.4 | $123.6 | $157.0 |
| Operating income | $1.5 | $2.5 | $9.4 | $10.8 |
| Operating margin | 3.8% | 4.8% | 7.6% | 6.9% |
| Net income | $0.9 | $1.1 | $4.2 | $4.2 |
| Diluted EPS | $0.02 | $0.02 | $0.09 | $0.09 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $8.7 | $27.2 |
| Adjusted EBITDA | Not provided in the excerpt | Not provided in the excerpt | $23.7 | $29.4 |
- Q3 revenue fell 26%; the company attributed $11.7 million of the $13.5 million decrease primarily to divested businesses. Tech-focused revenue declined 5%. Within that segment, ClearanceJobs grew 22% and eFinancialCareers grew 2%, while Dice declined 6% and Dice Europe revenue fell 76% before its closure.
- Nine-month revenue declined 21%, including the absence of the sold Healthcare business and lower Corporate & Other revenue. Tech-focused revenue decreased 4%.
- Q3 operating income declined by $1.1 million, with the decrease attributed mainly to the Rigzone sale loss and higher disposition-related costs. Nine-month operating margin improved year over year, partly reflecting a 2017 fixed-asset impairment and a 2018 gain on business sales.
- Nine-month operating cash flow decreased $18.5 million. Management cited lower earnings-related cash generation and working-capital changes, including more flexible customer billing terms and payment timing. Investing cash flow was $10.9 million, including $17.5 million of net proceeds from business sales and $6.6 million of fixed-asset purchases. Financing cash use was $26.4 million, principally reflecting $25.0 million of net debt repayments.
Balance sheet and liquidity
- At September 30, cash was $4.7 million, total assets $251.4 million, and stockholders’ equity $143.9 million. Cash was $12.1 million at year-end 2017.
- Debt was $17.0 million gross, or $16.6 million net of financing costs, versus $42.0 million gross at December 31, 2017. The $150 million revolving facility had $133 million of stated available borrowing capacity, subject to limitations. It matures in November 2020; the company reported compliance with financial covenants.
- Deferred revenue was $56.4 million, down from $83.6 million at year-end 2017. Management attributed the decline primarily to divestitures and greater billing flexibility.
- Management said U.S. cash, operating cash generation and available borrowing capacity should be sufficient for anticipated requirements for at least the next 12 months. The filing also identifies risks involving lender availability, covenant compliance, refinancing and weaker demand.
Changes, outlook and material items
- Business portfolio changes included the sale of RigLogix, sale of Hcareers, transfer of majority ownership of BioSpace and Rigzone, and closure of Dice Europe. The company retained minority interests in BioSpace and Rigzone; it agreed to provide Rigzone $0.4 million of funding, with no further funding requirement stated.
- Management described continued competitive pressure and customer-attribution challenges at Dice, which it said contribute to lower recruitment-package renewal rates. U.S. Dice package customers declined to approximately 6,200 from 6,600 year over year, while average monthly revenue per U.S. customer increased to $1,125 from $1,108 for Q3.
- The filing does not provide formal company-wide earnings or revenue guidance. For impairment analyses, management projected Dice trademark revenue to decline about 7% in 2018, about 1% in 2019, and grow in subsequent years; it projected Tech-focused revenue to decline about 1% in 2018 and grow in 2019. These are valuation assumptions, not formal guidance.
- Goodwill and trademark impairment are significant watch items. The most recent annual test showed Tech-focused reporting-unit fair value only 1% above carrying value; the Dice trademark was 4% above carrying value. Annual testing was underway, and management warned that weaker results, market conditions or higher discount rates could lead to impairment.
- The company adopted revenue standard Topic 606 on a modified retrospective basis, increasing opening retained earnings by approximately $4.5 million and capitalizing contract acquisition costs. Adoption reduced nine-month net income by $0.2 million versus the presentation without adoption, while increasing Q3 net income by $0.4 million versus that comparison. Operating cash flow was unchanged by adoption for the nine-month period.
- Disposition-related and other costs were $2.1 million in Q3 and $5.2 million for the nine months, mainly severance, reorganization and related costs. A tentative $1.0 million settlement liability was recorded for a class-action claim alleging violations of the Fair Credit Reporting Act; final execution and court approval remained pending.
- The nine-month effective tax rate was 47%, affected by share-based compensation tax deficiencies, business-sale tax benefits and a transition-tax adjustment. The company reported $3.2 million of unrecognized tax benefits and said up to $0.8 million might be recognized within 12 months.
- The board authorized up to $7 million of share repurchases through May 2019. The company reported approximately $0.8 million of purchases during the first nine months. The filing also describes a 1.75 million-share CEO restricted-stock inducement grant and a separate 750,000-unit performance-based award entitlement.
Important facts for investors to verify
- How much of the reported revenue decline reflects divestitures and closures versus underlying trends in the continuing Tech-focused business, particularly Dice customer retention and attribution.
- Results of the October 1, 2018 goodwill and Dice trademark impairment tests, and whether operating performance supports the valuation assumptions.
- Whether operating cash flow and deferred revenue stabilize following the changes in customer billing terms.
- Final terms and approval of the Fair Credit Reporting Act settlement, and resolution of the Hcareers sale escrow and working-capital receivables.
- Actual borrowing capacity under the credit agreement, covenant headroom and the company’s ability to maintain liquidity if demand weakens.
- The dilution and compensation expense implications of outstanding restricted stock, performance awards and the CEO grants.