DHI Group, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. DHI provides specialized online recruiting and career services. The company reorganized its reporting into Tech-focused, Healthcare, and Corporate & Other segments; prior-period segment results were recast.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $52.4 million | $56.1 million | $157.0 million | $172.0 million |
| Operating income (loss) | $2.5 million | $(16.1) million | $10.8 million | $(5.0) million |
| Operating margin | 4.8% | (28.7)% | 6.9% | (2.9)% |
| Net income (loss) | $1.1 million | $(16.8) million | $4.2 million | $(10.9) million |
| Diluted EPS | $0.02 | $(0.35) | $0.09 | $(0.22) |
| Operating cash flow | Not stated quarterly | $27.2 million | $37.0 million | |
| Adjusted EBITDA (non-GAAP) | Not stated quarterly | $30.0 million | $43.8 million |
Revenue fell 6.5% in Q3 and 8.7% year to date. Q3 cost of revenue was 14.5% of sales, versus 14.2% a year earlier; sales and marketing was 38.1%, versus 34.6%. Year-to-date cash capital expenditures were $10.2 million. Cash was $22.1 million at September 30, 2017, versus $23.0 million at year-end 2016.
At September 30, 2017, debt was $69.0 million gross ($68.4 million net of deferred financing costs), down from $86.0 million gross at year-end. The revolving facility was reduced from $250 million to $150 million; $81 million was available, subject to limitations. The facility matures in November 2020, and DHI reported compliance with its financial covenants. Current liabilities were $103.7 million, including $81.8 million of deferred revenue.
Material changes and segment performance
- Q3 Tech-focused revenue declined 6.8% to $39.8 million; Healthcare declined 4.1% to $6.5 million; Corporate & Other declined 6.8% to $6.1 million. For the first nine months, the respective declines were 7.9%, 4.4%, and 17.2%.
- DHI cited fewer U.S. Dice recruitment-package customers (approximately 6,600 versus 7,250 a year earlier), competition and digital-market changes, weaker energy-sector demand, and foreign exchange and Brexit-related impacts. ClearanceJobs revenue increased, partially offsetting declines elsewhere.
- Year-to-date operating results improved substantially versus 2016, primarily because 2016 included $24.6 million of Rigzone goodwill and intangible-asset impairments. The 2017 comparison includes a $2.2 million impairment after DHI discontinued getTalent.
- Year-to-date operating cash flow declined to $27.2 million from $37.0 million, which management attributed to lower earnings. Adjusted EBITDA decreased to $30.0 million from $43.8 million.
Outlook, risks, and unusual items
- DHI is pursuing divestitures of BioSpace, Hcareers, Health eCareers, and Rigzone to focus resources on its technology business. It gave no assurance that any sale will occur, or as to timing or terms. It also incurred $2.2 million of year-to-date disposition-related and other costs.
- Management said available U.S. and Canadian cash, operating cash flow, and borrowing capacity should meet anticipated needs for at least 12 months. This outlook is subject to demand, covenant, lender, and refinancing risks.
- DHI expects limited revenue-recognition timing changes from adopting Topic 606 on January 1, 2018, primarily for job postings and resume search; it did not expect a material cumulative revenue impact, but was still assessing the impact on contract acquisition costs.
- Risks cited include recruitment-market competition and cyclicality, weak energy demand, Brexit and foreign-currency exposure (not hedged), and the ability to execute its tech-focused strategy. The CEO was expected to depart by March 31, 2018 or upon appointment of a successor; the board was conducting a search.
- A $2.3 million accrual for unrecognized tax benefits was recorded in Q3 related to prior-year U.S. tax filings. DHI reported approximately $4.9 million of unrecognized tax benefits at quarter-end and said up to $624,000 might be recognized within 12 months. Management said ordinary-course legal matters were not expected to materially affect the company; no material pending legal proceeding was reported.
- After quarter-end, DHI received $3.3 million restitution on October 24, 2017 from a former employee; the gain was to be recorded in Q4 2017.
Important facts for investors to verify
- Whether planned non-tech divestitures proceed, and their sale prices, timing, and effects on reported results and liquidity.
- Whether Dice customer losses and broader revenue declines stabilize, and whether ClearanceJobs growth continues.
- Debt capacity and covenant headroom after the facility reduction, including the impact of variable interest rates and the November 2020 maturity.
- The final effects of Topic 606 adoption, tax examinations, and the CEO transition.
- Underlying profitability apart from prior-year impairments and 2017 restructuring, getTalent impairment, and restitution; the filing provides no formal earnings guidance.