DHI Group, Inc. (filed as Dice Holdings, Inc.) — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods unless stated otherwise. Amounts are in U.S. dollars.
Business context
The company operates specialized recruiting and professional-community websites across Tech & Clearance, Finance, and Energy, with smaller activities reported as Other. Revenue primarily comes from recruitment packages, job postings, resume-database access, advertising, and related services.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $52.6 million | $48.0 million | $155.1 million | $142.6 million |
| Operating income | $11.5 million | $14.7 million | $35.7 million | $44.3 million |
| Operating margin | 21.9% | 30.6% | 23.0% | 31.1% |
| Net income | $7.1 million | $11.0 million | $22.1 million | $29.1 million |
| Net margin | 13.4% | 22.9% | 14.3% | 20.4% |
| Diluted EPS | $0.12 | $0.17 | $0.37 | $0.44 |
| Operating cash flow | Not separately reported | Not separately reported | $40.8 million | $44.5 million |
| Capital expenditures | Not separately reported | Not separately reported | $8.2 million | $4.0 million |
| Free cash flow* | Not separately reported | Not separately reported | $32.6 million | $40.5 million |
*Company-defined non-GAAP measure: operating cash flow less capital expenditures.
Q3 revenue grew 9.5%, while operating income fell 21.7% and net income fell 35.8%. For the nine months, revenue grew 8.7%, while operating income declined 19.4% and net income declined 24.0%. The filing attributes margin pressure chiefly to increased operating costs, including acquisition-related costs, product-development investment, and higher general and administrative expense.
- Q3 segment revenue: Tech & Clearance $37.0 million (+12.3%), Finance $8.6 million (−8.8%), Energy $6.0 million (+32.7%), and Other $1.1 million (−10.2%).
- Tech & Clearance growth included contributions from Slashdot Media and The IT Job Board. Dice.com revenue was approximately flat for Q3; its recruitment-package customer count declined to about 8,450 from 8,650 a year earlier, while average monthly revenue per package customer increased about 2%.
- Finance remained weak amid reduced recruiting activity and economic conditions, particularly in Europe and the UK. Energy growth included increased website usage and advertising, plus revenue from a biennial industry event.
- Q3 cost of revenue rose 69.3% to $6.1 million; product development rose 44.5% to $5.6 million; and general and administrative expense rose 26.7% to $8.5 million. Q3 effective tax rate was 36.7%, versus 23.6%, reflecting the mix of U.S. and non-U.S. income and a prior-year discrete tax benefit.
Cash, debt, and liquidity
- At September 30, cash and cash equivalents were $44.7 million, versus $40.0 million at year-end 2012; the company held no investments at quarter-end. Cash included approximately $34.6 million held in non-U.S. jurisdictions and described as indefinitely reinvested.
- Long-term debt was $60.0 million, up from $46.0 million at December 31, 2012. The company reported $95.0 million of remaining capacity under its then-current $155 million revolving facility and said it was in compliance with its covenants.
- Nine-month cash flows were $40.8 million from operations, $(18.2) million from investing, and $(16.5) million from financing. Investing included $12.3 million for The IT Job Board and $8.2 million of fixed-asset purchases. Financing included $35.0 million of share repurchases and $20.0 million of debt repayments, partly offset by $34.0 million of new borrowings.
- Deferred revenue was $69.4 million, essentially unchanged from December 2012. Total assets were $371.1 million and total liabilities were $183.1 million at quarter-end.
- On October 28, 2013, after quarter-end, the company refinanced: a new facility comprised a $50 million term loan and $200 million revolver, both maturing in October 2018. It borrowed $65 million to repay the prior facility; scheduled term-loan principal payments begin March 31, 2014.
Material developments, outlook, and risks
- In July, the company acquired The IT Job Board for £8.0 million (about $12.2 million), net of cash acquired, plus up to £3.0 million (about $4.6 million) in contingent payments. It recorded $10.8 million of intangible assets and $9.1 million of goodwill. The acquisition contributed $1.1 million of Q3 revenue and an operating loss of $1.1 million.
- Slashdot Media contributed $3.7 million of Q3 revenue and an operating loss of $0.8 million; for the nine months, it contributed $11.8 million of revenue and an operating loss of $2.3 million. The company also recorded acquisition-related contingent consideration of $14.6 million at quarter-end. A $5.0 million WorkDigital payment was made in October; further contingent payments are expected in 2014, subject to stated conditions.
- Leadership changed at quarter-end: Scot Melland resigned as chairman, president, and CEO, retaining a board seat; Michael Durney became president and CEO. John Roberts joined as CFO in October.
- The filing provides no quantified earnings or revenue guidance. Management said existing cash, operating cash generation, and available borrowing capacity should meet anticipated requirements for at least 12 months, while noting that lower demand, lender availability, refinancing, and acquisition funding could affect liquidity.
- Key risks include competition; economic and recruiting cyclicality; dependence on attracting professionals and retaining customers; integrating acquisitions; foreign-exchange exposure (not hedged); interest-rate exposure; and debt covenant and refinancing risks. Management reported no pending material legal proceedings and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether revenue gains from acquisitions and Energy offset continued weakness in Finance and subdued Dice.com customer counts.
- Whether elevated product-development and other operating expenses translate into improved products and sustainable margins.
- Cash conversion and investment needs, particularly the decline in nine-month operating cash flow and free cash flow versus 2012.
- Debt, covenant capacity, and required term-loan amortization under the post-quarter refinancing, alongside planned share repurchases.
- Acquisition performance, contingent-payment conditions, and goodwill/intangible-asset impairment assumptions.