DHI Group, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results; dollar amounts are in millions unless otherwise noted. DHI is focused on specialized employment and recruiting services, with one reportable segment, Tech-focused, including Dice, ClearanceJobs and eFinancialCareers.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $37.2 | $38.9 | $111.7 | $123.6 |
| Operating income | $5.3 | $1.5 | $12.6 | $9.4 |
| Operating margin | 14.2% | 3.8% | 11.3% | 7.6% |
| Net income | $4.4 | $0.9 | $9.0 | $4.2 |
| Diluted EPS | $0.08 | $0.02 | $0.18 | $0.09 |
| Operating cash flow | Not separately stated | Not separately stated | $19.0 | $8.7 |
- Q3 gross margin was 88.6%, unchanged year over year; nine-month gross margin was 89.3% versus 88.4%.
- Nine-month Adjusted EBITDA, a non-GAAP measure, was $26.3 million versus $23.7 million; Adjusted EBITDA margin was 24% versus 21% on Adjusted Revenues of $111.7 million and $114.3 million, respectively.
- Cash and equivalents were $4.5 million at September 30, 2019, down from $6.5 million at December 31, 2018. Net cash decreased $2.0 million during the nine months.
- Borrowings under the revolving facility were $8.0 million gross ($7.4 million net of financing costs), versus $18.0 million gross at year-end 2018. The $90 million facility had $82 million available, subject to limits and covenants; it matures in November 2023. The company reported covenant compliance.
- Current assets were $24.0 million and current liabilities $71.0 million. Current liabilities include $50.1 million of deferred revenue. Management said available U.S. cash, operating cash generation and borrowing capacity should cover anticipated requirements for at least 12 months.
Changes versus comparable periods
- Reported revenue fell 4% in Q3 and 10% for the nine months. Much of the nine-month decline reflects businesses divested in 2018 and closure of Dice Europe. Excluding divested businesses, nine-month Adjusted Revenues declined about 2%; Tech-focused revenue excluding Dice Europe increased 1% after foreign-exchange effects.
- Q3 brand trends were mixed: ClearanceJobs revenue grew 17%, Dice declined 3%, and eFinancialCareers declined 5%. Management attributed ClearanceJobs growth to demand for cleared professionals and product improvements; eFinancialCareers weakness reflected foreign exchange and Brexit uncertainty. Dice recruitment-package customers were approximately 6,100 versus 6,200 a year earlier, while average monthly revenue per U.S. customer rose to $1,131 from $1,125.
- Profitability improved as operating expenses declined, including lower disposition costs and reduced general and administrative and product-development expense. For the nine months, operating income increased despite lower reported revenue. Lower interest expense and a lower effective tax rate also supported earnings; the nine-month effective tax rate was 25.5% versus 47.0%.
- Operating cash flow increased by $10.3 million year over year, reflecting higher income and comparison against the 2018 effect of customer billing-term changes. Investing cash use was $7.7 million, including $10.3 million of fixed-asset purchases, partly offset by $2.7 million of divestiture-related escrow proceeds. Financing cash use was $13.1 million, mainly net debt repayments and share repurchases.
Outlook, risks and unusual items
- The filing provides no formal company-wide revenue or earnings guidance. Management identified customer growth and retention, customer adoption of additional services, and continued product investment as important to future revenue. It described recruitment-package customers and renewal rates at Dice as stabilized.
- Management cited competition, product-development and customer-value challenges, recruitment-market cyclicality, potential economic slowdowns, Brexit and foreign-exchange volatility as risks. Foreign operations generated about 20% of nine-month revenue; the company does not hedge currency exposure.
- The annual impairment reviews were underway as of October 1, 2019. The Dice trademark had only a 2% fair-value cushion over carrying value in the October 2018 test; management said projected revenue was approximately flat for 2019 and expected to increase thereafter. Goodwill’s fair value exceeded carrying value by 40% in the October 2018 test. Failure to achieve projections or weaker markets could lead to future impairment.
- Nine-month disposition-related and other costs were $1.7 million versus $5.2 million a year earlier; related activities were substantially complete by September 30. The $1.0 million FCRA class-action liability was settled and paid in Q3 2019. The company reported no other material pending legal proceedings.
- Adoption of lease accounting in January 2019 added operating lease right-of-use assets and liabilities; at September 30 these were $15.9 million and $16.5 million, respectively. The company also had approximately $2.0 million of unrecognized tax benefits and said up to $0.2 million might be recognized within 12 months.
- The company repurchased 617,300 shares for $1.8 million during the nine months and had $5.7 million remaining under its current $7 million authorization. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Whether growth and customer retention at ClearanceJobs and Dice can offset pressure at eFinancialCareers and the effects of foreign exchange.
- Whether the Dice trademark and Tech-focused goodwill impairment tests support their carrying values, given the limited trademark valuation cushion and forecast sensitivity.
- Whether operating cash generation and available credit remain sufficient as cash balances are low relative to current liabilities and the company continues investing in software and repurchasing shares.
- How customer billing terms, deferred revenue and backlog develop; September 30 deferred revenue was $51.1 million and backlog was $73.8 million.
- Whether debt covenants, variable interest rates and LIBOR transition arrangements remain manageable, and whether the approximately $2.0 million tax contingency changes.