DHI GROUP, INC. quarterly report, Q1 FY2018

Full document

DHI Group, Inc. — Q1 2018 Form 10-Q

Reporting period: Three months ended March 31, 2018; compared with Q1 2017 unless otherwise noted. DHI provides specialized online recruiting and career services. Its strategy is shifting toward technology-focused markets, with selected non-core businesses sold or transferred.

Financial performance and liquidity

  • Revenue: $43.1 million, down 17% from $52.2 million. Tech-focused revenue fell 4% to $37.9 million; Corporate & Other fell 13% to $5.1 million. The prior-year comparison included Health eCareers, sold in December 2017.
  • Profit: Operating income was $6.8 million versus $4.3 million; operating margin was 15.9% versus 8.2%. Q1 2018 operating income included a $4.6 million gain on business sales. Net income was $3.5 million versus $1.3 million; diluted EPS was $0.07 versus $0.03.
  • Adjusted EBITDA: $9.7 million, down from $10.4 million. This non-GAAP measure excludes specified items; the company changed its definition in Q1 and recast the prior period.
  • Cash flow: Operating cash flow was $6.9 million, down from $14.5 million, primarily reflecting lower earnings and working-capital changes. Investing provided $1.7 million, including $3.5 million in sale proceeds, partly offset by $1.8 million of fixed-asset purchases. Financing used $4.3 million, including $6.0 million of debt repayments and $2.0 million of new borrowing. Cash ended the quarter at $16.2 million.
  • Costs and taxes: Cost of revenue was 12.0% of revenue versus 14.2%; sales and marketing was 37.8% versus 38.1%; general and administrative was 24.1% versus 21.6%. The effective tax rate was 44.3%, versus 61.6%, and remained above the 21% statutory federal rate, partly because of tax expense related to share-based awards and GILTI.
  • Debt and liquidity: Revolver borrowings were $38.0 million gross ($37.5 million net of financing costs), with $112.0 million of available capacity under the $150 million facility, subject to limitations. The facility matures in November 2020; the stated rate was 3.94%. DHI reported compliance with its financial covenants and said available cash, operating cash flow and borrowing capacity should meet anticipated needs for at least 12 months.
  • Balance sheet: Total assets were $295.0 million and total liabilities $149.9 million at March 31, 2018. Deferred revenue was $78.1 million, down from $83.6 million at year-end 2017.

Material changes and notable items

  • Dice revenue fell 11%; U.S. Dice recruitment-package customers declined to approximately 6,200 from 6,800. Average monthly revenue per U.S. package customer was nearly flat at $1,112 versus $1,110.
  • ClearanceJobs revenue rose 20% to $4.8 million, while eFinancialCareers revenue rose 9% to $8.6 million, including a favorable foreign-exchange effect.
  • DHI sold the RigLogix portion of Rigzone for $4.2 million and recognized a $4.6 million gain. It transferred majority ownership of BioSpace to management, retaining a 20% preferred interest. It had sold Health eCareers in December 2017.
  • DHI adopted ASC 606 using the modified retrospective method. Adoption increased opening retained earnings by approximately $4.5 million. For Q1, the company reported revenue $147,000 higher, operating income $1.415 million higher, and net income $1.061 million higher than it would have without adoption; operating cash flow was unchanged. The balance sheet included $7.2 million of capitalized contract costs.
  • Disposition-related costs were $1.0 million. DHI also recorded a $1.0 million liability for a tentative settlement in a class action alleging Fair Credit Reporting Act violations involving Open Web profiles; settlement remains subject to execution and court approval.

Outlook, risks and contingencies

  • DHI described revenue pressure from competition, lower Dice recruitment-package renewals and difficulty attributing value delivered to customers. Management cited product development and enhancements as efforts to attract and engage professionals and customers.
  • Management’s impairment analysis assumed a modest improvement in Tech-focused revenue trends during 2018, with improvement expected later in 2018 and into 2019. This is not formal company-wide financial guidance. The Tech-focused reporting unit’s estimated fair value exceeded carrying value by only 1% at its October 2017 test; weaker results or higher discount rates could lead to goodwill impairment. No interim impairment test was performed at March 31.
  • Other disclosed risks include recruitment-market cyclicality, continued competition, execution of the tech-focused strategy, Brexit and foreign-exchange volatility. DHI does not hedge currency exposure; a 1% decline in GBP/USD was estimated to reduce quarterly revenue and expenses by approximately $63,000 and $61,000, respectively. A 1% rise in interest rates was estimated to increase 2018 interest expense by approximately $380,000 on current borrowings.
  • The company continued to assess its transition-tax and other Tax Cuts and Jobs Act accounting; it expected to finalize the transition-tax accounting later in 2018. It reported approximately $3.1 million of unrecognized tax benefits and said up to $789,000 might be recognized within 12 months.
  • The board authorized a stock repurchase program of up to $7 million through May 2019; no shares were repurchased in Q1. A subsequent CEO equity grant included 1.75 million restricted shares and eligibility for 750,000 performance-based units.

Investor verification priorities

  • Separate recurring operating performance from the $4.6 million disposition gain and assess the decline in Adjusted EBITDA alongside falling revenue.
  • Review the impact and ongoing amortization of ASC 606 capitalized contract acquisition costs, and compare results on a consistent accounting basis.
  • Track Dice customer counts, renewal trends, deferred revenue and the company’s progress against its stated Tech-focused improvement assumptions.
  • Assess goodwill impairment sensitivity, especially given the 1% estimated fair-value cushion for the Tech-focused reporting unit.
  • Monitor the FCRA settlement approval, remaining divestiture-related costs, tax uncertainties, debt covenant headroom and variable-rate exposure.