DHI Group, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2018, compared with the same 2017 periods. DHI provides specialized recruiting and career services, with its remaining reportable segment focused on technology and related professional markets. The company continued its shift toward that business through divestitures and announced the closure of Dice Europe.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $41.6 million | $52.4 million | $84.7 million | $104.6 million |
| Operating income | $1.1 million | $4.0 million | $7.9 million | $8.3 million |
| Operating margin | 2.6% | 7.6% | 9.4% | 7.9% |
| Net income (loss) | ($0.2 million) | $1.8 million | $3.3 million | $3.2 million |
| Diluted EPS | $0.00 | $0.04 | $0.07 | $0.07 |
| Adjusted EBITDA | Not stated in the supplied filing text | Not stated in the supplied filing text | $15.4 million | $18.8 million |
| Operating cash flow | Not stated separately | Not stated separately | $8.3 million | $23.7 million |
Revenue and segment trends. Q2 revenue fell 21%; management attributed $9.9 million of the decline primarily to divested businesses. Tech-focused revenue decreased 2% in Q2 and 3% for the first half. Dice revenue fell 9% in Q2, with U.S. recruitment-package customers declining to approximately 6,200 from 6,750 a year earlier; management cited competition and attribution challenges. ClearanceJobs revenue grew 23% in Q2, and eFinancialCareers revenue increased 6% (1% excluding favorable foreign exchange, per management). The company’s average monthly revenue per U.S. Dice package customer was approximately unchanged year over year.
Profitability and cash flow. Q2 operating income declined despite lower operating expenses, reflecting the Hcareers sale loss and higher disposition-related costs. The six-month operating margin was higher year over year, helped by a $3.8 million net gain on business sales; it also included $3.1 million of disposition-related and other costs. Six-month Adjusted EBITDA declined about 18%. Operating cash flow was lower by $15.4 million year over year, reflecting lower earnings excluding the sale gain and working-capital changes, including billing-term changes and payment timing.
Liquidity and debt. At June 30, cash was $9.5 million, versus $12.1 million at December 31, 2017. Current assets were $41.5 million and current liabilities were $83.7 million; deferred revenue was $64.2 million current and $1.7 million long-term. Debt outstanding under the revolving facility was $19.0 million gross ($18.5 million net of financing costs), down from $42.0 million gross at year-end. The company reported $131 million of borrowing capacity, subject to facility limits and covenants, and compliance with financial covenants. The credit facility matures in November 2020. Management said U.S. cash, operating cash flow and available borrowing capacity should meet anticipated requirements for at least 12 months.
Material changes, outlook and risks
- Portfolio actions: Hcareers was sold in May for $16.5 million, with $14.0 million net cash proceeds received at closing and a $0.8 million Q2 loss recognized. RigLogix was sold in February, producing a $4.6 million gain; majority ownership of BioSpace was transferred to management in January. These transactions affect year-over-year comparability.
- Dice Europe: DHI announced it would close the offering effective August 31, 2018. Management expected no material impact on Q3 or future results. Dice Europe represented 3% of Tech-focused revenue in the first half.
- Outlook: No numerical revenue or earnings guidance was provided. Management’s goodwill-planning assumptions anticipated a modest improvement in the rate of Tech-focused revenue decline in 2018 and improvement later in 2018 and into 2019; actual results depend on execution and market conditions.
- Competition and goodwill: The company cited competition, difficulty developing and launching products, and challenges attributing customer value. At the October 2017 impairment test, Tech-focused goodwill fair value exceeded carrying value by only 1%; management identified possible future impairment if assumptions or operating results weaken. No interim impairment test was performed at June 30.
- Accounting and tax: Topic 606 adoption increased opening retained earnings by approximately $4.5 million and capitalized contract costs by $6.1 million. For the first half, adoption increased reported net income by $1.3 million versus the company’s presentation without adoption; operating cash flow was unchanged. The six-month effective tax rate was 51.9%, including share-based award tax deficiencies and sale-related tax expense. The company was still evaluating aspects of the transition tax and GILTI accounting.
- Legal and other contingencies: DHI recorded a $1.0 million liability for a tentative settlement of an FCRA class action, subject to execution and court approval. It also reported approximately $3.2 million of unrecognized tax benefits and said up to $0.8 million might be recognized within 12 months. Foreign-exchange and variable-rate debt exposure are not hedged; management quantified a 1% rate increase as adding approximately $0.1 million of 2018 interest expense on current borrowings.
- Capital allocation and leadership: A May 2018 authorization allows up to $7 million of share repurchases through May 2019; $94,892 was repurchased in Q2. The new CEO received a 1.75 million-share restricted-stock inducement grant and is eligible for 750,000 performance-based units.
Important facts for investors to verify
- Whether Dice customer counts and Dice revenue stabilize, and whether ClearanceJobs growth continues to offset weakness in other brands.
- How much reported revenue and cash-flow movement reflects divestitures, billing-term changes, and Topic 606 rather than underlying business trends.
- Progress on the Tech-focused strategy, Dice Europe closure, and management’s stated expectation for a later improvement in revenue trends.
- Whether the narrow goodwill valuation cushion remains supportable and whether future operating results or assumptions trigger impairment testing.
- Final settlement and court approval of the FCRA matter, resolution of tax uncertainties, and continued compliance with debt covenants and liquidity requirements.