DHI Group, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts below are in U.S. dollars; financial statement figures are presented in millions unless otherwise noted.
Business context and results
DHI operates specialized employment and recruiting services across technology and security clearance, finance, energy, healthcare, and hospitality. Its reportable segments are Tech & Clearance, Global Industry Group, and Healthcare. The company sold Slashdot Media in January 2016.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $56.1 | $65.1 | $172.0 | $194.7 |
| Operating income (loss) | $(16.1) | $11.0 | $(5.0) | $30.6 |
| Net income (loss) | $(16.8) | $6.5 | $(10.9) | $17.3 |
| Diluted EPS | $(0.35) | $0.12 | $(0.22) | $0.33 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $36.6 | $49.4 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $8.5 | $6.7 |
| Free cash flow (company-defined) | Not provided for quarter | Not provided for quarter | $28.2 | $42.7 |
| Adjusted EBITDA (non-GAAP) | Not provided in this filing excerpt | Not provided in this filing excerpt | $43.8 | $55.8 |
Gross margin, calculated as revenue less cost of revenue, was approximately 85.8% in Q3 2016 versus 85.0% in Q3 2015, and 85.7% versus 85.0% for the respective nine-month periods. Operating margin was approximately (28.7)% for Q3 and (2.9)% for the nine months in 2016, compared with 16.8% and 15.7% in 2015.
Material changes and financial position
- Revenue declined 13.9% in Q3 and 11.6% for the nine months. The declines reflected the Slashdot sale, weak energy-market demand, lower Dice customer counts, currency effects, and broader digital recruitment attribution and renewal challenges.
- Global Industry Group revenue fell 18.6% in Q3 and 18.0% for the nine months, primarily due to Rigzone. Rigzone revenue declined 55.2% in Q3 and 55.6% for the nine months. Healthcare revenue increased 6.0% for the nine months; Tech & Clearance declined 2.4%.
- The company recorded $15.4 million of goodwill impairment and $9.3 million of intangible-asset impairment for the Energy reporting unit, reducing its goodwill and unamortized intangible assets to zero. Management said the impairment assessment was preliminary and would be completed in Q4.
- Cash was $29.4 million at September 30, 2016, down from $34.1 million at December 31, 2015. Accounts receivable was $37.9 million and deferred revenue was $82.4 million.
- Long-term debt, net, was $90.7 million; gross revolver borrowings were $92.0 million, with $158.0 million available under the $250 million revolving facility maturing in November 2020. The company reported compliance with its financial covenants.
- Stockholders’ equity was $102.3 million, down from $138.6 million at year-end 2015. The company repurchased $26.2 million of shares during the first nine months and spent $2.7 million on 410,000 shares in Q3.
Cash flow, outlook, risks, and unusual items
- Operating cash flow fell to $36.6 million from $49.4 million, which management attributed primarily to timing of tax payments and lower operating income. Net cash used in financing was $34.9 million, including net debt repayments of $9.0 million and share repurchases of $26.2 million.
- Management said cash, U.S. cash generation, and available revolver capacity should be sufficient for anticipated requirements for at least the next 12 months. Approximately $23.4 million of cash was held outside the U.S. and described as indefinitely reinvested.
- No numeric revenue or earnings guidance was provided. Management identified customer acquisition and retention, expanding services, and attracting qualified professionals as important to growth; it also noted investments in new products and infrastructure.
- Key risks include continued weakness in energy recruitment, broader recruitment-market cyclicality, competition and changing digital recruitment practices, and Brexit-related market, currency, customer, and data-protection uncertainty. The company does not hedge its foreign-currency exposure; approximately 26% of nine-month revenue was earned outside the U.S.
- Q3 income tax benefit was $0.1 million; for the nine months, income tax expense was $3.3 million despite a pretax loss. Management cited a $2.8 million deferred-tax benefit associated with the intangible impairment. Approximately $3.6 million of unrecognized tax benefits was accrued; up to $1.5 million could be recognized within 12 months.
- The company reported no material pending legal proceedings and stated that ordinary-course claims were not expected to materially affect its financial condition, operations, or liquidity. Operating lease commitments totaled $23.9 million.
- After quarter-end, the company appointed Luc Grégoire as CFO effective upon filing; CEO Michael Durney had served as interim CFO until then.
Important facts for investors to verify
- Whether Q4 impairment testing changes the preliminary Energy goodwill and intangible-asset valuations.
- Whether Rigzone and other Global Industry Group businesses stabilize, and whether energy demand and recruitment activity recover.
- Dice recruitment-package customer trends and the company’s progress addressing attribution and renewal challenges.
- Cash generation, working-capital and tax-payment trends, and the company’s ability to sustain share repurchases while managing debt and covenant headroom.
- Potential effects of Brexit on foreign currencies, European customers, data-protection obligations, and reported results.
- The underlying assumptions and reconciliation for non-GAAP Adjusted EBITDA and free cash flow when comparing the company with peers.