DHI Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. All amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and reporting period
DHI provides specialized employment, recruiting and career services, with a focus on technology and other professional markets. Following 2018 divestitures and the closure of Dice Europe, the company reported one segment: Tech-focused, comprising Dice, ClearanceJobs, eFinancialCareers and corporate costs. Comparative segment information was recast to reflect the current structure.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Revenue | $37.1 | $43.1 | Down 14%; 2018 included $5.1 of revenue from businesses divested in 2018. |
| Net income | $1.6 | $3.5 | Down 55%. |
| Diluted EPS | $0.03 | $0.07 | 2018 included a $4.6 gain on sale of businesses. |
| Operating income | $3.6 | $6.8 | 2018 included the $4.6 sale gain; operating margin was 10% versus 16%. |
| Adjusted EBITDA (non-GAAP) | $8.5 | $8.3 | Adjusted EBITDA margin was 23% versus 22%; company-defined measures exclude specified items. |
| Cash from operating activities | $3.2 | $6.9 | Lower year over year, primarily reflecting billing-term changes and payment timing. |
| Cash and debt | $4.7 cash; $17.0 drawn | $6.5 cash; $18.0 drawn at Dec. 31, 2018 | $73.0 available under the $90.0 revolving facility, subject to limitations. |
Adjusted revenue, which excludes divested businesses, was $37.1 versus $37.9, down about 2%. Ongoing Tech-focused revenue excluding Dice Europe increased 1% reported, or 2% excluding foreign-exchange effects. ClearanceJobs revenue grew 20%, Dice declined 1%, and eFinancialCareers declined 4%, primarily due to currency effects.
Deferred revenue was $61.0 at March 31, 2019, compared with $56.1 at December 31, 2018. Current assets were $37.1 and current liabilities were $82.5. The company recorded $18.2 of operating lease liabilities following adoption of the new lease standard.
Material changes versus the prior comparable period
- Reported revenue fell $6.0, reflecting $5.1 from businesses divested during 2018 and $1.3 from the Dice Europe closure, partly offset by growth in the continuing business.
- Operating expenses declined, including lower cost of revenue, product development, sales and marketing, and general and administrative expenses. Some reductions reflected divestitures; ongoing cost movements also included lower legal costs and stock compensation, partly offset by commissions and professional fees.
- Operating income and net income were lower, while the comparison was affected by the $4.6 sale gain recognized in Q1 2018. Adjusted EBITDA increased modestly.
- Operating cash flow decreased to $3.2 from $6.9. Investing cash flow was an outflow of $3.1, mainly for fixed assets and internally developed software, versus a $1.7 inflow in 2018 that included business-sale proceeds.
- The company adopted Topic 842 leases on January 1, 2019, recognizing right-of-use assets and lease liabilities without a cumulative adjustment to retained earnings.
Outlook, management commentary, risks and contingencies
- No specific revenue or earnings guidance was provided. Management said existing U.S. cash, operating cash generation and available revolver capacity are expected to meet anticipated cash requirements for at least the next 12 months.
- Management described the Dice revenue decline as narrowing. It cited ClearanceJobs growth, product releases and enhancements, and investment in product development as important business drivers.
- Risks include competition, the ability to attract and retain customers and qualified professionals, recruiting-market cyclicality, and possible slower demand for technology, finance and cleared professionals. Brexit-related market, currency and regulatory uncertainty may also affect results.
- The $39.0 Dice trademark and $155.4 of goodwill are significant estimates subject to impairment testing. No impairment was recorded in the quarter; management noted that failure to achieve revenue and cash-flow projections, or weaker market conditions, could lead to future impairment.
- The company had $17.0 of revolving debt outstanding, maturing in November 2023, and reported compliance with its financial covenants. Borrowing and repurchases are subject to credit-agreement restrictions.
- A previously recorded $1.0 liability relates to a tentative settlement of an FCRA class action; preliminary approval had been granted, with a final approval hearing scheduled for August 2019. Management stated that other ordinary-course legal matters were not expected to have a material effect.
- The effective tax rate was 54.5%, including share-based compensation tax deficiencies and $0.4 of transition-tax expense. Approximately $1.8 of unrecognized tax benefits was recorded; the company said up to $0.2 might be recognized within 12 months.
- The Board authorized a new stock repurchase program of up to $7.0 through May 2020. The company repurchased 250,145 shares for about $0.5 in Q1 2019.
Important facts for investors to verify
- Whether revenue stabilization at Dice and continued ClearanceJobs growth persist, and whether the core business can offset divestiture-related declines.
- Operating cash flow and deferred revenue trends, including the effects of customer billing terms and collection timing.
- Liquidity, revolver availability, covenant headroom and debt levels, particularly if demand weakens.
- Assumptions supporting the Dice trademark and Tech-focused goodwill valuations, given the disclosed impairment sensitivities.
- Resolution and any financial effect of the FCRA settlement, tax examinations and other contingencies.
- Execution of product investment and cost initiatives, and the effects of foreign exchange and Brexit-related uncertainty.