DHI Group, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited results; dollar amounts below are in millions unless noted.
Business context and strategy
DHI operates specialized employment and recruiting services across technology and security clearance, financial services, energy, healthcare, and hospitality. Its reportable segments are Tech & Clearance, Global Industry Group, and Healthcare. On May 3, 2017, the company announced plans to pursue divestitures of BioSpace, Hcareers, Health eCareers, and Rigzone to focus resources on its technology business. It concluded a strategic-alternatives review in April and chose to remain independent; no divestiture transaction was assured.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $52.4 | $57.7 | $104.6 | $116.0 |
| Operating income | $4.0 | $8.5 | $8.3 | $11.1 |
| Operating margin | 7.6% | 14.7% | 7.9% | 9.6% |
| Net income | $1.8 | $4.9 | $3.2 | $6.0 |
| Diluted EPS | $0.04 | $0.10 | $0.07 | $0.12 |
| Operating cash flow | — | — | $23.7 | $24.9 |
| Capital expenditures | — | — | $7.8 | $5.3 |
| Adjusted EBITDA | — | — | $20.0 | $28.9 |
Revenue fell 9.1% in Q2 and 9.8% in the first half. Q2 operating income declined 52.8%; first-half operating income declined 25.4%. Cost of revenue was $7.7 million in Q2 (14.6% of revenue), versus $8.1 million (14.0%) a year earlier. First-half income tax expense was $3.5 million and the effective tax rate was 52.7%, compared with 36.6%; the increase primarily reflected tax expense on vested or settled share-based awards following adoption of ASU 2016-09.
At June 30, cash was $23.5 million, current assets $61.0 million, and current liabilities $107.9 million. Deferred revenue was $86.4 million, up from $84.6 million at year-end 2016. Gross revolving-credit borrowings were $71.0 million, down $15.0 million from year-end; $179.0 million of the $250.0 million facility was available, subject to limitations. The facility matures in November 2020, and the company reported compliance with financial covenants. Management said U.S. and Canadian cash, operating cash generation, and available borrowing capacity should cover anticipated requirements for at least 12 months.
Material changes and management commentary
- Q2 revenue declined across the reported businesses except ClearanceJobs. Tech & Clearance revenue fell 8.3%, Global Industry Group 12.3%, and Healthcare 5.6%. First-half declines were 7.6%, 14.6%, and 4.6%, respectively.
- Dice U.S. recruitment-package customers declined to approximately 6,750 from 7,300 a year earlier; average monthly revenue per customer also fell approximately 1%. ClearanceJobs grew on higher volume, pricing, and product offerings.
- Management attributed pressure to competition and changes in digital recruitment, lower Dice renewal rates associated with customer attribution practices, weak energy-sector demand affecting Rigzone, and foreign exchange and Brexit uncertainty affecting eFinancialCareers and Dice Europe.
- Q2 disposition-related and other costs were $1.2 million, primarily severance and related costs tied to the divestiture process and technology focus. Amortization fell substantially because certain intangible assets had become fully amortized or had been written off. Sales and marketing expense increased despite lower revenue, reflecting continued investment.
- First-half investing cash use was $7.7 million, mainly fixed-asset and internally developed software spending. Financing cash use was $15.7 million, principally $15.0 million of debt repayments. No stock repurchases occurred in the first half; the prior repurchase program expired in December 2016.
Outlook, risks, and contingencies
The filing provides no numeric revenue or earnings guidance. Management cautioned that slow recruitment activity in served industries could further reduce revenue and results. Other stated risks include execution of the technology-focused strategy, uncertain timing and terms of possible divestitures, competition, attracting and retaining customers and qualified professionals, energy-market weakness, Brexit and foreign-currency volatility, and debt covenant or refinancing constraints. The company does not hedge currency exposure; approximately 25% of first-half 2017 revenue was earned outside the United States. A 1% increase in interest rates was estimated to increase 2017 interest expense on current borrowings by approximately $355,000.
Operating leases totaled $27.5 million in minimum future payments. The company reported no material pending legal proceedings and said ordinary-course claims and litigation were not expected to materially affect financial condition, operations, or liquidity. Approximately $2.6 million of unrecognized tax benefits were recorded; up to $556,000 could be recognized within 12 months, though settlement timing is uncertain. No interim goodwill impairment test was performed at June 30 after management’s evaluations concluded the relevant reporting units were not more likely than not below carrying value.
Important facts for investors to verify
- Progress, valuation, timing, and potential proceeds from the planned divestitures, including whether any transaction is completed.
- Whether Dice customer losses and broader revenue declines stabilize, and whether investments in new products translate into customer growth and renewals.
- Cash generation, capital spending, and debt repayment capacity if operating results continue to weaken.
- Exposure to foreign exchange, Brexit-related uncertainty, and the energy-sector downturn, including possible effects on goodwill and reported results.
- The effect of elevated share-based compensation tax charges and the transition to the new revenue-recognition standard, which the company was still evaluating.