DHX - DHI Group: Artificial Intelligence And Headcount Increase Are Great Ingredients

2023-10-07 02:48:16 ET

Summary

• DHI Group plans to offer new platforms with increased engagement and communication between companies and job applicants.
• The company has seen growth in visits to its platforms and has a strong base of large clients.
• DHI Group's stock may be undervalued, and the company has repurchased shares to enhance demand and potentially increase stock price.

DHI Group, Inc. ( DHX ) recently announced its plans to offer a new version of its platforms, which may include more engagement, multi-directional communication between companies, and job applicants. I also think that the recent headcount increase, further platform optimization, and more large clients could accelerate future net sales growth. Even considering risks from competitors or social media players, under my DCF model, the shares seem cheap.

DHI

Founded in 2005 and with a recent history, DHI Group is a company that offers a series of digital tools and software managed via Artificial Intelligence to put professionals in the area of ??technology and security in contact with companies that require their services.

Even though these platforms are aimed at recruiting technology professionals in general, the company's specialty lies in talents in security technology, particularly those who have knowledge of public and government agencies.

In 2022, the company received most of its annual income through recruitment packages that are contracted by its clients from rate contracts, fixed monthly, quarterly, or annual duration.

ClearenceJobs and Dice platforms are used by DHI Group to offer its services. On this platform, there are profiles of professional talents, publications of job offers, and management and administration solutions for recruiters such as mailing services. Finally, the company offers a series of events to put different professionals and companies in contact. They recruit them. These two brands are grouped together in the only operating segment reported by the company that bears the Tech-focused name.

The company bases its growth forecasts on the trend of low levels of unemployment experienced by the technology labor market, which, by 2022, averaged 1.8% below the 3.5% of other professions throughout the United States. The statistics to highlight about the financial and operational results of this company are a growth of almost 20% in visits within its platform.

Balance Sheet

As of June 30, 2023, DHI reported cash worth $2.7 million, accounts receivable of $18 million, and total current assets worth $26 million. I am a bit concerned about the total amount of current liabilities being larger than the total amount of current assets. The company generates FCFs, so I believe that banks would offer credit lines. With that, I dislike that the current ratio is under one.

With goodwill worth $128 million and fixed assets of $22 million, the total amount of assets is equal to $223 million, close to 2x the total amount of liabilities. Overall, I believe that the balance sheet stands in a beneficial position.

I also believe that the list of liabilities does not seem worrying at all. Long term debt stands at close to $43 million, and total liabilities are worth $123 million. If we assume forward FCF close to $17 million, the debt is close to 2x-3x FCF, which does not seem a lot. I think that DHI could receive more debt financing to acquire other targets as well as to enhance FCF generation.

FCF Catalysts: New Acquisitions, More Hiring, Further Optimization, And More Products Will Most Likely Lead To FCF Generation

Based on these same forecasts, DHI believes that it has great opportunities to scale its business organically as well as through the acquisition of related businesses. Part of this growth strategy is guided through the expansion of its sales channels, which included hiring 170 professionals during the last year, as well as the permanent optimization of its platforms, customizing the service offering for its clients.

I also expect the inclusion and launch of new products within them, such as service packages, referral promotions, fees for applying for new jobs, and other details within the platforms. In my view, these initiatives will most likely accelerate net sales growth, and bring FCF growth.

A Lot Of Large Clients And An Expected Future Community Of Active And Passive Candidates Received Multi-directional Communication

In addition, serving almost 11,000 business clients during the year 2022 and recording the aforementioned percentage increases, the company's forecast is to experience similar operational benefits and continue this trend besides relying on market statistics and the increase in demand for IT professionals. A fact in favor of the company in this sense is the reference and recognition of some of its large clients. I believe that new massive corporations will most likely try out DHI as soon as they see other large companies working with DHI.

Moreover, the company has a lot of accumulated expertise, which may enhance future offerings. In the last presentation, management noted that new versions for the year 2025 are expected to focus on engagement, multi-directional communication, and active candidates. In my view, if DHI successfully offers a platform, in which candidates are willing to invest more of their time, clients would most likely pay more for the services offered. As a result, I believe that we may see more net sales growth.

Repurchase Of Stock Could Enhance The Stock Price As Demand May Trend Higher

In recent years, the company has carried out a strategy of repurchasing the shares, which will most likely accelerate the demand for the stock.

Our Board approved a stock repurchase program that permits the Company to repurchase our common stock. Management has discretion in determining the conditions under which shares may be purchased from time to time. The number, price, structure, and timing of the repurchases, if any, will be at our sole discretion and future repurchases will be evaluated by us depending on market conditions, liquidity needs, restrictions under the agreements governing our indebtedness, and other factors. Source: 10-Q

In 2022 and 2023, the company acquired a significant amount of stock, and a significant number of shares are available for purchase.

FCF Model

Taking into account previous financial figures and net sales growth, I made my own forecasts about future net sales growth of Dice and ClearanceJobs. With single digit sales growth from 2025 to 2030, I obtained 2030 net sales of Dice close to $217 million and 2030 net sales of ClearanceJobs close to $100 million. In total, we would be talking about 2030 net sales of around $317 million.

With the previous net sales growth and net sales results, I also assumed a conservative profit margin, close to 2%, which is significantly lower than what the company reported from 2010 to 2014.

With the previous assumptions, I obtained 2030 net income of about $6 million, depreciation of $36 million, deferred income taxes of close to -$11 million, and stock based compensation worth $9 million.

I also included 2030 income from equity method investment close to -$9 million, but no impairment of intangible assets, impairment of goodwill, or impairment of right-of-use assets. I believe that these are extraordinary events.

If we also include changes in accrual for unrecognized tax benefits of close to $1 million, changes in accounts receivable worth -$14 million, prepaid expenses and other assets of close to -$3 million, and changes in accounts payable and accrued expenses worth $16 million, net cash flows from operating activities would be about $42 million. Besides, with purchases of fixed assets close to -$29 million, I obtained 2030 FCF of $13 million.

For the valuation model, I included a terminal EV/FCF multiples close to 14x-17x, mainly because the company traded at around these levels in the past. I also believe that these multiples are considerably conservative.

In the CAPM model, I also took into account that the company pays interest rates close to 7.52%. With this in mind, I assumed that a WACC of around 7% and 11% would make sense.

With the previous assumptions and FCFs close to $23 million and $14 million from 2024 to 2030, Ev/FCF close to 14x and 18x, and a WACC of 7%-11%, I obtained an implied forecast close to $3.5 and $5.27 per share and a maximum internal rate of return of close to 12.7%. In sum, even considering the very conservative cost of capital and terminal EV/FCF multiples, DHI does appear undervalued.

Competitors

Competition within the job recruitment market is overwhelming for both traditional channels and the most modern digital channels. Within these we find renowned companies and social networks where talents and job offers are regularly promoted. There are also other platforms that target specialty niches such as GitHub or Stack Overflow. It is just a snapshot of the great fragmentation that is experienced within this industry. The application of artificial intelligence technologies for the optimization of services plays a fundamental role in the short term and in relation to the possible technological innovations that this market experiences.

Risks

Considering this framework of high competition, a large part of the company's risks involves maintaining its competitiveness among these markets and being able to adapt to the new technological changes that appear. Within this, the company has made the decision to orient its platforms on technology talents and even concentrate on the sale of recruitment packages and the income coming through this service. An incorrect reading of forecasts and market trends can seriously disrupt the company's operating margins.

Likewise, any change in the regulation on the application of technologies through artificial intelligence or any decline in professional activity in the technological area within the United States following the global inflationary crisis is a risk to be taken into account within this analysis.

Conclusion

DHI announced new platforms offering more engagement, multi-directional communication, and active candidates. The company recently hired a significant number of employees, further optimized its platforms, and expects more customization of services offered to clients. In my view, the market failed to recognize the business potential of DHI, and the company trades a bit undervalued, which may explain the recent repurchase of shares executed by the Board of Directors. Under my DCF model, the stock price could trade a bit more pricey even taking into account the current risks.

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