ZIP - ZipRecruiter Faces Drop In Hiring Services Demand

2023-07-07 13:01:16 ET

Summary

• ZipRecruiter provides online recruiting services to organizations of all sizes.
• The firm suspended full-year revenue guidance after a poor Q1 revenue result.
• I'm Neutral [Hold] on ZIP until we get more information on demand for hiring services in the face of slowing macroeconomic activity.

A Quick Take On ZipRecruiter

ZipRecruiter ( ZIP ) operates an online work opportunity marketplace for a wide variety of industries and job types.

Management has highlighted a very difficult Q1 environment for demand for its services as companies in the technology industry have reduced their hiring activity.

Given near-term higher cost-of-capital assumptions and management’s elimination of full-year 2023 revenue guidance, I’m Neutral [Hold] on ZIP for now.

ZipRecruiter Overview

Santa Monica, California-based ZipRecruiter was founded to simplify the job market for both job seekers and employers.

Management is headed by president and CEO Ian Siegel, who has been with the firm since 2010 and was previously Vice President of Web Development at Stamps.com.

ZIP aims its services at the SMB market and also at the enterprise market. The firm’s sales and marketing teams focus their efforts on enterprises and the website provides self-serve capabilities to SMBs.

The company's service works as a 'matchmaker' of sorts that seeks to curate job opportunities for job seekers and candidates for employers.

ZipRecruiter’s Market & Competition

According to a 2020 market research report by Fortune Business Insights, the market for online recruitment is expected to reach $43.4 billion by 2027.

This represents a forecast CAGR of 7.1% from 2020 to 2027.

The main drivers for this expected growth are an increasing desire of companies to find workers through online means, which has received a major boost in demand as a result of the COVID-19 pandemic.

Also, the online process enables companies to more efficiently discover and screen prospective employees, improving their workforces while potentially reducing hiring costs.

Major competitive or other industry participants include:

• LinkedIn

• CareerBuilder

• Craigslist

• Glassdoor

• Indeed

• Monster

• Google (GOOG)

• Facebook (META)

ZipRecruiter’s Recent Financial Trends

• Total revenue by quarter has fallen in recent quarters; Operating income by quarter has also dropped recently.

• Gross profit margin by quarter has been essentially flat recently; Selling, G&A expenses as a percentage of total revenue by quarter have dropped in recent quarters.

• Earnings per share (Diluted) have fallen in Q1 2023.

(All data in the above charts is GAAP)

In the past 12 months, ZIP’s stock price has risen 10.53% vs. that of the iShares Expanded Tech-Software Sector ETF’s ( IGV ) rise of 20.93%, as the chart indicates below.

For the balance sheet, the firm ended the quarter with $519.1 million in cash, equivalents and short-term investments and $541.8 million in total debt, none of which was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $118.6 million, during which capital expenditures were only $2.1 million. The company paid $78.0 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For ZipRecruiter

Below is a table of relevant capitalization and valuation figures for the company.

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

ZIP’s most recent Rule of 40 calculation was only 13.4% as of Q1 2023’s results, so the firm needs improvement, per the table below.

(Source - Seeking Alpha)

Commentary On ZipRecruiter

In its last earnings call (Source - Seeking Alpha), covering Q1 2023’s results, management highlighted the ability of the company to ‘rapidly adjust expenses’ in the face of changing macroeconomic conditions.

Leadership is seeing demand for hiring decline during a normally seasonally robust period of the first quarter of the year.

Because of this, management isn’t providing full-year 2023 guidance but does expect Q2 2023’s revenue to be down 29% from the previous year’s same-quarter results.

2023 adjusted EBITDA is expected to be $185 million at the midpoint of the range, although this figure usually excludes stock-based compensation, which has been $78 million in the last four quarters.

Management did not disclose any company or customer retention rate metrics.

Total revenue for Q1 2023 was 19.2% lower than the same quarter in 2022 and gross profit margin dropped 1.7% year-over-year.

Selling, G&A expenses as a percentage of revenue dropped 9.2%, a positive signal, while operating income fell 22.5% year-over-year.

The company's financial position is strong, with ample cash and liquidity against its long-term debt; free cash flow has been impressive.

ZIP’s Rule of 40 performance has been mediocre and in need of significant improvement.

From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below.

I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited ‘Uncertain’ five times, ‘Challeng[es][ing]’ two times, ‘Macro’ 15 times and ‘Drop’ four times.

The negative terms refer to the difficult hiring environment the firm and its customers are experiencing as a result of a higher cost-of-capital environment and perhaps other factors.

Analysts questioned company leadership about particular industry verticals seeing lesser or greater demand drop. Management noted greater resiliency in healthcare, travel and hospitality, while technology has shown increased weakness.

The primary business risk to the company’s outlook is the continued likelihood of increasing pressure on employment markets as the higher cost-of-capital environment persists despite business' desire to ‘hoard’ labor that it has already hired.

For the near term, I’m Neutral [Hold] on ZIP.

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