ZipRecruiter, Inc. (NYSE:ZIP) Q3 2023 Earnings Call Transcript

ZipRecruiter, Inc. (NYSE:ZIP) Q3 2023 Earnings Call Transcript November 8, 2023

ZipRecruiter, Inc. beats earnings expectations. Reported EPS is $0.23, expectations were $0.1.

Operator: Thank you for standing by. My name is Aaron, and I will be your conference operator for today. At this time, I would like to welcome everyone to the ZipRecruiter Q3 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn our call over to Drew Haroldson with Investor Relations. Drew, please go ahead.

Drew Haroldson: Thank you, operator, and good afternoon. Thank you for joining us in our earnings conference call during which we will discuss ZipRecruiter’s performance for the quarter ended September 30, 2023, and guidance for the fourth quarter 2023. Joining me today on the call are Ian Siegel, Co-Founder and CEO; David Travers, President; and Tim Yarbrough, CFO. Before we begin, please be reminded that forward-looking statements made today are subject to risks and uncertainties relating to future events and/or the future financial performance of ZipRecruiter. Actual results could differ materially from those anticipated in these forward-looking statements. A discussion of some of the risk factors that could cause actual results to differ materially from any forward-looking statements can be found in ZipRecruiter’s quarterly report on Form 10-Q for the quarter ended September 30, 2023, which will be available on our investor website and the SEC’s website.

The forward-looking statements in this conference call are based on the current expectations as of today and ZipRecruiter assumes no obligation to update or revise them, whether as a result of new developments or otherwise. In addition, during today’s call, we will discuss non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not a substitute for or in isolation from GAAP results. Reconciliations of the non-GAAP metrics to the nearest GAAP metrics are included in ZipRecruiter’s shareholder letter and in our Form 10-Q. And now, I will turn the call over to Ian.

Ian Siegel: Thank you, Drew. Good afternoon to everyone joining us today. Before we get started, I wanted to say a few words about ZipRecruiter’s Tel Aviv employees. As the conflict in Israel and Gaza unfolds, our number one priority has been the health and safety of our people. While all Tel Aviv-based employees have been impacted to some degree, unfortunately, some of them have been directly impacted. Our hearts go out to them for their losses and the conditions under which they must now operate. I have watched with pride and gratitude as ZipRecruiter team members around the globe have proactively taken on extra responsibilities so that our Israeli employees can prioritize taking care of their families. The well-being of our fellow team members will remain top of mind as we hope for peace and security in the region.

Turning to our results. Third quarter financials further demonstrate ZipRecruiter’s resilience and durability as macroeconomic conditions soften. Adjusted EBITDA of $54 million and adjusted EBITDA margin of 35% exceeded the high point of our guidance. Notably, adjusted EBITDA and adjusted EBITDA margin were all-time highs despite a weakening topline. ZipRecruiter has a resilient business model that has allowed us to weather the industry-wide hiring slowdown and maintain strong adjusted EBITDA profitability while still investing for the long-term. The dramatic change in the hiring market has impacted ZipRecruiter’s business along with other off-line and online hiring-related businesses in the United States. Despite some positive economic news, such as real GDP growth of 4.9% in Q3 of 2023 and unemployment of 3.8% in September of 2023, these data points only show part of the complicated picture that is the U.S. labor economy.

The Federal Reserve’s 525 basis point increase in interest rates over the past 18 months has increased the cost of capital for businesses, leading to employers taking a far more cautious approach to hiring than just a few quarters to grow. This increased caution manifest itself in both the number of job openings and the urgency with which those openings need to be filled. As a result, jobseekers are taking longer to find work and those currently employed are changing jobs with less frequency. The great resignation is over with quick rates returning to pre-COVID levels. This rapid change in the hiring market has impacted ZipRecruiter’s business, along with other off-line and online hiring-related businesses in the United States. Over any short-term period, the cyclical nature of the U.S. labor market will create a dynamic operating environment for us to navigate.

The flexibility and profitability of our business model have allowed us to weather this protracted downturn while continuing to invest in product innovation, technological advancement and increasing awareness of our already famous recruiting brand. While the total number of people employed in the United States from Q3 of 2019 to Q3 2023 has increased by approximately 3%. ZipRecruiter’s revenue has increased by 38% and adjusted EBITDA margin has expanded from 2% to 35%. We believe the opportunity in front of us to continue to capture more market share through continuous product innovation and technological advancement is bigger than it has ever been. Now I’ll turn it over to Dave to talk through some of our progress against the three pillars of our marketplace strategy.

David Travers: Thank you, and good afternoon. We continue to make advancements on our three growth strategies in Q3 of 2023. We believe we are still in the early stages of using smart matching technology to transform our employers and jobseekers come together. Our first strategic pillar is increasing the number of employers and revenue per paid employer in our marketplace. Growing revenue from large enterprise customers remains a priority and a significant long-term opportunity and we continue to make incremental product improvements to enhance the value of the ZipRecruiter platform and meet our customers’ needs. We continue to enhance and further deploy our campaign optimization solution we deployed in the first quarter. The solution is showing consistent improvements in hitting campaign targets and more customers continue to migrate onto the platform.

In Q3, campaigns using our solution were 40% more likely to achieve their targets than those that were manually managed. We also continue to make improvements that focus on eliminating friction in the hiring process. Our Invite to Apply features shifted the dynamics of the hiring process by enabling employers to take the initial step of reaching out the potential candidates. To further enhance the effectiveness of Invite to Apply for employers, we have started sending text messages to eligible candidates when employers believe they would be a great fit. Moving on to our second pillar, increasing the numbers of jobseekers in our marketplace. Labor market downturns present an opportunity to build the jobseeker side of the marketplace. We believe serving more jobseekers many of whom are using ZipRecruiter for the first time, will build brand loyalty that will continue to endure for years to come.

We continue to see increased activity from jobseekers, not only due to even labor market conditions, but also from our investments in jobseeker brand awareness and search optimization. In Q3, organic visits from jobseekers grew 46% year-over-year, making this our third consecutive quarter with 40% plus year-over-year growth. Whether it is a jobseeker who is using ZipRecruiter for the first time or someone who has used it in the past, our products such as our AI-driven career adviser named Phil, have never been better equipped to assist them in the job search process. In Q3, we rolled out several features to help jobseekers see more company details when searching for jobs. We introduced company pages, a single one-stop shop where jobseekers can see company-specific information such as company description, salaries, open job postings and more.

We also further contextualize jobs by adding more company information to aid discovery for applicants, such industry and company stock. We also continue to make product improvements so that key job information is easily viewable to jobseekers, understanding benefits packages such as health insurance, paid time off or retirement benefits, emerged among the most important considerations when a jobseeker decides which opportunities to apply to. In Q3, we started parsing jobs for benefits and presenting them on job listings, making them easier to reveal. This helps save jobseekers time when deciding which jobs maybe a good fit. I’ll conclude with our third pillar, making our matching technology smarter over time. Machine learning and AI have been a central focus of our technology efforts for many years.

Our specialized AI-powered matching algorithms get smarter over time by learning from the observed behavior across billions of interactions between jobseekers and employers in our marketplace. We believe our vast and proprietary data set gives us a distinct advantage as we make the hiring process more efficient and provide better experiences to both employers and jobseekers. In Q3, ZipRecruiter improved its resume parsing capabilities to further advance our algorithms, leveraging artificial intelligence and machine learning techniques and our proprietary data from directly observing jobseeker and employer behavior, our improvements have led to better accuracy in extracting information for millions of resumes to match jobseekers to employers.

Improvements to revenue [parser] directly enhance the quality of candidate previews and products like Invite to Apply. Now I’ll turn it over to Tim to talk through the financial results and our guidance. Tim?

Tim Yarbrough: Thank you, Dave, and good afternoon, everyone. Our third quarter revenue of $155.6 million represents a 31% decline year-over-year and is reflective of a continued soft hiring environment. Quarterly paid employers were 90,000, representing a 34% decrease versus Q3 2022 and a 12% decrease versus Q2 2023. This is primarily reflective of weakness amongst small and medium-sized businesses which make up the vast majority of our paid employers. Revenue per paid employer was $1,736, an increase of 4% both year-over-year and sequentially. The increase quarter-over-quarter and year-over-year is consistent with our long-term cohort trends where employers willingness to pay increases as our product continues to improve. Net income was $24.1 million in Q3 2023 compared to $20.6 million in Q3 2022 and $14.4 million in Q2 2023.

Q3 2023 adjusted EBITDA was $54.4 million, equating to a margin of 35% compared to $51.7 million, a margin of 23% in the prior year period at $43.3 million with a margin of 25% in Q2 2023. Net income and adjusted EBITDA both grew year-over-year and quarter-over-quarter, driven by a larger reduction in operating expenses, both personnel and marketing-related. Q3 2023 adjusted EBITDA of $54.4 million and adjusted EBITDA margin of 35% were both the highest in our company’s history, showcasing the financial strength of our business model. Cash, cash equivalents and marketable securities was $497 million as of September 30, 2023, compared to $497.2 million as of June 30, 2023. Cash, cash equivalents and marketable securities remain stable quarter-over-quarter as cash used for repurchases of Class A common stock under our share repurchase program was largely offset by cash provided from operating activities.

In Q3 2023, we repurchased 1.9 million shares totaling $28.2 million. Given our long-term growth outlook, our capital allocation strategy prioritizes organic growth investments in M&A over returning capital to shareholders. However, given the strength of our balance sheet and our free cash flow, we continue to opportunistically repurchase shares when we believe there’s an attractive ROI and potential dislocations in the stock price. Moving on to guidance. Our Q4 2023 revenue guidance of $128 million at the midpoint represents a 39% decline year-over-year. The softness in hiring patterns has not yet abated, and we are heading into a seasonally soft Q4. Our adjusted EBITDA guidance is $34 million at the midpoint or 27% adjusted EBITDA margin.

This guidance implies an adjusted EBITDA margin of approximately 25% to 27% for the full-year 2023, an increase of 5 to 7 percentage points year-over-year and compares favorably to the low to mid-20% range provided in August. We continue to demonstrate financial discipline and conserve capital during this unprecedented slowdown while also continuing to invest in technology drivers of our long-term growth. Navigating the ups and downs of the labor market is the reality of the industry. And as a result, we built a flexible business model structured to respond to a variety of market conditions. We are focused on what we can control, approaching all cycles with the same ROI-focused orientation, nimble mindset and speed to action. While the current environment calls for cost optimization, we continue to press our technology advantage, positioning ZipRecruiter well for growth in the economic cycles to come.

With that, we can now open up the line for questions. Operator?

Operator: Thank you. [Operator Instructions] And our first question is from the line of Trevor Young with Barclays. Your line is live.

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Q&A Session

Trevor Young: Great. Thanks. I guess first one, can you guys talk about the cadence of revenue growth throughout the quarter? There’s obviously a little bit of a B versus guide. So that implies August or September a little bit better than expected. And how have things trended so far in October and November, obviously implying some worsening in trends there. And then second question on the campaign optimization solution, some encouraging data points on that. Is that now widely available to all enterprise customers? And just any stats on how many enterprise customers or how much of enterprise spend is going through that managed solution would be helpful.

Tim Yarbrough: Yes. Thanks, Trevor. This is Tim. On revenue trends for Q3 and what we’re seeing so far. So Q3 follow the same kind of trends that we suggested when we issued guidance with month one being what it was at the time. The revenue trended roughly in line to a little bit down towards the end of the quarter. Despite that, we came up within a couple of million dollars better than our guidance overall. As far as what we’re seeing so far, the guide that we’re showing right now kind of reflects current conditions. Basically, we have not seen any kind of return to normal seasonality that we’ve seen in the past. Hence, the sequential decline, that would be a little bit steeper than what we’ve seen in previous Q4s, but generally in line with what we’re seeing right now.

Ian Siegel: Thanks, Trevor. And then yes, on the campaign optimization, yes, so it’s not relevant to the vast majority of our customers who are small businesses, but to larger sophisticated enterprises it is largely available and really depends on our ability to agree with them on a set of goals for the campaign that we can then drive toward and different employers have different goals, whether they’re metrics like cost per click or cost per hire or things like that or a number of hires they’re looking for. So that’s really critical in understanding so we can get that solution up and running. But the results there early on, as we spoke to, are extremely promising and increasing number of employers are hitting their goals, and we expect that tool and that optimization to continue to improve as it rolls out to more and more customers.

Trevor Young: Okay, great. Thank you both.

Operator: Thanks for your question. Our next question is from the line of Ralph Schackart with William Blair. Your line is live.

Ralph Schackart: Good afternoon. Thanks for taking the question. Two, if I could. First, just sort of – obviously, it’s a tough cycle in the market environment right now, but philosophically, on margins, is there a certain level that you would look to optimize the business as we sort of wait through the cycle to return back to some growth phase. And then maybe just as a side, during this cycle also, you’re obviously getting a lot of jobseekers, maybe speak to when the cycle does turn, what that does for the platform, as people are introduced to the brand and you’re acquiring more jobseekers on the demand side. Thank you.

Tim Yarbrough: Hey, Ralph, this is Tim. Thanks for the question. On the margin philosophy. So we approach all of our go-to-market decisions from the bottom up. So we don’t have a target margin that we’re looking at, at any point within the cycle. Q3 was very strong at 35%, and that’s a function of the investment opportunities that we saw within the period. Q4 very well look different, especially based on our guidance. But as the EBITDA margins could come up or down based on what we see in our response to it, we still are very confident in our long-term adjusted EBITDA margins of 30% as the company continues to grow in scale.