ZipRecruiter, Inc. (NYSE:ZIP) Q4 2023 Earnings Call Transcript

ZipRecruiter, Inc. (NYSE:ZIP) Q4 2023 Earnings Call Transcript February 22, 2024

ZipRecruiter, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by and welcome to the ZipRecruiter Inc. Q4 2023 Earnings Conference 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] As a reminder, today’s call is being recorded. I would now hand today’s call over to Drew Haroldson, Investor Relations. Please go ahead, sir.

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 and year ended December 31, 2023, and guidance for the first quarter 2024. Joining me on the call today 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 annual report on Form 10-K for the year ended December 31, 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-K. And now, I will turn the call over to Ian.

Ian Siegel: Thank you, Drew. Good afternoon to everyone joining us today. In 2023, demand for recruiting services dropped throughout the year for companies of all sizes. This culminated in Q4 of 2023, which had the lowest BLS reported hiring rate since 2014, excluding the onset of the pandemic. Quits and separation, some of the primary drivers of employer hiring are down to pre-pandemic levels. While in 2021 and 2022 workers left jobs for higher wages, wage inflation has abated and macroeconomic uncertainty has increasingly kept people in their current roles. With fewer job openings and lower employee turnover, the great resignation has turned into the big stay. As has been our standard operating practice, ZipRecruiter responded to the downturn by rapidly reducing expenses.

As a result in 2023, we delivered net income of $49 million and adjusted EBITDA of $175 million. This represented a net income margin of 8% and adjusted EBITDA margin of 27% year-over-year increases of one and seven percentage points, respectively. While there have been significant top line headwinds in 2023, product improvements have continued at full speed. Our long-term product and technology roadmap has remained fully funded. A few examples include our AI assistant Phil. Phil continues to improve as a conversational AI-driven career advisor, helping job seekers understand their goals and providing personalized job recommendations. Job seekers onboarded by Phil generate nearly twice as many applications as job seekers who come in through other channels.

Another example is building solutions for enterprise. In the third quarter of 2023, we introduced programmatic campaign optimization for larger customers. In Q4, we delivered the first round of optimizations to that solution, resulting in a 40% improvement in campaign performance over the prior quarter. A final example of our investment is our ongoing efforts to deeply integrate with applicant tracking systems. In 2023, we continued to deploy ATS integrations, which allow enterprises to activate ZipApply our one click application flow for job seekers. ZipApply delivers three times more applications per job for the same amount of spend. These integrations also enable customers to share hiring signals with us, which makes our matching technology smarter over time.

Navigating the ups and downs of the labor market is a reality of our business. In 2023, this meant conserving capital by primarily pulling back on marketing expenses. Although we retain flexibility to manage expenses if the labor market slows further, we think it is prudent to continue investing in long-term initiatives like the ones I’ve shared. The long-term opportunity to disrupt how job seekers and employers connect remains large. We will continue to improve our matching algorithms and products to increase engagement between employers and job seekers. While the shape and duration of the current labor market cycle remains out of our control, we remain focused on our mission of actively connecting people to their next great opportunity. With that, I will now turn the call over to Dave to review progress on our growth strategies.

Dave?

David Travers: Thank you, Ian, and good afternoon. Despite the headwinds, we were able to continue investing in key strategic initiatives because of our strong financial foundation. Just as we have over our history, we’re confident that over the long-term we will continue to gain meaningful market share for both offline and online recruiting solutions. We made significant progress in 2023 using innovative technology to deepen engagement between employers and job seekers. Our first strategic pillar is increasing the number of employers and revenue per paid employer in our marketplace. Growing revenue from large enterprise customers is a significant opportunity, and in 2023, we introduced two new solutions that increase the speed of implementation and the effectiveness of enterprise campaigns.

Our automated campaign creation solution simplifies the process of creating and activating new campaigns. And over the course of 2023, we iterated on tools that significantly reduce campaign creation time from hours to minutes. By driving customer adoption of our tools, fewer than 10% of new campaigns are now created manually. Our approximately 14o third-party ATS integrations are a strategic investment, nearly a decade in the making. Integrations bring employers jobs directly into our marketplace where job seekers can apply with our one click ZipApply feature without leaving our website. In Q4 of ’23, the proportion of our performance marketing revenue driven by ZipApply enabled jobs grew 23% against the prior year period. Moving onto our second pillar, increasing the number of job seekers in our marketplace.

As Ian mentioned, the great resignation has turned into the big stay with historically low unemployment and turnover resulting in relatively flat job seeking activity year-over-year in the U.S. labor market. This is consistent with what we see in our marketplace. Despite the 45% year-over-year decrease in sales and marketing expense in 2023, we had nearly 58 million unique job seeker interactions per quarter in 2023 on average compared to nearly 60 million in the prior year. We believe that this is a testament to our high aided brand awareness and superior job seeker products as organic visits from job seekers grew by more than 40% over 2022 and installs for our number one rated job search app for iOS and Android grew by over 20% year-over-year.

In the Q4, we further integrated the power of large language AI models into our job seeker products. For example, job seekers can now engage with Phil or AI-driven career advisor conversationally. This provides an even more engaging experience, particularly when new job seekers proceed through Phil’s onboarding flow. Phil interacts with job seekers more fluently learning about their experiences and suggesting job titles seekers may be interested in. Job seekers love our LLM fueled Phil. Users are 23% more likely to select one of the job titles suggested compared to the jobs shown in the prior onboarding experience. We also leveraged LLMs to introduce a new feature that assists job seekers with resume creation. Long theme is a cumbersome task that involves the meticulous crafting of detailed job experience descriptions.

Job seekers can utilize ZipRecruiter’s new AI enabled tools to create job experience descriptions by selecting key tasks and responsibilities, eliminating a major pain point in the job search, and further differentiating our job seeker experience. I’ll conclude with our third pillar, making our matching technology smarter over time. We bring employers and job seekers together using machine learning and AI. Our marketplace gets smarter over time as our algorithms learn from observed behaviors across billions of interactions between job seekers and employers. In 2023, we delivered nearly 40 million great matches, an increase of 24% over the prior year. Further job seeker engagement has grown with the average job seeker generating 10% more applications in Q4 of ’23 than in Q4 of ’22.

While overall employer demand has been directly impacted by macroeconomic pressures and uncertainty, our paid employers are getting incredible results. We delivered over 60% more applications per paid employer in Q4 of ’23 than in Q4 of ’22. As previously announced in Q3 of ’23, we leveraged cutting edge AI and machine learning techniques to improve our resume parsing capabilities. In Q4, we released an update to our resume parser that improved precision by an additional 9%. Separately, we also introduced new parsing capabilities for job postings, taking a comprehensive look at certain job description details related to qualifications, responsibilities, compensation, and company details. With improved parsing capabilities for both resumes and job postings, our algorithms will be able to better match job seekers and employers.

Now I’ll turn it over to Tim to talk through the financial results and our guidance. Tim?

Timothy Yarbrough: Thank you, Dave and good afternoon, everyone. Our fourth quarter revenue of $136 million represents a 35% decline year-over-year and is reflective of a continued soft hiring environment. Quarterly paid employers were 71,000, representing a 35% decrease versus Q4 2022, and a 21% decrease versus Q3 2023. This is primarily reflective of weakness among small and medium sized businesses, which make up the vast majority of our paid employers. Revenue per paid employer was $1,922 down 1% year-over-year, and up 11% sequentially. The decreased year-over-year is another signal of a tighter hiring market while the increased quarter-over-quarter consistent with historical seasonal trends. Net income was $6 million in Q4 ’23 compared to $19 million in Q4 ’22, and $24 million in Q3 ’23.

Q4 ’23 adjusted EBITDA was $42 million equating to a margin of 31% compared to $51 million, a margin of 24% in the prior year period, and $54 million with a margin of 35% in Q3 ’23. Net income and adjusted EBITDA decreases both year-over-year and quarter-over-quarter are primarily related to revenue declines. The fourth quarter was also impacted by a one-time $7.5 million charge in general and administrative expenses attributable to the acceleration of unrecognized stock-based compensation expense from the cancellation of market-based restricted stock units. Cash, cash equivalents and marketable securities was $520 million as of December 31st, 2023 compared to $497 million as of September 30th, 2023. Cash, cash equivalents and marketable securities increased quarter-over-quarter as the fourth quarter cash provided by operating activities was $34 million.

Moving onto guidance. As discussed above, the macroeconomic backdrop remains challenging. Our Q1 ’24 revenue guidance of $120 million at the midpoint represents a 35% decline year-over-year. Our adjusted EBITDA guidance is $17 million at the midpoint or 14% adjusted EBITDA margin for the quarter reflects our continued fully funded investment in hiring top engineering talent, new technology solutions and sequential increase in sales and marketing consistent with how we’ve typically approach marketing at the start of the year. Despite continued uncertainty compared to prior quarters, there is more positive consensus among macroeconomic forecasters around a smoother transition back to a more typical economic environment. Therefore, we remain prepared for wide range of outcomes in 2024.

As we evaluate the evolving backdrop, our operating philosophy is to level off adjusted EBITDA margins in the low to mid-teens, if we see the labor market downturn reaching a trough. We will continue to assess the labor market’s recovery and expect the return on our investments remaining poised to increase investment as opportunities arise. And alternatively, we are always prepared to show further cost discipline if conditions deteriorate. In any scenario, our flexible financial model and operating discipline allow us to invest in technology and grow our data advantage. We continue to be focused on what we can control, maintaining our strong financial foundation while staying ready for the eventual labor market recovery. With over $500 million of cash on the balance sheet and historical track record of profitable performance, we are ready to respond to whatever the external environment throws at us in 2024.

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

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Q&A Session

Operator: [Operator Instructions] Your first question is from the line of Kunal Madhukar with UBS.

Kunal Madhukar: Hi. Thank you for taking my question. One, when we look at — give me one sec. When we look at the number of matches that increased 24% year-over-year, and you delivered 60% more applications per paid employer in 4Q versus the year ago period. So why was performance revenue down like 40%? That’s one. And second is, when you give the guide for the fourth quarter, at that time, the guide seemed to be conservative to maybe even lower than that, given seasonality. So what changed during the quarter that you were able to come in and beat the estimates. Thank you.

David Travers: Thanks Kunal. This is Dave. I’ll take the first part of that and let Tim take the second. So, yes, what we saw over the course of the year is incredible progress on our matching technology, as we continue to invest despite the changing macroeconomic environment. So as you know, we’re a two-sided marketplace, and there was a significant change in demand over the past 18 months, and that impacted our revenue initially with small businesses when we first highlighted the change in the environment 18 months ago. And over time, it has increasingly impacted large enterprises as well. And that’s really the demand side of the equation is really what has driven the revenue decline in performance marketing. To your point, however, we made incredible progress in delivering more value, even despite the challenging demand environment where we are growing the value as measured by great matches that we grew by 24% as you noted, and that on a per paid employer basis and paid employers obviously have declined, we’re delivering way more value, 60% more applications per paid employer over time.

So the value of the product in the marketplace that we’re delivering to employers continues to grow as we continue to invest despite the changing demand environment, which drives revenue in the short term. But what — that value delivery is what gives us tremendous confidence over the long-term.

Timothy Yarbrough: Yeah. Kunal, this is Tim. I’ll answer the second question about Q4 versus the guidance. So the upside in revenue really came from the account of paid employers that came in a bit higher than we expected. Q4 is notoriously difficult to predict given the holidays and how seasonally the typical quarter cadence is something where it starts off relatively strong October through middle of November and starts to tail off in Thanksgiving, and then we cover slightly before, again declining through the end of the holidays. And so, back end of that quarter in a traditional year is difficult to predict, but given the macro headwinds that we’ve been facing is all the more so — but that’s the general shape of how revenue kind of spilled out throughout the quarter.

Operator: Your next question is from the line of Brian Fitzgerald with Wells Fargo.

Brian Fitzgerald: Thanks guys. How would you characterize the — I mean, thank you for the color so far, but I want to try and parse this apart a little bit more. How would you characterize the hiring environment right now in terms of what are hearing from employers, that should have or are close to firming up their hiring plans for the year? Are they pushing out, kind of locking down those hiring plans that’s anomalous from a normal year? And then anything to call out in specific verticals, are you seeing any trends across verticals that stand out, or are out of sync with what’s going on with the rest of the market?

Ian Siegel: Hi, this is Ian and I will take this question. And I think the important thing to understand is that over the last few weeks we have seen early signs of the labor marketing flattening out. And because of this, I just want to reiterate our operating philosophy. So if you look at what happened last year, and really for the last year and a half, we’ve had an industry-wide slowdown, and our top line went backwards, but in 2023, we still expanded our adjusted EBITDA margins from 20% to 27% when you compare it versus 2022. And that bottom line performance amidst top line contraction is our longstanding operating philosophy. When we see demand from employers decrease, we pull back on expenses. And in this most recent 18 month long decline, we’ve actually cut our operating costs by over 47%.

And this both reflects the discipline with which we adhere to our operating philosophy and also highlights the flexibility of our business model. If the current flattening trend continues, we are willing to accept lower EBITDA margins so that we remain ready to capitalize on what we consider to be an inevitable market recovery. If we see that recovery in 2024, you can expect that we’re going to increase investment just as we did when the first economy signals showed us that — the economy was reopening after COVID. And alternatively, if we see the market decline further, we’re going to manage our costs accordingly. So effectively we’re in a wait and see position, and we remain nimble and we will adapt to the realities of the market as it evolves this year.