ZipRecruiter - Q2 2023

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen. Thank you for standing by. My name is Erica, and I'm the conference operator today. At this time, I'd like to welcome everyone to the ZipRecruiter Inc. Q2 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. At this time, I will be turning it over to Drew Harwe with Investor Relations The Blueshirt Group.

Drew Haroldson (Investor Relations)

Thank you, operator. Good afternoon. Thank you for joining us on our earnings conference call, during which we will discuss ZipRecruiter's performance for the quarter ended June 30th, 2023, and guidance for the third quarter and full year 2023. 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 related 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 June 30th, 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, 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'll discuss certain 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. Now I will turn the call over to Ian.

Ian Siegel (CEO)

Thank you, Drew. Good afternoon to everyone joining us today. Second quarter results reflect ZipRecruiter's resilience in the face of a cooling hiring environment. Adjusted EBITDA of $43 million and adjusted EBITDA margin of 25% exceeded the high end of our guidance, while Q2 revenue of $170 million was in line with the midpoint of our guidance. Employers continue to respond to the enduring macroeconomic uncertainty with caution. The number of job openings, employers' willingness to pay for those job openings, has been declining significantly from the peaks of 2021 and 2022. This trend is consistent among both SMB and enterprise customers alike, across multiple industries and geographies. We see this as a macroeconomically driven reality, impacting companies across the recruiting space. This results in the continuation of an atypical hiring pattern. We are discontinuing full-year adjusted EBITDA guidance.

However, we believe that the company will achieve Adjusted EBITDA margins in the low-to-mid 20% range for the full year, given our ability to respond to our environment quickly. Regardless of near-term results, our financial profile and strong capital position allow us to look beyond the ups and downs of labor market cycles. Long term, our growth will be fueled by advances in our matching technology and the shift in demand toward technology-forward solutions like ours. We remain focused on increasing both our product's feature set and ease of use, as a range of breakthrough technologies allow us to create remarkable experiences. As we increasingly enhance efficiency and effectiveness in the recruitment process, we believe we will be top of mind for both employers and job seekers. This is what drives us every day.

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 (President)

Thank you, and good afternoon. As Ian just touched on, we have a massive opportunity to disrupt the recruitment category. As fellow shareholders and operators of this business, our strong conviction in our long-term investment thesis remains unchanged, and we continue to work on bringing our job seekers and employers together using our industry-leading matching technology. Our first strategic pillar is increasing the number of employers and the revenue per paid employer in our marketplace. While SMBs enjoy ZipRecruiter's applicant tracking system or ATS, larger employers typically use an enterprise-grade ATS to manage their hiring campaigns. Our third-party ATS integrations are a strategic investment nearly a decade in the making. We believe this serves as a formidable competitive advantage, making it easy for new enterprise customers to activate ZipRecruiter's recruiting solution.

Integrations also bring the employer's jobs directly to our marketplace, where job seekers can apply with our one-click ZipApply feature without leaving our marketplace. As of Q2, we have integrations with over 140 applicant tracking systems, and the proportion of our performance marketing revenue driven by ZipApply-enabled jobs was over 30% higher than the prior year period. In Q2, we completed our integration with UKG, one of the world's leading HCM cloud companies. Each additional integration like this one enables a subset of our enterprise customer base to benefit from an improved candidate experience, delivering 3x more applications per job for the same amount of spend. Now we'll move on to our second pillar: increasing the number of job seekers in our marketplace. Labor market downturns present an opportunity to build the job seeker side of our marketplace.

We believe serving more job seekers, many of whom are using ZipRecruiter for the first time, will build brand loyalty that will endure for years to come. Last quarter, we reported a 40% increase in organic visits from job seekers. We continue to see increased activity from job seekers. In Q2 of 2023, we saw a 46% year-over-year growth in quarterly organic job seeker visits. We believe this is a testament to our strong brand awareness and differentiated product offering. Job seekers often don't know exactly what they're looking for when it comes to their next opportunity. In fact, over 15% of web searches on ziprecruiter.com are blank, using no keywords at all. In Q2, we launched a new experience to enhance the job discovery process for those using our search products.

Those job seekers are now able to filter the available jobs on ZipRecruiter by topics such as industry, job title, local versus remote, salary expectations, and more. This improvement to the job search experience drove an engagement lift greater than 50% compared to the previous search experience. We continue to weave Phil, our AI-driven personal recruiter, into our job seeker products. In Q2, we expanded Phil to our market salary pages for specific roles. These pages are visited over three million times per month. Phil provides job seekers who visit these pages with a personalized experience, including tailored job suggestions, removing the friction from the job search process, and enabling ZipRecruiter to provide a differentiated job seeker experience. Job seekers who onboard with Phil generate nearly 2x as many applications as job seekers who register through our other channels, further demonstrating the value of Phil's personal recommendations.

I'll conclude with our progress around our third pillar: making our matching technology smarter over time. We bring employers and job seekers together using industry-leading matching technology. Machine learning and AI has been a central focus of our technology efforts for many years. We believe our massive and proprietary data set gives us a distinct advantage as we drive efficiencies into the hiring process. Our AI-driven matching technology learns from every data point collected in our marketplace. We're also constantly improving the underlying algorithms that match job seekers to open jobs on ZipRecruiter, driving even more improvements over time. These matching algorithms power our job alerts emails, which we send daily to our millions of job seekers to enhance their job search.

Algorithm enhancements made in Q2 continued to improve the quality of matches our job seekers receive via email and resulted in a 15% lift in our job seeker engagement with the jobs they were shown. I'll turn it over to Tim to talk through the financial results and our guidance. Tim?

Tim Yarbrough (CFO)

Thank you, Dave. Good afternoon, everyone. Our 2nd quarter revenue of $170.4 million was in line with the midpoint of guidance provided in May. This represents a 29% decline year-over-year and is primarily reflective of a continued and accelerating softening in the hiring market. Quarterly paid employers were 102,000, representing a 35% decrease versus Q2 2022 and a 4% decrease versus Q1 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 $1,677, an increase of 9% year-over-year, but a sequential decrease of 3%. The sequential decrease was driven by employers' willingness to pay being unfavorably impacted by overall macroeconomic conditions.

However, we remain confident that the growth trends we've seen in all of our cohorts over the years will continue in the long term. GAAP net income was $14.4 million in Q2 2023, compared to $13.1 million in Q2 2022. Q2 2023 Adjusted EBITDA was $43.3 million, equating to a margin of 25%, compared to $45.4 million, a margin of 19% in Q2 2022. Net income and Adjusted EBITDA remained relatively flat year-over-year, as lower revenue was mostly offset by lower operating expenses. Cash, cash equivalents, and marketable securities was $497.2 million as of June 30th, 2023, compared to $519.1 million as of March 31st, 2023.

The decrease quarter-over-quarter was primarily due to $50.5 million of share repurchases in the second quarter. Given our long-term growth outlook, our capital allocation strategy prioritizes organic growth investments and M&A over returning capital to shareholders. However, given the strength of our balance sheet and our free cash flow, but with appropriate consideration of the uncertainty we face, we continue to opportunistically repurchase shares when we believe that there is an attractive ROI and potential dislocations in the stock price. Moving on to guidance, as Ian mentioned earlier, employers have continued to pull back in hiring in light of an uncertain macroeconomic backdrop. The speed of this deceleration is particularly noteworthy, with July's revenue being down approximately 31% year-over-year.

This informs our Q3 2023 revenue guidance of $150 million at the midpoint, representing a 34% decline year-over-year. Our Adjusted EBITDA guidance of $40 million at the midpoint, or 27% Adjusted EBITDA margin for the quarter, reflects our continued fully funded investment in product innovation, while simultaneously moderating our operating expenses during the slowdown. The atypical hiring patterns observed year to date give us limited visibility beyond Q3. Q4 has typically been a seasonally softer period for hiring, and we do not yet have a clear view of when employers' confidence will recover. Last quarter, we discussed our review of a path to delivering Adjusted EBITDA of $178 -192 million, given the top-line scenarios we could reasonably foresee at that time.

The rapidity and inconsistency of the cooling hiring environment has, however, reduced this confidence. Therefore, we are withdrawing our prior full-year Adjusted EBITDA guidance. However, even with the wide range of possible revenue scenarios for Q4, our adaptable business model gives us confidence in achieving Adjusted EBITDA margins in the low to mid-20% range for the full year. This reflects our financial flexibility and an ROI-informed propensity to conserve capital during downturns, while we also continue investing for long-term growth. One of our strategic assets is our ability to navigate turbulent times. We approach both up and down cycles with the same ROI-focused orientation and speed to act. While the current environment calls for cost optimization, we have a healthy balance sheet and remain committed to disciplined capital allocation.

This includes pressing our technological advantage through our investments in AI-driven matching, allocating sales and marketing spend to high-performing channels, and restructuring our teams for greater efficiency. It's these decisions and investments that we believe will position us well for the next several economic cycles. With that, we can now open the line for questions. Operator?

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, press star, then 1 on your telephone keypad. We would like to follow the policy of one question, one follow-up. We will pause for just a moment to compile the Q&A roster. Our first question comes from the line of Ralph Schackart from William Blair. Ralph, go ahead.

Ralph Schackart (Equity Research Analyst)

Good afternoon. Thanks for taking the question. If I could. Tim, I think you talked about 30%+ declines in July revenues. Can you maybe give us a broader picture of what the linearity of the revenue decline was through the quarter? The follow-up is just more philosophically, you know, how you're thinking about if this is sort of a prolonged down cycle for hiring. Is there a minimum level of dollar spend that you'd want to maintain in sales and marketing line, or would you know, just be purely focused on preserving margins, you know, where whatever that may be, whatever percentage that may be going forward? Thank you.

Ian Siegel (CEO)

Hey, Ralph, thanks for the question. This is actually Ian, and I just want to take sort of a meta whack at this before I turn it over to Tim to get into more specificity. I just want to say that it seems really clear from where we're sitting that what we're looking at is macroeconomic. Our data is showing that job postings, and we're talking both free and paid job postings, they're down from a year ago. This is consistent with what others in the industry are reporting. It seems very clear to us that this trend that we're observing is something that is an external force as opposed to an internal problem. I also want to reiterate what we just said in the call, which is we're literally built for this type of environment.

If the macro continues to soften, the truth about our business is we're well capitalized, we're profitable. Even in the face of the declining demand we've observed over the past year, we've been able to maintain that profitability. The product fundamentally works. Our marketplace is rated number one by both job seekers and employers alike, and we have 80% aided brand awareness on both sides of that marketplace. Finally, I just want to say we're operating at full speed. Our roadmap is focused on making the process of hiring more efficient for employers and more effective for job seekers.

We are hard at work at the next generation of our product right now, so that when a recovery comes, you can look for us to take as rapid action to increase investment and spend into that uptick as we did to bring costs down and operationalize around the reality that we face that we find ourselves in today. As far as sort of the trend line on what you are seeing and the specifics, but I'm going to turn that over to Tim and let him give you more granularity on that answer.

Tim Yarbrough (CFO)

Yeah. Hey, Ralph, this is Tim. As far as revenue trends within Q2, we saw revenue starting continuing to trend down through the balance of the quarter, but it really accelerated towards the back end into June and July. As you noted, we, we disclosed that the July revenue is approximately 31% year-over-year. The trend was really back end-weighted, generally speaking. To your second question about minimum spend in terms of sales and marketing, just kind of give you some high-level thoughts on how we think about sales and marketing. When you look at the Q2 sales and marketing bucket of roughly $72 million, that's a, a fair amount of money, and it's, it's deployed based on a number of different factors that we measure.

It's not just ROI, but cash on cash payback, LTV, brand as well. One of the reasons why I think our minimum spend can be pretty low is because we have already built up a fairly substantial brand awareness among employers and job seekers. We noted this before, but it's much more expensive and difficult to build a brand than it is to maintain it. Even as we flex the marketing spend down, we're doing that because that marginal dollar is not performing to the level that we would otherwise require, given the expense of it. You know, we demand a lot from those marketing dollars and kind of flex up and flex down accordingly.

The other thing I'll mention is that, as a matter of strategic import, we commit very little capital to outer periods, and so that's another reason why we're able to move very quickly. We don't have large amounts that we have to spend within a given period, in other words.

Ralph Schackart (Equity Research Analyst)

Great. Thanks, Ian. Thanks, Tim.

Operator (participant)

Our next question comes to the line of Trevor Young from Barclays. Trevor, go ahead.

Trevor Young (Director and Internet Equity Research Analyst)

Great, thanks. As you guys look out, you know, 12, 24 months, what opportunities do you see, or, or how are you trying to position yourself to come out of this cycle stronger or with greater market share? I think you alluded to maybe some new iterations on product. Then as you see, you know, those potential share gains coming out of the cycle, are those still coming from some of the incumbent solutions, or is some of that more coming from direct online competitors? Basically, what's the recession playbook from here?

Ian Siegel (CEO)

Thank you for the question. I think, you know, what I said up front is what I will reiterate, which is because of the sensitivity of our ability to measure the appetite amongst both small and large employers for recruiting services, we're able to very rapidly respond to whatever macroeconomic condition we find ourselves in. The playbook for us is to operate a profitable business, and when there is demand on the increase, we will invest into that, which, as I said, we can detect very quickly. When we see demand on the decrease, we will moderate our spend, and we will reorganize our business, bring down our operating expenses. The largest war chest we can to prepare for whatever the next uptick is. Now, what does that mean?

It means that we're gonna bring down investments that have either a slower rate of return and/or do not have the same level of LTV to them. However, we're gonna keep pedal to the metal on technology investments as we build the next generation of our product. We've been working with AI for multiple years now. Everywhere we introduce it into our product is either an engagement force multiplier, or it has produced some fairly profound results in terms of the quality of the results that both the employers and job seekers on our service are able to achieve. That is going to continue. I think you look at the world as it exists today, the opportunities presented by AI and their application to our category are more exciting right now than they have ever been.

I think you can expect that you will see us continue to update over the coming quarters on what we are doing with the opportunities that are, as I said, apparent as of this moment. I think the playbook is simply to continue to invest in building a truly disruptive product, one that makes things easier and more efficient for both sides of our marketplace, as we prepare for, in the cyclical environment that we're in, the inevitable uptick and the increase in demand and need for recruiting services.

Trevor Young (Director and Internet Equity Research Analyst)

That's really helpful color, and actually probably a good segue into my follow-up. Just on the efficacy of seekers onboarding via Phil, the 2x number of applications, what proportion of new-to-Zip job seekers are actually opting to onboard with Phil?

Ian Siegel (CEO)

When we look at Phil, initially, Phil was deployed on just a couple of entry points into our service, and every quarter we've been updating you as we take what has proven to be a winner, and spread that entry onboarding experience across every possible entry point into our product. You have seen us over the previous quarters tell you that we have brought Phil to our mobile app, tell you that we have brought Phil to our salary pages. There are many, many entry points into ZipRecruiter. There are a wide variety of ways a job seeker can find their way onto the platform. We are, as quickly as possible, bringing Phil into every one of those, so that the experience that you would have coming through the homepage is the experience you have, regardless of where you find your way into our solution.

That's because what has proven to be true already is that AI is transformational to the experience. Not only was there a significant 2x increase in terms of the number of users who land on our site, who subsequently decide to register when they meet Phil, as opposed to just a search box, but we now have the downstream data on their click activity, and we can see that it also doubles the number of clicks or the level of engagement they show with the product. Fundamentally, they're having a better experience. By Phil greeting them, we're able to capture more information about who they are and what their needs are, so we're better able to serve them.

I think it's really just the tip of the iceberg in terms of what we can do with Phil and the quality of the experience we can deliver.

Trevor Young (Director and Internet Equity Research Analyst)

Great. Thank you.

Operator (participant)

Again, I'd like to remind everyone, if you would like to ask a question, to press the number one on your telephone keypad. Our next question comes from Doug Anmuth from JPMorgan. Doug, go ahead.

Doughlas Anmuth (Managing Director and Senior Equity Research Analyst)

Hi. Thanks. Hi, thanks for taking the question. This is Wes on for Doug. Just wanted to ask on enterprise. I think it stepped back again a little bit this quarter as far as overall mix of the business and kind of around to where you were in 1Q of 2022. Just, you know, how should we be thinking about it going forward, or are there things that you can kind of get it going in the other direction again, or is it, you know, just a function of macro at this point?

David Travers (President)

Thanks, Wes. Yeah, this is Dave. We have incredible long-term confidence in enterprise. What we've seen is that whereas SMB, a year ago, were the first to feel the effects of the downturn in the labor economy, enterprises are feeling that now or responding by reducing their demand for labor now. So, you see that reflected in, in some of the enterprise numbers there. From a product market fit standpoint, everything about our long-term outlook for the enterprise business remains intact. We've been onboarding amazing new customers, getting incredible experiences and testimonials. We've shared some of those with you, and you'll see over time that we'll share more and more, and we're increasingly tuning our go-to-market with ever more sophistication.

You know, we started this business over a decade ago, really focused on the SMB market, and just in the past few years, have transitioned to also focusing upmarket with a more sophisticated go-to-market. Recently, in the past few quarters, have really upleveled the sophistication and infrastructure we have to serve these most sophisticated customers in the world, and they are long-term investments. These sales cycles are vastly longer than the 1-day, 5-day, you know, closing process that an SMB has. All the long-term, you know, outlook there is excellent. What we're seeing now is that enterprises were slower to react, but they're now reacting to the downturn and pulling back some of their hiring plans.

You know, we remain incredibly ambitious, and this will be a growth area for us for a long time to come, through ups and downs and multiple cycles.

Ian Siegel (CEO)

I, I just wanna add to that, if I could, that part of the reason for our confidence in the long term in enterprise is it's one thing to sell customers, it's a very different thing to both onboard and deliver for them. The 140-plus ATS integrations that we have now completed, and turning on ZipApply for those customers, it basically triples their results for the same amount of money. It often makes activating as a new customer as simple as making a single click. We feel like that if you look at the ingredients that are required, a lot of hardest work is already under our belt, and we're well-positioned to penetrate this enterprise market.

Consider it to be one of the real challenges for anyone who wants to sell into enterprise, is getting these integrations done, and it's been really a decade of work in order to get to where we are today.

Ralph Schackart (Equity Research Analyst)

Great. Thank you, both.

Operator (participant)

Ladies and gentlemen, that concludes our call today. Thank you for joining. You may now disconnect.