Ziprecruiter, Inc. Q1 FY2023 Earnings Call

Ladies and gentlemen, good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the ZipRecruiter Incorporated First Quarter 2023 Earnings Conference Call. Today's conference is being recorded. Thank you. And I will now turn the conference over to Drew Haroldson, Investor Relations. You may begin.

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 March 31, 2023, and guidance for the second 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 March 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 in our Form 10-Q. And now I will turn the call over to Ian.

Thank you, Drew. Good afternoon to everyone joining us today. Q1 revenue of $183.7 million was down 19% year-over-year, but above the high end of the range of our guidance. Q1 '23 adjusted EBITDA of $35.3 million and adjusted EBITDA margin of 19% exceeded the high point of our guidance. This strong profitability in the face of both deteriorating macro conditions and persistent interest rate increases is a testament to the flexibility of our business model and our ability to rapidly adjust expenses. In our last call, we highlighted the atypically slow start to the year, which informed our guidance for the rest of the year. January normally marks the beginning of the hiring season as employers kick off annual hiring plans and operate with refreshed recruiting budgets. Q1 '23 showed a sharp deviation from what those seasonal trends would have predicted. The softening observed at the outset of Q1 has only accelerated and we see demand for recruiting services continue to decline. This slowdown has been broad-based across both SMBs and enterprises as well as across the majority of industries. From conversations with our customers, we see employers paring back their hiring in response to the uncertain economic backdrop we now face. Because of these trends, which are unlike anything we've seen in our 13 years of doing business, we are not providing full year revenue guidance. However, while there is a wide range of possible top line outcomes, we remain focused on delivering against our guidance of $185 million of adjusted EBITDA at the midpoint. One of our key strategic advantages of ZipRecruiter is our ability to rapidly respond to changing macro conditions. We're doing what we've always done in a softening labor market: decreasing expenses to increase profitability. In spite of this deceleration, there are several long-term investments, which are now bearing fruit. Organic job seeker traffic was up 40% in Q1, 56% of these new job seekers received an invitation to apply for a job directly from an employer within seven days of joining our marketplace. It's our profitable flexible operating model, along with our hard-earned 80% aided brand awareness on both sides of our marketplace that allow us to adapt to this cooling market, all while continuing to invest in improving our industry-leading matching technology and top-rated user experiences. Now I'll turn it over to Dave to talk through some of our progress against the three pillars of our marketplace strategy.

Thank you, Ian. There is no doubt that headwinds in the macroeconomic environment are impacting our customers' hiring plans. Regardless of the shape or duration of this current labor market cycle, we firmly believe that ZipRecruiter will play an increasingly large role in bringing job seekers and employers together. To that end, I'm excited to share with you some of the progress we've made to drive a generational shift in how technology enables job seekers and employers to come together using our industry-leading matching technology. We will start with our first strategic pillar, which is increasing the number of employers and the revenue per paid employer in our marketplace. Even though current macroeconomic headwinds have temporarily muted our progress in moving these KPIs sequentially, we're confident that our investments in building great products for employers will bear fruit in the long term. Our enterprise customers remain a top priority, driving us to focus on eliminating friction in the hiring process for these larger customers. In Q1 '23, we introduced a new tool which simplifies the process of creating and activating new campaigns for enterprise customers. We estimate that campaign creation tasks previously requiring hours now take minutes. The new tool resulted in much faster creation of campaigns, simultaneously improving the customer experience and creating a faster time to revenue for ZipRecruiter. In addition to reducing friction in the hiring process, we also increased the certainty that enterprise employers will be able to spend their budgets. Our automated campaign optimization solution achieves campaign targets 34% more often than the previous manual processes. Finally, employers often struggle with the laborious process of writing job descriptions. In Q1 '23, we leveraged generative AI to launch over 1,000 new searchable job template pages. Not only does this even further reduce friction in the hiring process for employers, but job seekers also love these new pages. Now I'll move to our second pillar: increasing the number of job seekers in our marketplace. It's no surprise that more job seekers are looking for work. In fact, we saw a 40% increase in organic visits from job seekers in Q1. This current backdrop provides an opportunity for ZipRecruiter to be there for job seekers in their time of need and makes the work we're doing to build the world's most innovative job-seeking tools all the more important. We've been providing regular updates about improvements we make to Phil, our AI personal recruiter for job seekers. We're excited about Phil because we put the human face on navigating the job search process, engages with job seekers during their onboarding and uses their real-time feedback to curate the job search experience. We're continually expanding sales reach across our job seeker products. While Phil's onboarding flow was previously launched to our mobile, web and desktop users, as of Q1 '23 Phil is now also featured in both of our number one rated native apps. ZipRecruiter addresses the information asymmetry inherent in the hiring process by equipping job seekers with useful information and insights to help them on their journey. In Q1 '23, we launched a new career advice hub containing hundreds of helpful articles with more on the way. These articles help job seekers understand what employers are looking for and how to make their applications stand out. Job seekers love the new content, which is a contributor to the large increase in job seeker traffic in Q1. Salary remains one of the most important criteria for job seekers when looking for a job. In Q1 '23, we rolled out estimated pay ranges for when we have high confidence in the prediction and the employer doesn't provide the info. Over 60% of jobs in our marketplace now show pay rates, either provided directly by the employer or via the new ZipRecruiter estimate. These listings get more impressions, clicks and applies than those without any form of pay data. I'll conclude with our progress around our third pillar: making our matching technology smarter over time. Our algorithms get smarter as job seekers interact with Phil and different jobs in our marketplace. In Q1 '23, we retrained our matching models for job seekers who are earlier in their journey and have less activity in our marketplace. This increased the percentage of new job seekers getting an invite to apply within their first seven days from 18% to 56%. Over 68% of these new job seekers received an email within one day.

Thank you, Dave, and good afternoon, everyone. Our first quarter revenue of $183.7 million exceeded the high end of the guidance we provided in February. This represents a 19% decline year-over-year and is primarily reflective of continued and accelerating softening in the hiring market. Additionally, we faced particularly challenging comparisons against Q1 '22 when we grew 81% year-over-year. Quarterly paid employers were 106,000, representing a 29% decrease versus Q1 '22 and a 2% decrease versus Q4 '22. 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 $1,734, an increase of 15% year-over-year but a sequential decrease of 11%. In prior years, enterprise-driven strength in Q4 has resulted in lower sequential growth in Q1. In Q1 '23, this trend was exacerbated by reduced hiring demand from both enterprises and SMBs. 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 $5 million in the first quarter of 2023 compared to $8.4 million in Q1 of 2022. Q1 '23 adjusted EBITDA was $35.3 million, equating to a margin of 19% compared to $37.2 million, a margin of 16% in Q1 '22. The adjusted EBITDA margin expansion year-over-year primarily reflects lower sales and marketing expenses, which we reduced in response to the changing macroeconomic landscape, and partially offset by increases in research and development expenses. Cash, cash equivalents and marketable securities was $519.1 million as of March 31, 2023, compared to $570.4 million as of December 31, 2022. The decrease quarter-over-quarter was primarily due to $60.2 million of share repurchases. Additionally, we announced that our Board of Directors has authorized a $100 million increase to the Company's share repurchase program. This is in addition to the previous authorizations of $450 million in total. We note that this authorization is not a commitment. We will remain diligent allocators of capital as we continue generating free cash flow, while also recognizing the uncertain macroeconomic environment. Moving on to guidance. The atypical softness we noted during our last call has increased in recent weeks. While Q1 '23 revenue was down 19% year-over-year, revenue in April was down 27% year-over-year. This is reflective of a contraction in demand with both SMBs and enterprises continuing to reduce the number of jobs they post and the amount they spend for job advertising. If these trends, which inform our guidance, considerable macroeconomic uncertainty remains and changes, both positive and negative can continue to have an impact on our 2023 revenue. Our Q2 '23 revenue guidance of $170 million at the midpoint represents a 29% decline year-over-year. Given the increasingly uncertain macroeconomic environment, we are not providing annual revenue guidance. We will continue to take advantage of opportunities to win the business with new employers and deepen our relationships with existing employers, but recognize that further macroeconomic fluctuations that are impacting our customers will have a direct impact on our top line performance. Our adjusted EBITDA guidance of $38 million at the midpoint or 22% adjusted EBITDA margin for the quarter reflects our continued fully funded investments into new solutions for the labor market, while simultaneously moderating our sales and marketing investments during the slowdown. Finally, we reiterate our ability in the majority of scenarios we can reasonably foresee to generate 2023 adjusted EBITDA between $178 and $192 million. While there are a wide range of top line possibilities, the flexibility of our business model allows for many paths to this adjusted EBITDA range. As always, we will respond to our environment quickly, which means conserving capital and an increased focus on profitability during times of decreased demand from employers. This further demonstrates the flexibility of our business model and our continued commitment to delivering value to shareholders over the long term across a broad range of economic environments. With that, we can now open the line for questions.

We will take our first question from Ralph Schackart with William Blair.

I have a question regarding the decline in revenue, which has decreased by 19% year-over-year for the quarter. It appears that April is down 27%, and the forecast for the next quarter is a decline of 29%. Could you provide some insight on whether this downward trend is continuing into Q2? Additionally, I would appreciate your thoughts on your confidence in maintaining the EBITDA guidance range for the full year.

Thanks for the question. This is Ian. And I think you have accurately summarized what we shared today, which is that there has been an acceleration of the deceleration in the demand for recruiting services. We have clearly left behind what had historically been a standardized and highly predictable seasonal hiring pattern. And so our ability to predict with accuracy where the decline will stop is somewhat impaired by the fact that there is no historical precedence in our company history for what we're seeing right now. But in spite of that, and thanks in large part to the nimbleness of our financial model as well as our ongoing focus on product improvements, we remain both confident that in the short term, we can deliver on the EBITDA, which is why we have reasserted the range and, with specificity, said that we still think we can hit the target we set for the year. And further, over the long term, thanks to those ongoing product improvements, we remain confident and optimistic about our ability to grow our market share. This is very clearly a macroeconomic phenomenon. This downturn is affecting a multitude of players in our industry. And just last week, we had an enterprise summit, where I spoke to 30 of the largest hirers in America. These are companies that hire between thousands and tens of thousands of employers per year. Across the board, all of them have reduced their hiring plans in the face of the economic uncertainty their businesses face.

Yes, it's Tim. I will address the question regarding operational expenses. We have several strategies that we can implement, with the largest and most adaptable being our spending on sales and marketing. In the first quarter, we allocated over $88 million to sales and marketing. A significant portion of this expenditure is flexible and not committed to future periods. However, this is not our only option. We have also reduced additional hiring, concentrating only on the most impactful tech roles. We've evaluated many of our discretionary costs such as travel, entertainment, and professional services. Therefore, we have multiple strategies we can implement to reach $185 million in adjusted EBITDA across various revenue scenarios.

This is Dave, Ralph. One other thing I would add is that, that 40% growth in job seeker organic traffic is exactly what we would expect to see in a scenario like we're seeing right now. This is an opportunity for us over the long term to prove value to job seekers at the moment they need us more than they needed us for years. And we're meeting that challenge and this will pay dividends for us for years to come as job seekers will be able to experience that our product just continues to get better. And so those that haven't needed us for a couple of years are now going to experience what Phil can do for them, the power of our great matches, what it's like to be invited to apply to a job, most of the time within one week. And so all those investments we've been making in both brand and product on that side of the marketplace is what's going to power us through when employers come back.

And we will take our next question from Mark Mahaney with Evercore.

Two questions, please. You talked about seeing that accelerated deceleration kind of equal across SMBs and enterprises. Could you give us a little color on the verticals of extra weakness or the verticals that are still showing some resilience like nursing, I assume? And then secondly, we've kind of gone out and then we're coming back in, in terms of work from home. Is that having any impact on your business as a whole? I thought that the kind of increasing complexity of work from home may make some of the matching algorithms more valuable, but maybe they're less so now that we're going back to kind of more normal work environments, but maybe that's not that material. Just comment on that, please.

Well, I'll take the second question first, which is on work from home. So less than 10% of our listings advertise the opportunity to work remotely or in a hybrid format. Interestingly, those jobs are runaway winners in terms of the number of applicants that they receive. However, it is a de minimis portion of the overall hiring market. So it doesn't have a major impact on our business. We have tuned our algorithms such that we are experts at delivering candidates from anywhere to those jobs. So theoretically, as the market shifts, that will continue to be an advantage, but the market overall has not tipped that way in spite of still having more than 60% of job seekers looking for remote or fully or some form of hybrid work as their first choice.

Yes, thank you, Mark. This is Dave. In terms of sectors, healthcare is one industry that continues to display less cyclicality and appears to be less affected by the current slowdown. On the other hand, travel and leisure sectors also seem to be performing reasonably well. However, technology does seem to be more affected by the downturn. While we don't significantly over-represent in any of these areas, our performance largely mirrors the economy as a whole. One sector that stands out, perhaps surprisingly given recent news, is finance, which has not yet been greatly impacted despite the headlines regarding banks and other issues. Overall, while certain sectors stand out, the main trend is quite broad-based across the economy from both geographical and industrial perspectives, with some patterns emerging. We began discussing a slowdown among small to medium-sized businesses starting in June last year, and as you pointed out, this quarter we’ve seen enterprises also feeling the pinch, which might be due to the evolving slowdown or annual budget cycles. Large and small customers alike are finding their businesses reasonably strong, yet they are feeling cautious based on the current environment; as a result, they are scaling back in the short term. Their long-term goals remain intact, and we expect to play a significant role in those plans as they focus on building their teams, though it is certainly impacting immediate hiring needs.

We'll take our next question from Doug Anmuth with JPMorgan.

It's Wes on for Doug. I think just kind of with a lot of what's going on in the macro and broader layoffs, what you're seeing, job seeker tailwinds, but openings declining. Just to get updated thoughts on competition more broadly with the two larger players as well as some of the smaller ones and how things maybe have evolved. And secondly, I think you guys have been getting nice traction on the enterprise side. I think that stepped back a little bit this quarter, at least in terms of revenue share for that segment. How are you thinking about the progress of that towards that 50% marker throughout this year kind of given the macro backdrop?

Yes, that’s a great question. On the competition front, we collaborate with over 1,000 job sites, including many significant offline players. What we've observed is an economy-wide trend, not just specific to ZipRecruiter. Competitors, like us, are also pulling back on their investments in go-to-market strategies and marketing. Additionally, some are retracting their aggressive pricing strategies that were in play earlier this year. These are the main competitive trends we've noticed. Our primary focus remains on our customers rather than our competitors. From our customers' perspectives, we’re hearing a mix of cautiousness in the short term and ambitious plans for the long term. We feel very confident in the long-term health of the U.S. labor economy and our role in advancing it. Regarding enterprise, you’re right; there’s a noticeable pullback in short-term hiring demand and job openings, and this trend is affecting enterprise as well, not just small and medium-sized businesses. Last quarter, the performance marketing component of our enterprise revenue decreased from 23% to 22%. While there was a slight decrease, the overall trend is broader. Enterprises are now planning and budgeting further ahead because they have large infrastructure projects to meet their hiring needs when they require thousands of employees. They are seeking efficiencies in this environment. However, the fundamental need for a larger workforce remains unchanged, driven by the need to replace attrition and support growth as they expand into new locations and businesses. We will be part of that growth. During a recent discussion with 30 of our largest customers, we heard strong confirmation of their long-term alignment with us and ongoing need for talent. So, we will continue to concentrate on our customers and feel assured that the competitive landscape will adjust positively as we maintain our customer focus.

We'll take our next question from Justin Patterson with KeyBanc.

Just thinking about kind of the puts and takes of the different drivers, employers and revenue per paid employer, how should we think about just the ability to sustain the revenue per paid employer growth as job postings come in a bit more, and we just don't have that same scarcity of labor as we had previously?

Justin, this is Tim. In the first quarter, both key performance indicators, paid employers and revenue per paid employer, came in lower than expected, especially revenue per paid employer. This trend continued in April. The main factor affecting paid employers was the decrease in demand from small and medium-sized businesses, which represent the majority of our paid employer numbers. A decline in hiring from these businesses has a significant impact on this KPI. On the other hand, revenue per paid employer has been affected by both small and medium-sized businesses and enterprise clients. Small and medium-sized businesses are likely to either stop hiring altogether or reduce the number of job postings, which in turn lowers revenue per employer. Additionally, the general slowdown in enterprise hiring, as mentioned by Ian and Dave, will also directly influence revenue per paid employer. We observed that revenue per paid employer was subdued in the first quarter. However, we remain confident that the long-term trends reflected in our extensive cohort data will persist, despite the temporary disruptions caused by the current economic climate. The same holds true for paid employers in the long run; while the numbers may fluctuate due to economic factors, we expect them to continue to grow over time.

We will take our final question from Eric Sheridan with Goldman Sachs.

I want to ask a big picture one. You talked earlier to Ralph's question about investments and another question about competition. But you guys were very early investors in AI on the platform and positioning the platform for where technology was going over the medium to long term. And leaving aside sort of some of the things that are outside of your control in the short to medium term, how do you think about some of the investments you've made and continuing to make as competitive differentiators coming out of the macro dynamic looking out to '24 and '25? And whether you think even as some folks try to play catch-up on that, that could be an area where you're back to a position of share taker and how we should be thinking or quantifying that?

Thank you, Eric. This is Ian. This is the question I often ponder the most because I believe the job industry has evolved through three phases. Initially, the focus was on volume, followed by a focus on candidate quality. Currently, we are in a phase where advanced matching algorithms help identify the right connections. However, the real challenge is creating enthusiasm and engagement between employers and job seekers, enabling them to communicate quickly and ideally lead to hires. I believe that our true competition lies in the experience we provide, rather than the matching technology itself. It's important to have a strong brand and a substantial marketplace to test and improve the experience through matching algorithms. We have these components in place and are highly concentrated on enhancing the experience for both employers and job seekers. This commitment is reflected in our high ratings, and our R&D focus is on visible innovations rather than internal optimizations. Future advancements at ZipRecruiter will center on tangible improvements, such as ensuring that 60% of our job listings include salary data, which we implemented last quarter. This initiative leads to a 40% increase in applicants for employers, as job seekers value this information. Moreover, 57% of new job seekers using our service receive direct invitations from employers to apply within a week, which creates an excellent and memorable experience for them. Achieving this level of experience is challenging and demands high-quality matching along with a significant number of employers on our platform. I believe these advantages will continue to strengthen, and I'm enthusiastic about our product roadmap. We are not just on the right track; we are well into our journey. I look forward to the developments in '24 and '25.

Eric, this is Dave. I want to expand on that idea. I often reflect on how job seekers, over the past ten to twenty years, have come to expect a variety of search results when they submit a query. Technology is increasingly enabling us to meet their expectations by connecting them with great employers who see them as complete individuals. We have developed an exceptional dataset over the years that is difficult to replicate, even with advanced algorithms. By leveraging this data with cutting-edge technology, we can effectively link employers with job seekers. This represents the true power of AI for us as we concentrate on this crucial aspect of people's lives—connecting them to opportunities, rather than employing AI for a broad range of general inquiries. We are committed to addressing this challenge and positively impacting lives. You can expect to see significant advancements from us in the years ahead.

And ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.