Ziprecruiter, Inc. Q4 FY2023 Earnings Call

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. 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.

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.

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 separations, 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.

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. 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 140 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 2023, 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 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, our 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 fuelled 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 2023 than in Q4 of 2022. 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 2023 than in Q4 of 2022. As previously announced in Q3 of 2023, 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.

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 is consistent with historical seasonal trends. Net income was $6 million in Q4 2023 compared to $19 million in Q4 2022, and $24 million in Q3 2023. Q4 2023 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 2023. 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 31, 2023, compared to $497 million as of September 30, 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 2024 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 approached 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 a 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.

Your first question is from Kunal Madhukar with UBS.

Hi. Thank you for taking my question. When we look at the number of matches that increased 24% year-over-year, and you delivered 60% more applications per paid employer in Q4 compared to the same period last year, why was performance revenue down by about 40%? Additionally, when you provided guidance for the fourth quarter, it appeared to be conservative and possibly lower than expected, considering seasonality. What changed during the quarter that allowed you to exceed the estimates? Thank you.

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 that 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 that value delivery is what gives us tremendous confidence over the long term.

Sure. Kunal, this is Tim. I'll respond to your second question regarding Q4 and our guidance. The increase in revenue was primarily due to a higher number of paid employers than we anticipated. Q4 is usually challenging to forecast due to the holidays, as the typical pattern starts off strong from October to mid-November but then slows down around Thanksgiving, and follows this trend through the end of the holiday season. Therefore, forecasting the latter part of the quarter in a typical year is tricky, especially given the macroeconomic challenges we are currently facing. Nonetheless, this outlines the general revenue trends we experienced throughout the quarter.

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

Thanks, everyone. How would you describe the current hiring environment based on what you're hearing from employers regarding their hiring plans for the year? Are they postponing or finalizing their hiring plans in a way that's unusual compared to a typical year? Additionally, are there any specific trends across various sectors that stand out or seem inconsistent with the overall market?

Hi, this is Ian and I will take this question. The key thing to understand is that in recent weeks, we have noticed early signs of the labor market stabilizing. I want to reiterate our operating philosophy. Over the last year and a half, there has been an industry-wide slowdown that caused our top line to decline. However, in 2023, we still managed to expand our adjusted EBITDA margins from 20% to 27% compared to 2022. This strong performance on the bottom line, despite top line contraction, aligns with our operating philosophy. When employer demand decreases, we reduce expenses. During this 18-month decline, we have cut our operating costs by over 47%. This showcases both our commitment to our operating philosophy and the flexibility of our business model. If the current stabilization trend continues, we are prepared to accept lower EBITDA margins to position ourselves for an inevitable market recovery. Should we experience that recovery in 2024, we will increase investments as we did when signs of economic reopening emerged after COVID. Conversely, if the market declines further, we will adjust our costs accordingly. Therefore, we are currently in a wait-and-see mode, remaining nimble and ready to adapt to market realities as they unfold this year. The current stabilization we observe is a new phenomenon considering the past 18 months.

Thanks, Ian. Appreciate it.

Yeah.

Sorry. Yeah, so to the second part of your question on verticals, we have continued to see a number of verticals move in the dynamic environment we're in. So for example, tech, which was a leading vertical that started to tail off in terms of hiring. Tech continues to be quite slow as one example. Another example is the government sector, which started off the downturn quite strong, but over the past quarter has been fairly soft. And on the flip side, a bright spot is education, where there continues to be a teacher shortage and other school, and education-related shortages, and where there's continued catch-up hiring aggressively taking place. That said, in every quarter, in every year-over-year period, we see sectors moving in different directions. And there's been no major structural change to the mix, or the weighting of our marketplace vis-a-vis the whole economy. Again, in terms of industry, in terms of geography, our marketplace in terms of job skill level, our marketplace looks very much like and is very representative of the whole U.S. economy.

Thank you, David.

Your next question is from the line of Doug Anmuth from JP Morgan.

Great. Thanks for taking the question. It's Wes on for Doug. Product improvements and then still investing in the long-term opportunities, I think that's pretty largely consistent with what you did last year as well. So just kind of giving the uncertainty ahead and coupling that with what you've already accomplished in '23, what are key priorities or areas of focus for you coming into '24 from like a product or investment perspective?

Hi, this is Ian, and I'm happy to address this question. We are very excited about the progress of our product because it feels like we are finally starting to see the benefits of our long-term strategic roadmap. For a long time, we have been dedicated to developing the best matching algorithms in our field to connect job seekers and employers. However, we have realized that it is not enough to simply show them the right matches; we also need to encourage engagement between them. Therefore, we are focusing heavily on engagement features, and you can already see the results of that effort. In 2023, for instance, our organic job seeker traffic increased by 40%, which was sufficient to counterbalance the decrease in our spending on paid acquisition for job seekers this year. As a result, traffic in 2023 was mostly flat compared to 2022. Nonetheless, the engagement level and the number of applications from job seekers rose by 17%, indicating a significant increase in interactions within our marketplace. We are thrilled about this progress as it demonstrates that we are moving in the right direction. Building a brand has been crucial for us to generate a consistent flow of organic traffic to both sides of our marketplace while ensuring optimal matching. Now, we are concentrating on motivating those two groups to engage swiftly. We are experiencing notable success in this area and plan to continue our investments. This aligns with our strategy of remaining agile this year and maintaining our investment levels, as we believe our product is rapidly advancing. As mentioned previously, we are beginning to see early signs of market stabilization, and we aim to stay prepared for that.

Great. Thank you so much.

Your next question is from the line of Ralph Schackart with William Blair.

Afternoon. Thanks for taking the question. On the call, you talked about the last few weeks seeing the labor market flattening out. Just curious, was that sort of a gradual, sort of trend to when it eventually flattened out, or was it a little bit more pronounced? And then just to follow up to that, are you seeing that across the board with SMBs as well as enterprises? But any color you could add between those two segments as well, be helpful. Thank you.

Thanks, Ralph. This is Dave. Yes, so it's been fairly broad-based. It's very early, but we've seen a few other periods of a couple of weeks here and there where we've seen some signs of flattening over the past 18 months and then further down trends, but this has been going on for a few weeks now over a month, and it's been pretty broad-based in terms of industry and category size. But it's, I would say, much more gradual than anything sharp, or like a recovery.

Okay. Thank you.

Your next question is from the line of Justin Patterson with KeyBanc.

Great. Thank you very much. Good afternoon. Two, if I can. First, just wanted to go back to kind of some of the investment commentary you've given. You've obviously made a lot of progress with the products over this past cycle. It sounds like we can expect investment stepping up a bit more here. As you just look at all of the product improvements you've made and are leaning into marketing again, how should we think about just market share gains coming out of this cycle versus what existed in the past? And then if got a follow-up after.

This is Ian and I will again take the question. So the way we think about market share is, it's really hard to measure quarter-to-quarter, better measured over years, and especially when you're experiencing the kind of seismic changes in the labor market that we've undergone over the last one and a half years, it gets really tricky. But that said, we definitely believe we are gaining market share. And while our top line has come down, we are certainly not alone there. Our entire industry has effectively suffered a decline. And while there are a few larger players and many smaller ones, what still seems clear is that online is taking share from offline and that we ZipRecruiter have been winning share in that online segment of the market. Let me explain why we believe that and why we are confident that we're going to continue taking share in the future. I already mentioned that our organic job seeker traffic is up over 40% in 2023. That is a significant amount of increase in traffic. That going up allowed us to turn paid job seeker acquisition down. And while we didn't invest at the same levels, we effectively were able to keep job seeker traffic flat because there were so many job seekers coming to us for free. Further, those job seekers were highly engaged. As I mentioned before, the total applications were up 17% in 2023, which we view as validation of our strategy on improving our matching algorithms and also improving Phil. So the more we make Phil feel real, the more conversational and warm Phil becomes, and the better key guides job seekers through their process of putting together a resume and looking at the right jobs, it seems to be a virtuous cycle in terms of not only are we getting more traffic now, but we are optimistic about the future of what this strategy could bring to the site in terms of both users and their engagement. So if we zoom back out, we've also achieved 80% aided brand awareness with both employers and job seekers, which means we are a top-of-mind solution for both sides of our marketplace. And that has proven to be incredibly valuable because it generates a foundation of effectively organic traffic. And it gives us tremendous flexibility when it comes to navigating downturns like this, because it gives us optionality in terms of control of our expenses. But further, and what we're also excited about is, there definitely is a value in having a recognizable brand when it comes to marketing and advertising in terms of the level of response that you get. So being a known brand, having higher brand recognition, that increases the efficiency of advertising. And when we see the recovery come and when we're investing into that recovery, it's just another advantage that we are able to press as the category resumes to something that looks more like normal. I want to stress, again, the flattening we've seen is very, very early and we have seen signals of flattening before and then the downturn resumes, so too soon to call it. But we are watching closely and staying very focused, and keeping optionality for now.

Got it. That's helpful, Ian. And the second question might also have some too early to call pieces in it, but I'll try anyway. Dave highlighted several examples of how LLMs are being used across the business. When you step back and just look at a lot of this AI investment, do you think you'll see more of an impact on either the revenue side or expense side this year? And I'm just curious, why you think one or the other?

ZipRecruiter has been an AI company for nearly ten years, and we've experimented with various techniques to create our top-tier matching system. The advent of large language models enables software to develop distinct personalities and voices, providing numerous applications. We have started to integrate this into our offerings, which will significantly enhance how employers connect with candidates and vice versa. This development is already yielding results, contributing to a rise in successful matches and increasing the number of applicants per employer. While the exact timing of the revenue impact remains uncertain, I am confident that improved services will lead to higher revenue in the long run, and we foresee even more opportunities for enhancement through ongoing optimization.

Yeah. To add onto that, Trevor, one of the things we've seen thus far as we bring on new technologies to make us more efficient, for instance, the campaign creation process for enterprise customers used to be highly manual now, only a tiny percentage of campaigns are made manually, as I spoke about earlier. That's a case where rather than reducing expenses, what we've done is redeployed the resources that would've done that to spend more time with customers, align upfront on a shared definition of success, drive results faster, analyze and optimize campaigns, et cetera. So I think we're seeing early signs that that's going to really pay off for us, but that's how we've approached it thus far. And I look forward to reporting on more about what the results are as we continue to invest.

Thank you.

Your next question is from the line of Mark Mahaney with Evercore.

I want to ask about the number of quarterly paid employers. I apologize for arriving late and may have missed this topic. How do you view this number reaching its lowest point? I recognize that there are macroeconomic issues at play, but in certain large industry sectors, there might be a shift in hiring philosophy. I may be focusing too much on the tech sector, but it seems there’s a trend of growing first and potentially adding hires later, which reflects a change in mindset. Could you help us understand where that number might stabilize and how much of a lagging indicator it could be this time due to structural changes in hiring perspectives compared to previous economic cycles? Thank you.

Thanks Mark. This is Dave. So, yeah, in terms of the paid employer number, as referenced earlier in our letter, the hiring rate during Q4 reached the lowest level since 2014. So that's the number of hires in a given month adjusted for the size of the labor force. And so that metric, if it were to continue to come down, could impact paid employers, or if that were to recover or stabilize, that could certainly have an impact on paid employers. I think it would've a bigger impact than any permanent shift in attitude toward hiring per your comment. Like I said earlier, tech is one of the, if not the most impacted vertical on a year-over-year basis in the entire economy as we look out there and that's where I think the biggest sort of structural attitude shift toward hiring is being talked about. We have not seen that permeate other sectors to nearly the same extent. But honestly, the biggest factor we see there is what drives that higher number is less the net growth in jobs or anything like that. The most hires are to backfill people that have left to take on another job, or decided to do something different. And as Ian and I talked about earlier, the great resignation has turned into the big stay. And we see that as something that is working through the system after the tumult of people sort of sheltering in place during COVID, a great reshuffling in terms of a big resignation during COVID and the immediate reopening. And now there's some sort of digesting of that. But fundamentally, we continue to see the economy and business needs being extremely dynamic, the needs of different types of jobs. They have employees opportunity to go get even better jobs or get a raise. Those things are going to continue to be the case. So structurally we don't see any massive shift underway despite some of the more tech-oriented headlines and thought leadership around what that might bring.

Thank you very much, David.

Your next question is from the line of Eric Sheridan with Goldman Sachs.

Thank you so much. Two questions, if I could. Topics we've talked about on prior earnings calls, given the demand environment on the job side, what is the current update on your efforts to keep job seekers more engaged for longer and potentially set up a healthy rebound when the macro environment's more receptive to that scale of job seeker and level of engagement that you've been building over the last couple quarters you've talked about? That would be number one. And then with the ability to pull back on marketing the way you have more recently, any key learnings that you have that that could mean increased leverage or higher ROI around your marketing dollars that could have longer-term implications for the company beyond the current period. Thanks so much.

I will address the first part of your question. We are already observing signs of success in increasing job seeker engagement. Last year, organic traffic rose by 40%, and we are enthusiastic about this trend. Analyzing user behavior reveals that not only are more people coming to the site without the need for paid acquisition strategies, but they are also more engaged compared to the previous year's users. This improvement results from several changes we've implemented on the website, which can be categorized into a few main areas. Specifically, we have improved our matching capabilities, enhanced the relevance of the opportunities presented to users, and become more selective in the jobs we display to them. Collectively, these changes are leading to a consistently better experience for our users. We believe that engagement is crucial for continued growth, and we are making significant progress in this area.

We believe that the over $1 billion we spent to achieve 80% brand awareness among both job seekers and employers will ultimately yield positive results as the market recovers. Our marketing investment is evident in the noticeable increase in organic job seeker activity. These job seekers represent the highest quality and are the outcome of our long-term investments in product and brand development. The shift towards organic growth, along with our reduction in marketing expenses by 45%, while still driving growth in organic job seekers, has the potential to positively impact our finances. This gives us continued confidence in our ability to achieve our long-term EBITDA margin target of 30%.

Great. Thanks for the color.

At this time, there are no further audio questions. This does conclude today's call. Thank you for joining. You may now disconnect.