Dice Holdings (DHX) is the owner and operator of a variety of niche websites focused on job postings and recruiting. The company has had lackluster results recently, in particular with the quarterly results announced in October which saw the stock drop about 15% in one day. Following this and the stock has continued to trend slowly downward in December, now sitting around $7/share and close to 52 week lows.
Although the company does have some competitive threats (details I will cover later in this article), the business has very good margins and maintains close to a 20% free cash flow yield. This has allowed the company to continue to make acquisitions over the past few years to keep growing revenue while not taking on excessive debt. As the stock has dropped the company has also repurchased more than 10% of shares since 2011, and just this past week has initiated another $50m 1-year program for 2014 which would allow the company to buy back about another 10% of outstanding shares at the current price level. Dice has made good on its repurchase program in 2013, having executed it fully, so we can expect that they will be poised to do the same again as long as the stock remains cheap. This combined with an improving US economy should serve as catalysts to drive the stock higher from here. Also interesting to note is that the 7 Wall Street analysts who cover the stock are estimating earnings to increase only 0-4% from 2013 to 2014, which seems quite low when you couple the new buyback plan together with the improving economy and the relatively stable businesses that Dice operates.
Putting it all together and I think the shares are a good value at today's levels and can be expected to rise to a more fair valuation of about $9/share in 2014, implying upside of 25-30%.
Business Overview - A Strong Player in Focused Career Websites
Dice has been a long standing leader in a number of niche websites focused on job postings and career oriented services. The company has a big focus towards IT professionals, in particular with its flagship site Dice.com as well as the newly acquired Slashdot and SourceForge. The latter two are well known destinations for the IT savvy crowd looking both for the latest news on tech gadgets as well as open source projects, and are the company's first foray away from its traditional core business of job posting sites. Going back over 10 years ago now, when I was in my young 20s as an IT student at a major Engineering school, Slashdot had already become very popular among programmers.
Besides these Dice has acquired a number of other web properties over the years, and they also own niche sites which focus on job postings and recruiting in the Financial, Energy, and Healthcare markets. Also recently they have purchased the "IT Job Board", which is strong in tech job postings in the western European market. It should be noted that Dice.com has a long standing presence in North America but it is virtually unknown outside of this region. For example from personal experience working as an IT professional for 6 years now in western Europe, I can tell you that none of my colleagues have ever heard of it. Here the dominant force in recruiting at the moment is definitely LinkedIn (LNKD), and beside that there are still a lot of smaller recruiting agencies that companies use. I'll cover more on the threat of LinkedIn later in the article.
Below is an overview of all of the properties now owned by Dice Holdings:
In terms of revenue breakdown, the company estimated in October that it would end the fiscal year 2013 (through December) with a yearly revenue of $208m. 70% of this comes from the "Tech & Clearance" segment, which includes Dice.com and the other IT related sites together with ClearanceJobs.com (a specialty site focused on US government jobs requiring security clearances). The Finance segment (efinancialcareers.com) makes up 17% of revenues, and Energy (rigzone.com) 11%. The other segment is 2%, which is primarily composed of the healthcare sites. It should be noted however that this business outlook was given in October, and since then in November Dice has purchased "onTargetJobs" for $50m in cash. This greatly expands the company's presence in healthcare jobs, adding 3 more sites (HEALTH eCAREERS, Hcareers, and Biospace) to complement the already existing "Health Callings". The acquired business had revenues of $38m last year, which combined with the existing $4m or so from Health Callings means that Healthcare should have close to 17% of company revenues going forward.
Overtime the last 10 years, the company has been able to continue to grow revenues and still maintains an impressive EBITDA margin of about 35%. This is worth noting, especially in the face of competitive threats from the rise of social networking sites in the past few years.
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Clearly the business still maintains a lot of competitive advantages, which come mostly in the form of network effects and the fact that the company's highly focused and specialized sites are able to charge a premium compared to some of the more generic competitors. For example Monster Worldwide (MWW), the operator of the more well known monster.com job board is about twice the size of Dice Holdings in terms of market cap and has a greater world wide presence, however the company has EBITDA margins of only about 14% which is less than half of Dice.
Looking further at the Dice websites, we can get an idea from compete.com on how big the monthly user traffic is. Note that these are approximate figures and are US based only; Some of these sites have a significant overseas following as well (e.g. SourceForge).
- Dice.com (700k, +55% yoy)
- slashdot.org (228k, +20% yoy)
- sourceforge.net (2.8m, +20% yoy)
- rigzone.com (225k, +10% yoy)
- efinancialcareers.com (62k, +133% yoy)
- clearancejobs.com (117k, -2% yoy)
- healthecareers.com (283k, +10% yoy)
- hcareers.com (380k, +3% yoy)
- biospace.com (69k, +13% yoy)
- healthcallings.com (350k, +3% yoy)
In total, this is approx. 5.2m visitors per month, which is a significant traffic of users, all of which are highly focused for particular job/recruiting/IT needs. About half of this however is from the media properties Slashdot and SourceForge, which generate revenue primarily from display advertising rather than recruiter subscription packages. This business has struggled as of late, with management citing both sales execution issues as well as declines in display advertising from large tech companies. Display ad growth however continues to outpace by far other forms of advertising, so I don't see this as a long term issue.
For comparison in the job posting market, Monster.com actually has over 17m users per month, so clearly it has vastly more traffic than all of Dice's websites combined. However as discussed above Dice is a much more profitable business, which shows that it is able to maintain a sophisticated and more targeted user base, which allows it to charge more for its services and spend less on maintaining what it has. Monster Worldwide spends about 6% of revenues on capital expenditures yearly, whereas Dice has trended much lower, roughly 3% in recent years.
Worth noting as well as that most of Dice's sites have seen good growth in terms of user traffic in the past year, although this can be quite lumpy. Slashdot and SourceForge actually have gotten much less popular over the last decade, I'll cover this more later in the risks to be aware of.
Dice has a Strong Financial Position and Generates Healthy Cash Flow
As of the latest filings, Dice has $44m in cash and $60m in long term debt. Interest expense has been very reasonable at less than $2m per year, whereas the operating income was close to $60m in 2012. With gross margins near 90% in this kind of business, there is substantial cash flow being generated every year. Even as acquisitions have increased and the company has stepped up product development to further support the mobile ecosystem (SG&A and R&D were $112m the TTM, up 11% yoy), the company is still able to generate significant free cash flow. As mentioned above capital expenditures are only 3% of revenues, and therefore free cash flow came in at a lofty 19% of revenues in the past year. Actually a few years ago when the company was spending less on R&D, free cash flow yield was as whopping 30%+! This company is definitely a cash generating machine. The company should be able to continue to use this cash generating ability to drive significant value for shareholders via a combination of opportunistic acquisitions and stock repurchases.
Valuation - A Good Business Model Offering an Earnings Yield >15%
Turning to the current market valuation, and we can see below that Dice is trading at an EV/EBITDA valuation of about 6.5, and is therefore offering a cash on cash earning yield over 15%. This is the lowest it has traded in more than a year, and seems very cheap for a company with the cash generating ability that it has.
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I think this also doesn't make sense when you consider that a much lower margin business such as Monster Worldwide trades for more than 14x EBITDA. Although we're unlikely to see Dice trade up that high in the near future without significant unforeseen catalysts, I do think that the continuation of strong stock repurchases and an improving economy in the US will likely improve overall results at the recruiting oriented websites. This could be further supported by analyst upgrades or estimate revisions as they begin to factor in these recent developments. I see the stock getting back to 8-9x EBITDA in 2014, which would bring it 25-40% higher from today's prices.
This valuation is further supported by DCF models, where I expect to see forward growth of 8% per year discounted at 10%, bringing the shares to around $9. This level of growth should definitely be possible, considering that the past 5 years have actually been better than this (near 10%), and the next 5 should have much of the same in terms of strong cash generation, which will allow further acquisitions to continue to grow EPS. If the company was experiencing a drastic decline in revenues, than the current valuation would be appropriate, but as it stands now the businesses have remained largely flat recently. Although this is not that exciting and Dice can surely execute better, as it stands now the market is being too pessimistic in the staying power of this business and the stock was sold off too aggressively in October, which has created the current opportunity for value investors to scoop up some shares.
Recent Catalysts
New Stock Repurchase Program - Just this past week, Dice has announced a large stock buyback program of $50m. A few worthwhile points to note, is that this is only a 1 year program, and at current prices it would allow the company to buy nearly 10% of outstanding shares. This would be a significant catalyst to drive earnings higher. Sometimes company's announce these programs but then never follow through with them, or do so less aggressively than announced. However Dice had a similar $50m program in 2013 which it has executed on fully, so management has definitely put their words to action and we can assume they will do the same in 2014. I think this makes perfect sense, as long as the stock doesn't spike in price early in the year, in which case it would make good capital allocation sense to ease off on the buyback.
Improving US Economy - Usually job boards/recruiting websites do much better when the economy is showing signs of strength as this means that hiring picks up steam. This is exactly what is happening now in recent months (after the company's last earnings announcement). US consumer spending is picking up, and GDP growth topping over 4%. It is still too early to see how sustained this is, but this is the first time in several years that growth is really showing signs of picking up more significantly. I think this will help Dice to beat current analyst estimates going into 2014, as currently Wall Street is expecting earnings to be largely flat or slightly positive, but improving macro conditions combined with heightened stock buybacks likely will mean the company can beat current estimates by 10% or more.
Key Risk - LinkedIn is the Big Threat
The huge rise of professional networking site LinkedIn is in my opinion the biggest current threat to Dice. With its 38m visitors per month in the US alone (not even counting app traffic), LinkedIn is a growing force to be reckoned with. This could be a likely reason why companies like Dice have gotten cheap on a past earnings basis, as the market is betting that they are losing out on market share to the likes of LinkedIn. While we cannot deny that this is true to some extent, I think what is most telling here is that Dice's revenue is not declining drastically. While it is true that most of it's growth has been inorganic recently, it's core sites like Dice.com have been relatively flat. As of the last quarter Dice.com had 8450 paying subscribers which was less than a 3% drop from the previous quarter, and 90% of these are under annual contracts. So the turnover rate here is quite manageable and there is not alarming double digit declines. Clearly recruiting agencies and HR departments in large companies are still finding significant value in their subscriptions to Dice websites.
LinkedIn is a powerful network, but its primary use case remains for professional networking and it is only used indirectly for job searching. When someone is looking for a job they are likely to post their resume on all available major sources and apply to specific positions. I would contend that they are still much more likely to do this on websites such as Dice.com or even Monster,instead of LinkedIn. LinkedIn is a great tool the other way around when recruiters are searching for candidates that they might be able to pry away from competitors. This is common practice for recruiters nowadays where they collect a list of potential candidates from LinkedIn and then give them to hiring managers who can assess resumes and decide whether they want to invite for a first interview or not.
Clearly Dice.com has lost out on some of its power from earlier in the 2000s, as a simple check on Google Trends will show:
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So although LinkedIn is definitely taking some business away from job sites as it continues to grow and scale globally, I would contend that most job seekers and recruiters are never relying on a single source and they will continue to value the traditional job posting sites which still traffic millions of visitors per month as was discussed above.
The Bottom Line
Dice Holdings is a long standing company with a strong position in the online job and recruiting market. The company has grown revenues, free cash flow, and earnings at a steady 10%+ clip in the last 5 years, as it continues to use its cash generating ability to grow via acquisitions. As the company has gotten cheaper, value is also being driven by plentiful stock repurchases, including a brand new $50m program for 2014. Combining this with a stronger US economy, and I believe analysts are currently being too pessimistic in the company's ability to grow earnings next year. Dice is poised to beat current estimates by 10% or more, and this should drive the stock back to a more fair valuation, which I believe is around 30% above today's prices. As such the stock appears to be a good value buy heading into 2014.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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