ZipRecruiter, Inc. (ZIP) Earnings Call Transcript & Summary

Good afternoon. Thanks for joining us today. I'm Trevor Young, one of the U.S. Internet analyst here at Barclays. And I'm pleased to be hosting Ian Siegel, one of the co-founders as well as the current CEO of ZipRecruiter. Thanks for joining us today Ian.

Thanks for having me.

So to start, I want to touch on a few questions on kind of the current competitive environment. Zip competes in sizable upwards of 200 billion TAM, competing against some of the legacy HR departments and recruiters as well as some of the well-known names like LinkedIn and Indeed, and we heard from them yesterday here at the conference on the online side of things. What enables you to win against both legacy players and the online heavyweights? And relatedly, do you Zip, as really disrupting the traditional recruiting model? Or is there an opportunity to coexist or even partner with those traditional recruiting players?

A lots to unpack there. So I think that if you look at a category in its totality and the 200 billion of it, while online is the fastest-growing subset of the category, it still represents a de minimis percentage of the total. And so I think there is a lot of runway just through disruption and building a better solution. And for a long period of time, we can work in partnership with the existing players because we're a tool that augments their efforts. But over the long course of the next, say, decade, what I would expect to happen is the sophistication of the tools we're building can perform as well as any human. And in particular, when you look at lead -- a need like nationwide recruiting, the tools are in fact better because most recruiters aren't set up to recruit nationally, whereas these tools are perfect for it. So I see a lot of runway for growth in front of us, whether it's competing with the existing players, sort of the traditional players or the online players.

That's super helpful. And can you unpack a little bit on how you think you win? Because you're clearly not just a lead gen model, right? You actually help see your clients, the employers all the way through to hiring the -- hopefully, the ideal candidate. So is that where you're most differentiated? Help us understand that versus peers.

What really sets ZipRecruiter apart is that we're not a job board. We're not a site where you post a job and then create the opportunity for job seekers to, hopefully through serendipity, finds their way to your job if they are the right fit. ZipRecruiter is a matchmaker. So we have invested hundreds of millions of dollars and really been on the bleeding edge of what is the technological innovation in the category through the deployment of techniques like machine learning, deep learning and now even meta learning to try and identify who is the best fit candidate for roles that were just posted. And then we go a step further. We go one step beyond matching because matching is becoming just table stakes, and now we're playing in what I call the world of social engineering. What we're trying to do is induce that just right candidate to apply to that job almost as soon as it has been posted. And in many cases, what we are doing is, in fact, showing the best candidates for a job to an employer right after they post it and then letting the employer directly recruit those candidates. And when you look at a time in the market that is as competitive as it is for talent like it is right now, that advantage that we confer to employers is proving to be a real difference maker in their ability to close talent.

Since you just mentioned it, kind of an extraordinary hiring environment that we're in right now, employer demand has obviously rebounded sharply coming out of COVID last year, while labor has been slow to come back. How would you characterize the current environment? And how has it been progressing into year-end? Have we been seeing any abatement in this supply demand mismatch?

I mean the job market really is a tale of 2 sides right now, where employers are showing a rabid appetite for talent, and they are trying to hire almost desperately, and you're seeing them raise wages, you're seeing them increased benefits. You're seeing them offer numerous perks. Everything up to it, including for entry-level jobs they are being willing to pay for college tuition for candidates that come in. And still -- still they're unable to fill these jobs because there is a shortage in labor supply that is a compounding set of variables that have led to this reality that we exist in, but you're about somewhere between 4 and 6 million people short of participation in the labor market of what it needs in order to get back to sort of a normal healthy job market. What we are seeing is a glide path of employers demand slowly returning back to sort of pre-COVID levels. They are working their way through it. Those measures they've taken have had some modest effect. What we have not seen is job seekers rushing back into the job market the way you would expect. While there are many theories about that, I think the most telling data point in this story is the fact that not just ZipRecruiter surveys, but every third-party external survey we look at says the same thing. Job seekers during COVID learned that they really enjoyed remote or hybrid work. Over 50% of job seekers are looking for either remote or hybrid work right now. And if you look at the pre-COVID period, only 2% of jobs offered that as a work option. And today, already more than 10% and are now offering that. So there's definitely a rapid shift happening as employers rush to where the job seeker demand is. But it still significantly lags the appetite of job seekers. And so I think they're holding out right now. So they're holding out for jobs that let them live the lifestyle that they enjoyed over the last 18 months.

So sticking with the job seekers for a second. There's some data that suggests a lot of job placements in the last couple of months or a few quarters, is coming from candidates that have maybe left other jobs for that more appealing comp package or the greater flexibility, some of the characteristics that you mentioned rather than people rejoining the workforce. One, do you -- is that kind of a trend that you're seeing to realizing that the data is not always super transparent on that? And what will it take for labor to come back into the marketplace, come off the sidelines?

When you look at why labor went to the sidelines, of course, it's what I just said. It's this desire for this new type of work. But there were a variety of things that were holding them back. It was waiting for a vaccine, waiting for their kids to go back-to-school, waiting for stimulus to run out, waiting for mortgage forbearance programs to end. And all of that is done. Like that is over. So all the excuses that people have been giving for why because we are not participating have been removed. And yet job seekers have still not come back. So we have to ask ourselves, why is that happening? Well, the one remaining excuse is that during the last 18 months, there's been an unprecedented level of savings, money accumulation in these individuals' bank accounts. And so they find themselves with the largest nest eggs and the longest opportunity they've ever had to sort of reflect and ponder about what kind of life they want to live, what kind of work they want to do. But you got to believe that in 2022, those nest eggs are going to have shrunk, and that will be the final excuse. And we will see the job seekers coming back there are some endemic realities that still sort of haunts the job market, particularly for jobs that require an individual to interact with the public on a regular basis. There's a real aversion to that. And those jobs, which were already previously deemed lower quality jobs have become even worse. Just imagine yourself working in a retail store or in a restaurant around the Christmas season. And now you're not just a cash registered worker or waiter, you're also, in some ways, a bouncer who has to check vaccine cards and people treat you very badly when you make these requests. There is a litany of horror stories coming out that are really creating a disincentive for people who were thinking about sort of taking seasonal work. It's creating a lot of hesitancy amongst that population.

So clearly, some issues in certain categories, but more broadly, maybe we have to watch crypto balances to see when people will come off the sidelines. Sticking with some of that commentary on specific verticals that are maybe challenged or certain job types, are there any industry verticals or geographic regions that have been particularly strong or weak? Anything of note there or is it really broad based?

I mean the fundamental answer is it's extremely broad-based in terms of the shortage of talent, and it's really across every job category and essentially across every geography. These weird pockets where unemployment is only 2% as versus other places where unemployment is 7%. But like in general, the story in the country is one of like across every skill level, every duration of experience, every salary level in every geography, you're seeing a shortage of labor.

Got it. And it sounds like not really working through that backlog. As you mentioned, employers starting to see that glide path back to something closer to pre-COVID levels, but nowhere near there yet. Shifting to --.

Sorry, go ahead.

No, go ahead.

I was just going to say, I think what we're seeing is in an adaptation amongst employers like to the new reality. If you can't find the talent, you find other ways to work.

Makes a lot of sense. Shifting to revenue. So roughly 80% of revenue is subscription-based. It's tied to the number of jobs that the paid employers looking to fill when you ultimately fill the job, the subscription likely ends. What's -- why is that the right business model for most of your clients? It's -- clearly, to me, it's a double-edged sword because you technically get quote fired for doing a really good job placing candidates.

Yes. It's like being a dating site that generates marriages, right? Well, the way I think about this is that over the long arc of history, being the site that fills jobs the fastest is a winning strategy. And that has been almost our sole product focus for the last 4 years. If you look at the last 4 years, we've reduced the time it takes to hire someone from 39 days down to 16 days on ZipRecruiter. And our aim is to keep driving that down, which is in effect, disrupting ourselves. However, that's happening in the large part through the improvements we've been making to matching, where I said we play matchmaker role and we show the right candidates to right employers, so you're not leaving it to a chance anymore. It also has a lot to do with the experience we create, which I call the social engineering piece. So for example, if a candidate applies to your job and that candidates being considered by another employer, we'll put an act fast label on that candidate, providing you more information so that you know that this is a hot candidate that is potentially going to be off the market if you don't go quick. And on the flip side, for candidates, we'll let them know when the employer is either reading their resume or giving them a rating, so they feel that momentum. So even if the employer hasn't communicated with them, they feel that the process is working. And I got to believe, as I said, that by creating a better experience for both sides of our marketplace monetization always proves easy when you have an exceptional product, and we're finding that to be true. If you look at our RP, which is the average revenue per paid employer just keeps going up. That's because employers invest where they're having success.

That makes a lot of sense. And to your point on the candidate side, putting a good experience for them, also continues to attract them to the site. I think some of the stats you put out is #1 Canada pacing out for both iOS and Android for several years now. Can you just touch a little bit on some of the advertising you've been doing lately, particularly on the candidate side? Because I know that's part of the story here into the back half of the year, ramping up ad spend, particularly on that candidate side?

Yes. I -- COVID was terrible for everyone -- almost everyone, I guess Amazon [indiscernible] but COVID was terrible and ZipRecruiter included the job market took an immediate beating, the likes of which you would never have predicted in any forecasting exercise. So ZipRecruiter went through a number of austerity measures at the very beginning of COVID, one of which was returned our marketing to employers almost off. And the discovery made, if there was ever a silver lining from COVID, it was the power of brands, just being top of mind. The answer to the question is like, I have to post a job, where should I post it? Having employers more than 80% of employers in America already think of ZipRecruiter as the answer to that question meant that before we turned our marketing back up, what we learned was that the employers would come back, not just new customers, prospects who had never used a ZipRecruiter, but a record number of previous customers who've had success on ZipRecruiter reactivated their accounts without us doing the same ubiquitous marketing we have been doing to try and bring them back. It really changed how we think about the business, and it also changed how we think about the job seeker side of our business because now we have been very, very good performance marketers with job seekers. And a lot of our traffic was organic, but what we were awoken to is the potential of building the same kind of brand on the job seeker side of our marketplace, as we have already accomplished with the employer side of our marketplace because you can get both sides to that 80%, then this amazing effect occurs, where you can do sort of more of a maintenance investment in marketing, and you can reap the operating leverage rewards of being such a recognized brand. To accomplish that, I mean, we spent over $600 million getting to where we were on the employer side. And now we've begun to fight in a meaningful way on the job seeker side, but we'll be making substantial investments in job seeker marketing for the next, I would say foreseeable future, is how I would say it, trying to build brands there to the same strength we did the employer side.

You said they are really helpful insight there about how you didn't have to like revamp the ad spend back to try to get that reengagement with the employers. But I think goes back to your comment a few minutes ago that when you give them a good outcome, even if they turn off their account for a while because they don't have a job to fill, they're likely to come back, right? And that's how you get the flywheel going. We touched on the 80% of revenue that's subscription-based, but you have a smaller piece of the business that people aren't maybe as familiar with, which is more performance-based, similar to some of the other online peers. What are the circumstances in which this model makes more sense for your customers? Is it a certain employer type or job type? And where do you see the performance-based side of the business going over time?

Well, if you look at ZipRecruiter, basically, about 80% of our customers are paying us on some start of a subscription-based plan, it could be daily, it could be monthly. And then about 20% are on this performance base. And it tends to split pretty much by SMB and enterprise between those 2, with 80% of our business being SMB and 20% being enterprise. But if you look at the U.S. and you look at the jobs that are open at any given time, about half the open jobs in the country come from enterprise and half come from SMB. And what you see happening at ZipRecruiter is as we achieve bigger and greater scale, we are moving more and more into being a reflection of the overall U.S. economy with the enterprise portion of our business growing quickly. And I would anticipate that over the next few years, you will see us morph into more of a reflection of the job market, where 50% of our customers are on subscriptions and 50% are performance-based. I mean performance-based customer is going to be someone who is probably got a large HR department, is comfortable with performance, marketing, setting up bids and budgets and campaigns. I mean, it's something we have to think more and answer more questions to get set up right, whereas with the subscription side is basically post the job the way you always have, and then you only pay as long as that job is posted and when you turn it off, you're done paying.

Before we wrap on revenue, are there any other types of revenue that you envision for Zip in the coming years? Obviously, you just expanded on the opportunity on the enterprise side, more of an ad-based model. And as one of the go-to marketplaces for both employers and candidates, is there an opportunity for promoted listings, featured employers that have a lot of openings in a given category that sort of thing?

Well, we actually have already deployed a number of upsells that allow -- fundamentally, the simplest way to say it is, if you're an employer, depending on the urgency of your hiring needs, you have a number of ways you can pay more to get more. And when you see our average revenue per employer going up, what you're seeing is satisfied customers investing even more behind a solution that works. That's the predominant way that RP goes up for us. And so what I've said about the long arc of history and how like over time, if we're the solution that fills jobs the fastest, I'm not worried about finding the monetization. That's really been proving out for us even as we disrupt ourselves, we've been driving up the amount employers pay us on average. And we've been doing it through this philosophy of giving them more tools, so they can really either support a single job that is urgent and hard to fill, or they can support a job where they need to staff up a large number of people in the same world, like an inside sales team or like say a retail outlet, or a restaurant that's trying to hire waiters or waitresses. So we've created all these mechanisms for them to essentially self determine their willingness to pay, and that's proved to be an effective strategy. And they can see us -- I mean, there's so many more ways that we can improve upon that. So I would expect RP to keep going up reliably over the next few years as we continue to deploy more mechanisms and tools for employers.

That's super helpful. We -- obviously, we touched a little bit on the brand spend historically and how you're pivoting to focus more on the candidate side of the equation, and you mentioned that you're willing to spend heavily there. What about on the R&D side of things, right, at the end of the day, while you're in a marketplace, you're also very much a tech company, R&D spend historically, has been fairly lean as a percentage of revenue, and it's levered several hundred basis points this year 400, 500 basis points, I think. Do you feel like you have the right level of investment here? And bigger picture, how should we think about the product road map from here in light of that anticipated spend?

Well, to be clear, the company has over 300 engineers and R&D center with over 100 engineers in Israel, and we've been practicing the art of modern advanced algorithmic matching techniques for more than 6 years. So that means not only have we deployed them, we've built the systems to both train and persistently retrain so that we optimize those models. And that's part of the reason that you see us grow from 39 days to filling a job down to 16. I mean, it's almost a direct relationship between the quality of the matches that we're delivering to employers and the speed with which they're making hires. So systems keep getting smarter, and I'm delighted with that. But make no mistake, we don't consider ourselves a job board. We consider ourselves a matchmaker marketplace. And that has driven -- it is the AI technology behind it that makes that manifest. We are doing a lot of product work on the social engineering around it. But at the very core, fundamentally what we do is as quickly as possible when a job is posted, we bring the right candidates to that job, and then we drive the 2 sides to engage. So I think we will continue to invest aggressively into technology because that's one of the key moats around our business right now.

So to that point, it sounds like potential for aggressive investment on sales and marketing, aggressive investment in R&D, obviously with the intent of driving future growth. Big picture, how do you think about balancing that growth versus profitability? Because obviously, EBITDA profitable today, have been for some time, healthy free cash flow, balance sheet in great shape. Just help me understand how you think about the right levels of investing back in the business, balancing that growth versus margin opportunity?

Well, I think it's clear to us, particularly if you look back to fourth quarter of 2020, when we basically achieved the 30% EBITDA, adjusted EBITDA margins that we're projecting that we're going to get to, but at a much larger scale over the next few years. We're in this fortunate position to be in a business we understand very well. And what I would say is we intend to rationally and sensibly continue to grow it, but we are also going to be opportunistic about investments. And so where we find opportunities to meaningfully improve the product experience or grow the 2 sides of our marketplace, you'll see us make that investment. But I think our past performance and what we have set as expectations still holds true and that you're going to see us continue to rationally operate this business where you're going to see a balance between the 2.

That's super helpful. And that actually wraps up most of my questions here. I know we're wrapping a couple of minutes early, but thank you so much for taking the time to join us. Hopefully, we can do this actually in person in the future and look forward to seeing what Zip has in 2022. Thanks so much.

Thank you.