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

Okay. Great. We are live. And I think this is the last meeting of the day before we can all go enjoy a little happy hour. So thanks again, everyone, for attending day one of the Barclays Conference. My name is Trevor Young. I'm one of the Internet analysts here at Barclays, and I'm pleased to be hosting the ZipRecruiter team; David Travers, President; Tim Yarbrough, CFO. So thanks again for attending this year.

Thanks for having us.

I'm sure you guys are in the same boat like we are, where we're all becoming macro prognosticators.

Yes. Exactly.

I would imagine that's been a lot of a line of questioning today, but unfortunately, I'm going to punish you with a little bit more of that. So, a lot has changed in the macro perspective since we hosted you last year. At that time, you had already been cautioning that at some point, we would see labor supply-demand dynamic normalizing kind of that glide path back to normal. You've begun to see that in your paid employer metrics, but we're still seeing opening significantly outstripping the number of people looking for jobs. First, what's driving that disconnect still persisting given what we're seeing macro-wise rising interest rates, inflationary pressures, just overall caution even among the consumer. And then particularly like looking across our coverage, a lot of the companies here today have already started to reduce headcount. So what's the disconnect we're seeing?

Yes. Absolutely. Great to see everyone. Thanks for having us. So here's what we see. One is we are definitely in a mean reversion process from the lofty peaks of a year ago in the labor market. And at the same time, things aren't as dramatic as the headlines would lead you to believe. And even when you peel away sort of headline drama, if you look at various industries, tech of major industries is among the worst, if not the worst, in terms of its year-over-year change in demand. So the headlines and what companies talking here today might be talking about is very different from what we're seeing in travel and leisure or in healthcare where things remain still fairly robust. And so then most industries are somewhere in between those 2 ends of the spectrum. And so versus what we're reading, I think what's notable so far about the process is that it's been fairly orderly and not so dramatic in terms of what we're seeing in the actual data day-to-day. And the one SKU we do see is that there's definitely a faster response to changing conditions as usual on the upside and the downside. In this case, in a cooling period among SMBs, which is obviously a big chunk of our business.

Yes. That makes a lot of sense. And just hitting on that tech piece, among the worst verticals you're seeing right now, what do you attribute that to?

Yes. I think a lot of it has to do with the scale of the staffing up that occurred over the past several years and the rate at which people staffed up. And the change in the cost of capital has had more profound impact on some of those companies than on others.

Yes. So maybe overshot to the upside and now kind of retooling.

Yep.

Got it. So looking forward, how do you see labor markets playing out over the next 12 months to 18 months? I'm not looking for specific guidance for you folks, but just rather how do you see job openings trending, potential layoffs and any nuances around that?

Yes. So first off, the caveat, of course, is that our strategy is not to prognosticate better than others. Our strategy is to react more nimbly and more decisively than others. So, we've done that before through COVID and otherwise, we'll continue to do that again. That said, what we see right now is that we're in this, reverting to some sort of post-COVID normal process facilitated by higher interest rates and the like. And I think that we will continue along that glide path. So, I would expect things to continue to cool in that. We don't see anything that looks so out of whack that it's got to break soon. So not knowing anything more than a lot of other folks, my best guess is that it would continue to be a fairly smooth process. But each twist and turn of the economy, we'll see what happens.

Yes. That makes a lot of sense. And so against that mixed macro backdrop that we've kind of alluded to, but also kind of orderly deleveraging in the labor markets are more of a supply-demand balance. Obviously, the Zip team comes across as really confident that you'll be able to navigate whatever the environment is and continue to take share. So what informs that confidence? What have you done through the boom times to pushing you to better navigate potentially leaner times?

Yes. I mean, fundamentally, we've got more than double the revenue we had pre-COVID, and we have barely any more people than we had pre-COVID. So, we've been very efficient in how we've rebuilt the company from having to downsize during the COVID downturn and a really dramatic set of circumstances to now having a much more substantial balance sheet, a much bigger business, a much bigger share of the business that's enterprise, that's a little more stable in macro ups and downs. But what also gives us confidence is that we've been through this one before. And our best guess is that this is going to be a much less dramatic turn of events than last time. And so if anything, we will manage this better than we did last time because we practiced before. And if anything, we're more nimble than we've been in the past. And part of that nimbleness is we've stayed very lean in terms of adding headcount ourselves.

Yes. Yes. Makes sense. So, that's all within your control. How do you feel as though you're stacking up against the peer group? I mean you've got LinkedIn here earlier today. Just help us understand given their scale, how you feel as though you stack up? How do you think of in terms of like share gains or within certain categories or certain compensation levels where you're competing very well or potentially have more work to do?

Yes. Yes. Other than sort of our revenue mix skewing more toward SMBs than the overall market, which we can get into more in a second where we have a real mix shift occurring over time. We're different than LinkedIn, and that our business looks like the whole U.S. economy. So, they are incredibly powerful professional social network. They are very powerful as a tool for high-end white-collar jobs and jobs for people like those at this conference and who listen into conversations like this. But for the vast majority of the economy, professional social networking doesn't have quite the same value proposition. And so it makes the overall marketplace where LinkedIn plays one important role. They've been great partners of ours from the very beginning, and we see ourselves as something very different, which is when job seekers come to us, they're not looking to network, they're looking to look for a job and they are increasingly looking to us as a personal recruiter and fill our personal recruiter technology to engage with them like a human being on a one-to-one basis rather than to be the recipient of a search result like others have trained them to do. So, we increasingly -- when we talk to job seekers, we only get more and more confident that very few of them tell us from incumbents today that they go through the job search process feeling like I felt confident throughout the entire process. I knew exactly where to turn for advice. I felt very confident when I made my final decision that this was the right decision for me, just the opposite. Technology can solve this problem. And one of the ways we're solving it is through personalizing the process and creating our Siri, our Alexa, fill as the persona that will guide them through the process. And what that does is, in addition to making job seekers feel great, it gets them in a conversation where they share more data with us about how the job search is going. I like this job, this interview didn't go well, I didn't like this. And that is incredibly powerful, so we can go beyond their resume and use that for matching purposes. And so when we make it more human, they share more with us and we can use our matching technology to give them even better results.

And with respect to share gains, you can also look at our growth in the context of the category as a whole. So, we operate in a -- we play in a very large marketplace. So the overall recruiting market in the U.S. alone is over $200 billion. And that includes online and offline recruiting solutions. So of that $205 billion, roughly $10 billion to $15 billion of that is online where we play directly. And that $10 billion to $15 billion intuitively is growing much faster than the category as a whole, roughly 14% over the next couple of years. So, you can compare that with our compounded annual growth rate from 2019 through the midpoint of our guide in 2022 of 28%. So, we're in a fast-growing part of this recruiting category, but we believe that we're share gainers as well [ without ] taking the share. And it sounds like because you're addressing pain points not only for your customer who's the employer, but also actually the employees that's actually helping them navigate the research process by doing so. They're sharing more information, which helps you further refine it.

That's right. So it's a two-sided marketplace. The employers are the ones that pay us, but the employers go where the job seekers are. And so our job seeker value proposition is critical.

That's helpful. And then talk a little bit about the business composition and paid employer trends, particularly as they've been softening here. You mentioned very much focused on the SMB side, but I know you also have a growing enterprise side. What trends are you seeing there? Any differences between how SMBs are reacting in the current environment versus enterprise? Any color you can share on that?

Yes. So SMBs, as usual, are faster to react on the way up and the way down. And we saw that over the summer. Even looking at some of the sentiment analysis as some small businesses called in to pause their hiring needs. They talked much more about wanting to wait and see how things developed more than they talked about, oh, my business is dropping or I don't have the money to hire someone. And so it was waiting and anticipating to see what happens, whereas enterprises have a longer decision-making cycle. But once they decide they're going to hire, they go through with their annual plan to hire, et cetera. So what we see there is a much more softness and a much steadier trend of softness for a few quarters on the SMB side, whereas the enterprise side of the business continues to be strong. And what we see is the peaks and troughs of the enterprise part of our business has been more stable through COVID and before. So, we anticipate it will be less dramatic on that side of the business. And those -- that makes sense. The balance sheets of those companies are extremely strong. A lot of them have -- unlike some of the high flyers, a lot of them have not hired up to crazy extents and actually downsized during COVID and never got back to sort of homeostasis even much less growing. And so they still have significant hiring needs. And so we're quite bullish on what is not just a cyclical but a long-term secular trend, where half the dollars in this market are spent among enterprises looking to hire in the U.S. And today, we're only at 23% of our revenue being performance-based, which is mainly those enterprise customers.

Got it. And so within that performance piece, is that predominantly enterprise and then on the kind of the plain vanilla, I'm placing a job, what's the mix there of enterprise versus SMB? Do you still have some enterprise pieces within that?

Yes. So the best way to look at the 2 sides of our business, we have roughly 77% of our revenue comes from subscription based flat rate pricing. And this is a really attractive product for small, medium-sized businesses that do not have their own applicant tracking system. And so we give them a free applicant tracking system that's very lightweight. They can post their jobs, very quickly see the candidates come in. I used this ATS before I worked at ZipRecruiter in my last company and worked great. So that caters very nicely to those SMBs. On the other side of the shop, we call that performance-based pricing. That's 23%. That is particularly appealing to larger enterprises that sit atop more sophisticated applicant tracking system. And so that's the rough way to kind of look at the revenue mix between the 2 sides of the business. That 23% today or in Q3, it's compared to something like 19% a year ago. So, we're seeing that general trend towards the 50% that Dave talked.

Right. And is that the end state end goal, get it to 50-50? So what investments are you making behind that to improve that mix? I mean, obviously, some natural mix shift going on as the SMBs pull back, as you mentioned. But what are you proactively doing to try to solicit that business?

Yes. Exactly. So there's something foundational that works equally well for SMBs and enterprises, which is access to great candidates at scale, which equally applies to both sides of the marketplace. What's different about enterprise is the go-to-market motion is very different. And so it takes a longer and more sophisticated sales cycle with a different sales force that can do a multi-touch on-site, talking strategically to a Chief People Officer and talking tactically to a Talent Acquisition Manager and everywhere in between. And so we're building out that go-to-market motion as we grow. And so you'll continue to see us grow that part of the go-to-market. And I would say because of our SMB roots and a lot of the initial salespeople coming from the SMB side, we're stronger at going to the day-to-day decision maker than we are at the over-the-top top-down sales process. So, you'll see us get better at that over time. And that involves not just sales but also building products so that, that conversation and dialogue with the Chief People Officer is valuable. So, we give them insights, for example, into the local labor market for the roles that they're hiring and what the long-term trends look like so they can think about, do I need to open a new call center in a different city or can I double my footprint in my current city or things like that? So that's one example. But there will be lots of ways you'll see us engage in dialogue. But foundationally, the most important thing we can do for enterprises and SMBs alike is engage job seekers with fill and with other matching technology so that we have that foundational element they're looking for, which is great candidates to fill their jobs.

Right. And in the context of the subscription as well as more of the performance based, talk to us a little bit about pricing, some of the add-on features that you've been rolling out? Obviously, part of the key driver of revenue here. How have you been experimenting with different price points for different employers? Are there any offerings that are easier, employers asking for that you don't currently have, that you're looking to potentially build out near term or longer term?

Yes. So pricing remains a long-term powerful lever here. From a top-down perspective, the way we think about that is that people are paying and spending 90% of the dollars in this category offline and paying an order of magnitude more to make a hire than they pay us. So, there's a lot of room to run, and there's a lot of room for software to eat the world here and deliver a better service than you can get offline today. And so that's one of the reasons we're so optimistic and why our track record to date is so good about increasing monetization over time. So specifically, what can we do? So on the small business side, we provide flat rate pricing, which for non-sophisticated full-time hiring, people who are running a business not hiring all the time, you know exactly what you're going to pay, you get all the candidates, you can sort of attract. And so we vary price based on number of jobs you need to hire for simultaneously and at basic 3 tiers; standard, premium, pro kind of a service tier. And so in addition to that, we will, over time, add more and more features that become also premium add-on. So for example, over the past year or so, we've had a lot of success allowing employers to invite the very best candidates in market, which we identify for them proactively and say, here's the list of 25 candidates we think are great, go ahead and click on the ones you want us to invite on your behalf to apply, and those candidates love getting recruited like that, like the experience that a lot of people in this room may have experienced of having a high-end search firm reach out to you and make you feel like your skills are in demand. Most people haven't experienced that. And so they're incredibly responsive, and it biases way toward the highest end of the job market. And we are very good in getting better every day at predicting which of those candidates are going to be great fits. And so then once you invite to apply 12 of the 25 we suggested, we also just learned something instantly. So you posted a job, we immediately give you 25 candidates, we figured out which 12 were good and which 13 didn't look so good. And now we also figure out very quickly 5 of those 12 candidates we invited to apply are going to respond very quickly. So now we know where supply and demand are coming together all of a sudden, and our matching algorithms are all over that, and we start the cycle again and we fill a job with a great candidate very fast. And so you'll see us do more things like that, that make the process more human and lead to natural opportunities to allow employers to pay more to get more. And one of the ways that's sort of intuitive is last quarter, those employers who were with us for over a year got 4x as many great matches as those who started with us just last quarter. And so that is a powerful example of how the more you use us, the more our system learns, the more we deliver great matches and simultaneously over that period of time, our prediction rate on great matches just gets better and better. So the employers rate a great match thumbs up over 70% of the time, and we're off and running.

Yes. So to that point, it sounds like the longer an employer stays on the platform, potentially better outcomes. Can you talk a little bit about how revenue per employer and the maturity of an employer on the platform trends presumably, as you get good outcomes, hey, I want to use a recruiter again for more jobs or more frequently? So just talk a little bit about that relationship.

Yes. So very reliably, every year, every cohort, employers pay us more as time goes on. And that's because exactly to what you talked about. The longer you get to know and see what it's like to recruit on our platform, the better the system works for you and the more confidence you have in how it works. And so our technology makes it worth it to pay more to get even more value. And there are several ways. If you're an enterprise customer, that means you increase your bid and your budget the way you would on Google or Facebook when something is working. And as a SMB, you upgrade from standard to premium to pro and the higher and higher percentage of SMBs upgrade and then they add on more features. And if they start out testing us out on just some of their jobs, they end up adding all of their jobs.

Shifting gears a little bit to the cost side. You alluded to it before how you basically doubled your revenue and kept headcount internally at pretty lean levels. But obviously, sales and marketing is a major investment area for you both on the employer and the job seeker side. You've laid a solid foundation on marketing to job seekers over the past several years. You have top marks in terms of app downloads on the job seeker side for iOS and Android. But recently, you've actually pulled back more on your marketing as that employer demand has waned. So talk to us how you flex that up or down given the current environment?

Yes. So, we're fundamentally very flexible on the sales and marketing line items where we focus in laser-like manner on ROI across the variety of marketing channels that we deployed, both on the job seeker side and the employer side. And a very small percentage of our marketing spend is committed to future periods. So that means that we can pivot up or down depending on how the ROIs are shaping up. So, you saw that in a pretty extreme form back in COVID in Q1, Q2, where we dramatically reduced operating expenses and then to a much lesser extent over the last couple of quarters. So from Q2 to Q3, dropping sales and marketing as a percent of revenue down from 57% to 50% in Q3. And again, that's us flexing to the demand as we see it shaping up.

Right. So as you see revenue growth slow, you can pull back on that marketing spend to preserve EBITDA dollars....

That's right.

All else equal. And do you see an opportunity, given all the brand equity that you've built up, whether it's through podcast or targeting to both employers and job seekers to get structural improvement in sales and marketing over time?

Absolutely. Absolutely. So one thing that we learned during the COVID era as we ramp down marketing, we saw the economy begin to recover faster than I think a lot of people expected. We knew that because we are still marketing to a lesser extent. And then we saw the ROI shaping up nicely, so we're able to invest into that. However, even before we could spend up, we saw that the number of paid employers reactivating or coming back to the marketplace began to climb and set records pretty quickly. So, we discovered that we actually had a pretty meaningful brand already built up from over a little -- a little over a decade of marketing exclusively to employers. So today, we have 80% aided brand awareness among employers and that same number is 70% on the job seeker side despite the fact that we've only been at it for a couple of years. So, I think to your point, we're going to get even more leverage from our sales and marketing spend over time to the extent that we continue to build that brand.

Yes. Foundationally, from a top-down basis, the way I think about it is that we are already reaching as evidenced by 80% of employers and 70% of job seekers, the vast majority of people in the United States and we're going to grow a lot more. So the opportunity to get operating leverage without even making nominal cuts to marketing is significant.

Yes. And obviously, another area of spend is R&D. You alluded to your fill assistant AI program. Can you talk a little bit about what fill actually does? And maybe what it can prove upon as it gets more sophisticated, whether it's on the employer side or the job seeker side?

Yes. Absolutely. We are in the early innings of how technology can transform, how a job search can work and how artificial intelligence can transform. So what fill does is, as you onboard for the first time at ZipRecruiter is fill gets to know you a little bit around some very basic variables, how urgent your job search is? Are you looking to start a shift tomorrow at 8 a.m.? Or are you just starting to think about launching a 90-day job search, as an example? Those lead to very different experiences. So very quickly find out how important is remote work to you, what industries are interesting, et cetera, et cetera. And now we are armed with a lot of data. And when we approach it with fill in a conversational manner rather than giving you a form to fill out in it to submit, a lot more people finish the process of signing up and we get a lot more subsequent engagement. And it's much more intuitive than when you said, hey, I'm really just looking for remote work, 1 week later, I changed my mind, turns out people will tell you you've changed your mind if it's in a conversation much more than going to the edit button in your profile. And so that's incredibly valuable data for us to gather. And we can also infer a bunch because you're responding to certain jobs that we thought would be great. But you're also not responding to certain jobs we also thought would be great, and we can say, hey, there's a difference between these 2. And now we know. You said you were looking just for management positions, but these high-paying positions with your same title that give you a 20% plus raise from what you're currently making, you're also responding very quickly too. So it's not just management you're looking for. You're looking for a pay raise and now we're off and running with the new insight. And so that's the sort of thing that fill makes much more intuitive, and it makes it much clearer to the job seeker that the investment of sharing information has a return on investment. So, I'm much more interested in doing.

And presumably a differentiated experience rather than just going to a traditional job board filling out a profile and then filling out yet another every job that....

Exactly.

So, we'll ask the question, do you even know what you want to do?

Yes.

And oftentimes the answer is no.

The answer is no.

Like over half the time the answer is no. And so we help them through fill, show them different jobs for them to respond to and ask them whether they like these jobs or not. And that helps curate the experience later on interestingly.

Last one before I open up to the audience. Obviously, you've had really healthy and consistent EBITDA and free cash flow for quite some time, ample cash on the balance sheet. You did a debt deal earlier this year that looked -- in retrospect looks [indiscernible] that you got. So kudos on that move. Are there any areas of the business that you think could be beneficial to reinvest and then alternatively, external uses of cash? Do you look at M&A and then capital allocation beyond that?

Yes. So -- yes. So, absolutely first priority for us from a capital allocation standpoint is investing in organic areas to grow. So, we're always evaluating that. One of the things that has helped us now in terms of our current level of profitability navigating COVID beforehand is in the DNA of this business, this business was bootstrapped and made it to $50 million in revenue without taking $1 of outside capital. We've been efficient from day one. So it wasn't a culture change. It wasn't an adaptation to new interest rates and cost of capital. It's the way we've always operated. And so we will continue to do that. But for right now, organic growth looks fully funded. We'll be aggressive when we see an opportunity, but we feel very confident in our ability to get to 30% long-term EBITDA margins. We're well on our way already, obviously. So then second order of investment priorities is M&A. We're actively on the hunt and looking, don't anticipate one big transformative acquisition, but rather more likely a handful of small and medium-sized opportunities in the tuck-in capabilities and teams, et cetera. So, we continue to look for that. And the third priority is return of capital to shareholders, where right now we see a clear opportunity to get an extraordinary return from doing so, but it's not part of a systematic ongoing. It's opportunistic in this moment.

Got it. Makes a lot of sense. With that, I'm going to open it up to the audience if we have any questions. Well, great. David, Tim, thank you so much for joining us.

Thanks for having us.

Sure.