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

Okay. So we're just about ready to get started with our next session. I think we're going to close the doors as people sort of make their way in. It's my pleasure to host the team from ZipRecruiter. We've got Ian Siegel, Co-Founder and CEO; Tim Yarbrough, CFO. Guys, great to see you. Thanks for being part of the conference again.

Great to be here. Is my mic working?

Your mic is working. Okay. I always start the same way. But for those who don't know the ZipRecruiter story, Ian, I always love to start with you and just give you the floor for a minute or 2 to give us a little bit about what you've been building in the current state of the platform and then we'll get into a whole host of more detailed topics.

Excellent. Yes. So for those unfamiliar with ZipRecruiter, we are a job to marketplace. The original premise for the site was very simple. We would be a place you could go, push 1 button to send a job to most of the job boards that matter across the Internet and then have all the candidates from all those different sites come into one easy to review list. The market responded incredibly positively to this. We were able to bootstrap for our first 4.5 years. We got to north of $50 million in revenue with significant cash flow positivity before we ever raised any outside money. And a funny thing happens about 5 years in, which is when you keep adding more and more distribution sources, the volume of candidates you provide keeps going up. And it turns out there is too much of a thing. And so we realized that we were going to have to move out of our era of volume of sort of super sourcing candidates to an era of quality. And that's when we started experimenting with all of the advanced algorithmic techniques, which are often referred to as AI, machine learning and deep learning, where the techniques we were using to try and deliver just right candidates. And that worked fantastically well, but then we learned the final truth, which is if you're going to provide the right person for an employer to look at or the right job for a job seeker to look at, the next most important thing is to get them to actually engage with each other. And so that is the era we are in today, which is in addition to focus on all of the advanced algorithmic matching, a lot of our innovation is focused at actually driving the 2 sides to engage with each other.

Okay. That's a great place to start. And I agree. I always think it's interesting when you talk about AI because you've been doing things that are being talked about as AI for quite a long period of time as a company. It's not new to you as an organization.

Building upon that, I think what I always get asked for investors is sort of the market opportunity that you sit in. How do you define that market opportunity? How do you see the competitive landscape? And where are the points where you're trying to drive differentiation?

Yes. I mean I think the overall TAM on the market, if you look at all of the HR category products that are aligned to recruiting is over $200 billion. And interestingly, because we all think of like the major players online being companies like Indeed and LinkedIn and ZipRecruiter. But if you take all of us and you add us together, we're accounting for probably around 10% or less of the total TAM in the category. And that's because the bulk of the revenue is still going to the off-line recruiters who are able to charge an enormously premium price for effectively delivering the same service, albeit with a slightly more human touch. And therefore, that is why they are taking in so much of the opportunity in the category. So first and foremost, I think about the shift from off-line to online as being the brightest opportunity for ZipRecruiter. But I know no one is satisfied with that answer alone. So let's talk about the online competitors. What is the big difference between ZipRecruiter and our 2 foremost competitors, which are, of course, LinkedIn and Indeed? LinkedIn is a giant database of the currently employed, predominantly white-collar professionals. It's a place where recruiters go to try and pride people out of their current jobs, which they are happy with. When we put them in a different category from Indeed, which is if you think about it, the biggest traditional job site that is currently online. And I call it traditional job site because when you go to their home page, the first thing you see is a search box where they ask you to type in a term and a location and then try and browse your way to the jobs that you should apply to. The difference with ZipRecruiter is we are trying to play the role of active matchmaker and that is embodied by our homepage, where if you go to that page, you will see that you are greeted by Phil, our personal AI recruiter for every job seeker who effectively onboards you and collects a bunch of information about you to try and identify the urgency of your search, the job category you're interested, what your skills are, where you want to work. And then instead of asking you to browse your way to the jobs that are right for you, Phil is using a number of some of the most advanced algorithms that if we could ever built within our category to curate the just right jobs for you, so that the job-seeking experience becomes one more of being presented with opportunities as versus you being asked to proactively go find them.

Understood. Okay. One more big-picture question, and then I want to get into some of the nitty-gritty nuances in the business. Obviously, the macro backdrop has been a big debate point here at the conference over the last couple of days. Can you discuss what you're currently seeing and how the workforce environment has evolved year-to-date? Are there any industry verticals or geographies that have been more resilient, less resilient things you're trying to call out in terms of the snapshot and the environment you're operating in?

Yes. I mean it's been a crazy few years. First, we had COVID, which effectively annihilated the job category overnight. As you can imagine, when everyone was told to stay in their houses, the amount of hiring in this country went way down. And then very rapidly thereafter, you had a massive recovery, where thanks to the combination of both federal stimulus and state stimulus dollars going into the pockets of consumers and businesses. All businesses were growing and consumers had money to spend. And so hiring was rampant during this period. It was at record levels and then what goes up must come down. And so for the last 18 to 24 months, you've seen a steady decline with no bottom having been found yet in terms of the demand for recruiting services. And that's because, of course, of a number of macro factors related to that. However, with fewer and fewer jobs being posted online, there is increasing anxiety amongst job seekers and an increase in the number of job seekers who are looking opportunistically for additional work. It is nice to see that in an environment like this as a validation of the strategy that ZipRecruiter has been pursuing, we are, by far, the fastest-growing job seeker traffic destination online. And this is happening in a period of time when many websites are experiencing a decrease in the amount of job seeker traffic that they are getting. We continue to be the #1 rated mobile app and have been for many years, and we have almost 1 million 5-star reviews at this point. So I think the investments that we're making in both sides of our marketplace pay dividends at different times. And so in a macro like this one, it is the job seeker side of our marketplace that is reaping the whirlwind, if you will, of opportunity.

So I guess, against that backdrop, probably the number one question we get about you guys as a company is how do you discern the signpost of stability, return to growth? What are you watching? What are you planning for? How do you think about a return to a more healthy environment and how you can capitalize on that?

Well, first off, we say over and over again, we don't have a crystal ball. We have a number of what we think of our good early signal as it relates to which way the market is going, and that has allowed us to both aggressively invest into the upturns that we have seen and aggressively pull spending back during the downturns. Our business has a 90% gross margin business, and an enormous percentage of our overall costs are discretionary and able to be adjusted rapidly. And so even as we have gone through this extended protracted period of downturn, the company has been able to maintain both positive adjusted EBITDA part margins as well as positive net margins. So we're able to very finely manage our company's performance profile, and we expect that to continue and over the long term, we feel really confident in our ability to get to 30% adjusted EBITDA margins as a steady state for our business.

One of the things we noticed during the early part of the COVID cycle, is that the economy was recovering a lot faster than anybody really anticipated. And we were able to notice that because we saw the number of reactivations or those that employers that had a relationship with us that left and that came back without us even marketing towards them, started coming back a lot faster than we had expected. And that's thanks to the 80% brand awareness that we enjoy for both employers and job seekers. And so here we are with that large amount of brand awareness, we can see when the employer demand is coming back even if we're not marketing.

Okay. Understood. You've historically talked about getting to a goal of a mix of SMBs and enterprises to be at rough parity with each other. Can you talk about some of the investments you're making to try to drive that parity and drive that mix on the employer side? Maybe just start there.

So the overall labor market in the U.S. is a 50-50 split between SMBs and enterprises. There's about 5 million SMBs, we'll say, companies with 100 or less employees. There's about 150,000 enterprises, and the recruiting spend is split between them. SMBs work very much like a traditional consumer good in terms of your ability to market and get direct response from them, so you can like tell them you have a service, they can come to the site, self-service in creating an account and pay you and it's all good. Enterprise is a completely different beast. So these large companies, these large employers, they will hire tens of thousands, and in some cases, even hundreds of thousands of people a year. They predominantly do their recruiting through intermediaries. So they either work with staffing companies or temp agencies or they will work with what's called agencies that take their budget and are theoretically expert at spreading that budget across all of the different recruiting sites that are available within the market. Further, these companies have a canonical source of record which is their applicant tracking system in which they vet to candidates. So there is a lot of complexity in terms of building relationships with them where they don't want to use accounts on your service. They want you to push content into their services and then they want you to work with their chosen intermediary on actually finding candidates and letting these third parties participate in the recruiting process. These relationships are much more complex. They take multi-quarter sales processes to initiate. They take high-touch account management in order to maintain. And it is a new muscle for ZipRecruiter that we've been intensely focused on over the last 3 years in order to go after the enterprise segment of the market. We started on SMB. Roughly 80% of our revenue is now coming from those SMBs, 20% is now coming from the enterprise. We have a large built-in sales force and account management team that is specifically focused on that segment of the market. We've been having a lot of success in creating sort of a rinse and repeat strategy for how we're going to go after these entities. We're getting ever more sophisticated in how we market to them. We remain confident that, that split of 50% of the market being SMB and 50% of the market being enterprise will be reflected in our revenue in the next few years. You will see a natural shift in the mix of revenue that we have to match what the overall market is currently showing. As far as like the special technologies that are required in order to service the 2 sides of the market, fundamentally, what it comes down to is a recruiting solution that works for a liquor store also works for a large enterprise. And the real challenge from a technology standpoint is not the recruiting piece, it's the integration with these intermediaries and their chosen softwares in order to deliver those excellent candidates to them.

Okay. Maybe one follow-up with respect to business mix. How do you think longer term about the balance between a transaction-based model and a subscription-based model coming back to the mix of monetization you'll see for the company longer term?

So the 2 customer classes we have, each prefer to pay us a different way. SMBs really like price certainly in a time-bound period, so we offer them subscription. And enterprises are sophisticated performance marketers. So they like things like campaigns that are delivered on a price per click basis. So we offer the pricing model of choice to each segment of the market that they prefer. Both segments have the opportunity to switch to the other's preferred method. We're effectively indifferent to the way that customer choose to pay us. Our marketplace works on an auction basis and everything is translated into that auction. But right now, the 80% of our customers who are SMBs are -- the majority are on a subscription and the 20% of enterprises, the vast majority are on a pay-per-click or some other form of performance-based payment strategy.

Yes. SMBs often prefer the subscription-based packages that we provide because they're very intuitive. So you can buy job advertising and a per job per day basis. Very simple. If you have just 2 jobs to hire 4 and they're not going to take very long, post the job for 10 days, pays for 10 days, and then we'll see you next time. So it's very easy to understand. There's no surprises in the bill. The other thing that I'll add is, no matter if it's performance based or subscription based, it's margin -- they're the same margin for both of those packages, so we're indifferent.

But bringing it back to price overall, I feel like marketplaces and platforms like you built over time, there's always elements of the value you're delivering to your marketplace as well as what you're attracting in terms of price and price elasticity. You and I have talked about this on earnings calls over the last couple of years. But how do you generally think about price elasticity and the value you're delivering versus longer term what the price might be in terms of continuing to take price and monetize on the back of those value-added services?

I mean it's very clear to us right now. And just through common sense when you look at the market in which we are competing, that we have significant price optimization opportunity because the willingness to pay for off-line recruiting services is literally thousands of dollars more than what we currently charge to fill a job through our platform on ZipRecruiter. And the majority of the way in which we induce customers to pay for higher -- pay us higher prices is either through getting them to put more of their jobs on our platform, so that we increasingly become an important part of their recruiting strategy or it's pay for performance on a per job basis where they choose to do something to advantage or upgrade the particular job that could be something where you just wanted to get more traffic or that could be something that delivers a better highlight of that particular feature. But by and large, we allow customers to choose to increase the amount that they are paying us. That does not preclude us from simply raising price, that is something that we are thoughtful about, less thoughtful about it in a 2-year downturn where the demand for recruiting services keeps coming down, but we are still thoughtful about it. And we think over the long term, as our technology continues to improve, we will certainly see price increase. I just want to say that regardless of what the macro is, if you look at any cohort on an annualized basis of new customers, the starting price point that they have paid us has gone up every single year. And if you look at any of those cohorts as they mature over time, the amount each customer is paying us has also been going up every single year. So our current pricing strategy is working.

Understood. Okay. Leaving behind the current backdrop, you find yourself in. Longer term, how should investors think about what the key strategic priorities are for investing in the business for the long term? And how does that get brought back to what you think about as the margin potential for the business longer term?

Yes. I'll take a first crack at this. So we enjoy a lot of flexibility in our business. Like Ian said, we have a 90% gross margin business. We have a very comfortable cash position and a very flexible operating expense structure. So when we look at the cycles, as they've come and gone, you've seen us respond quite aggressively to the upside and to the downside. And so our sales and marketing spend, for example, is highly flexible, and that's intentional. So we do not have contractual commitments in our marketing spend for years in advance. We keep that very -- we keep very nimble in that spend. So that when we do see signs of recovery, we can aggressively lean into that. And conversely, when we've seen demand weighing like we have over the last 2 years, you've seen us flex that amount down. And so that variability helps us remain quite nimble. But there's -- we've been -- despite the ups and downs over the last couple of years, we've been consistent in our investments in our technology and product road map. And so in this last shareholder letter, we introduced ZipIntro, which is a really interesting way of driving face-to-face connections between employers and job seekers. It's one of many things that we've been working on. And so building out a road map, if that is an example, are the things that we're going to continue to lean into.

I'm just going to add on to that and just say a little bit more about ZipIntro. I told you that there were the 3 areas that went volume and quality and the engagement. And I think the closer we can get to getting employers face-to-face with quality candidates fast, the more opportunity we have to raise prices because the more we emulate the value of the service they're getting from an off-line recruiter, and ZipIntro is just one of many strategies we are deploying against that. And for those that aren't familiar with it, ZipIntro is basically speed dating, but for hiring. So an employer creates a job. And then the next day, they pick a time that they're going to be free, and we bring them a cohort of algorithmically identified quality candidates that have RSVP'd and are excited to talk to that employer so that employer can do like 5-minute back-to-back quick fit checks, but also the job seekers are doing fit checks on the employer. And the feedback from both sides of the marketplace has been amazing. But in particular, from job seekers, we have received rave about this. 90% of the job takers have gone through this experience have said that they would absolutely use it again. And then if you look -- we also measure their qualitative feedback and the commentary is effectively like this is how hiring should work. This just makes so much sense because the #1 complaint job seekers have if they apply and apply to jobs and they never hear anything back. So the appeal of being able to talk face-to-face with a human is outstanding as it relates to this segment of our market.

You talked a little bit earlier about AI and Phil. I want to ask it through 2 prisms. When you think about what you've already built from an AI perspective, maybe talk a little bit about how you feel that differentiates you today in the marketplace vis-a-vis your competitors? And in terms of forward looking, what are the key areas of investment where you're making investments today in AI and machine learning that you think can continue to drive wider degrees of differentiation over the longer term?

I think the challenge that we have set for ourselves of playing the role of matchmaker is incredibly ambitious because it requires you to do a bunch of things that have never been done before. I mean there's off-the-shelf software that would allow you to build a job site today, where there's basically search engines in a box that are ready to go. To play a matchmaker, you need to have a site that almost has a personality that can greet a job seeker on the way in, that can intake a job seeker collecting a bunch of information about them, and then can give them guidance through every part of the process just like a human would that you were to work with. So that's everything from advice about how to adjust their resume to make it more effective. Curation of jobs that are going to be just right, which let's define that as jobs that the job seeker is very likely to get a response to should they actually apply. Actual advocacy for that individual, before they've even applied to a job where they thought Phil will literally pitch job seekers to employers so that the employers are the ones who then reach out to the job seeker going first and saying, "Hey, I found you on ZipRecruiter. You look great. I would love to talk to you." That's an extraordinary experience for most job seekers. The majority of people in America will go through their entire careers without ever talking to a recruiter. So having an employer actually reach out and contact you is a unique experience. Once Phil has fully manifested and is providing that kind of guidance, he will be a first of its kind solution for guiding job seekers through the process of finding work, but more importantly, staying as a persistent partner. Most of us think about job seeking like a light switch. It's either on or off. I'm ready to change jobs. Let's go find a job, turn it on. Okay, I found my job, turn it off, right? I doubt anyone in this room is always monitoring the labor market to see if an absolutely just right golden opportunity has come online for which they would be eminently qualified and would potentially be better than the job they have. I'm sure not anyone in this room is monitoring the salary trend for their particular job that they are doing to find out whether the amount that they should be getting paid is going up or going down to inform any decision they might make about like is it time for me to change jobs or should that hang on tight to this job because I'm being paid at or above market rates? That kind of forest view guidance is what we are providing to job seekers. And that is going to completely change the way that I think all of us look at work because no one has ever been in your corner that way on a persistent basis.

Well, it's interesting, too, because you've seen a lot of this in -- not to talk about the sector I don't cover, but even in the real estate industry, you see a lot of like you own a piece of property, here's the dynamic pricing around that property. Here's what's happening in your neighborhood. Here's where our supply is becoming available. There's a lot more of that. But for the record, I'm not checking out anything of the job labor market, if anyone at Goldman is listening to us. I'm perfectly happy and pleased and not going anywhere, for the record. So I don't have any idea. So let me turn next to M&A. You recently acquired Breakroom, an employer review platform. Whenever anyone does M&A, I'm always kind of curious about the rationale behind that particular piece of M&A and then maybe broadening it out and bringing it back to your strategic philosophy around doing M&A and allocating capital behind inorganic growth like that.

Well, I'll say I'm incredibly excited about Breakroom, which is the acquisition that we just made. And the reason why I'm excited is twofold. One, it's a great product, where there's over 100 million people in the United States that are working as what's called frontline workers. And the nature of these jobs is they tend to be low-skilled entry-level positions where there's very little differentiation between when you look online at like working at Starbucks, working at McDonald's, working at a hardware store or whatever it may be. But what there isn't good information about in the job description is what is it actually like to work there? Like they'll give you the requirements, but they won't tell you how many breaks per day do you get? Is it hard to get shifts or not? What are the managers like? Is there a break room? Little things that don't sound that important maybe to the people in this room, but incredibly to the people who are considering taking these jobs. And Breakroom has devised a product that is very good at collecting this kind of rich detailed information directly from the employees, not who are upset because the preponderance of people who have been leaving reviews on employer review sites are the angry, disgruntled workers who are looking for an outlet where they can hurt that company that hurt them. This is a product that is just very good at capturing actual information about what it's like enriching the job descriptions to help future prospects decide whether or not they want to work there. I'm also incredibly excited about the novel way they figured out how to collect all of that feedback from job seekers taking advantage of modern social networks in a way that we haven't seen before. So they have a sophisticated product strategy, a sophisticated marketing strategy. They've only been in the U.K. We're bringing them to the U.S., expect to be able to replicate the success they've had in the U.K., which may very short window has been outstanding. And I'm looking forward to using that information to enrich the job listings on our site.

Okay. So building on that answer about M&A, maybe broaden it out to think about capital allocation more generally, right? There's always the choice between investing in the business, possibly do inorganic growth through acquisitions, returning capital to shareholders. What's the current priorities there on capital allocation? And what are the key messages for investors?

Yes. We're in a privileged place to be able to do all of them as we need to. But the prioritization that we have has been the same ever since we came out in our direct listing. So leaning into our organic growth initiatives many of which we've already talked about remains by far our #1 priority followed by M&A. So we talked about Breakroom already. That's -- that was a roughly $17 million acquisition, so relatively small. That's more something that I think would be likely for us to continue to do smaller tuck-in acquisitions. It's more our appetite level. And then thirdly would be shareholder returns. We've been participants in open market purchases. We've done ASRs in the past. And so we will take advantage when we see a good deal out there.

Okay. We only have a few minutes left, but I always love that ending on a big picture question. So I'm going to ask you from 2 perspectives. How would you frame the big milestones and goals that you're trying to skate after if you think about what you're trying to do with the business over the next 12 to 18 months? And if we're sitting here a year from now, what do you think investors or the broader investment community is not thinking about dramatically with respect to your company or your industry?

Well, as far as I think about the future for ZipRecruiter, there's a lot of different ways to dress this up. But at the end of the day, what makes customers happy, and we really have 2 classes. One is going to be the employer and one is going to be the job seekers, is when you get to the point where a human is talking to another human. And the faster we can make that happen for both sides, the more both sides are satisfied. And I said before, like if you go look at the 5-star reviews of which there's almost 1 million on our mobile apps at this point, the two things that jump out of you are how easy it was to use and how great the outcome was. And it's that point about outcome over any specific feature over any specific like marketing promise that I think is the thing that I feel best about because our evangelists or people who are finding success on our platform. When I look at the category as a whole, and you said what are investors not thinking about. Let me tell you, I've been at this conference for many hours today, and they're thinking about a lot. It's hard to find a little corner where they haven't dug in deep with me. So I don't think there's any amazing a-ha. If I had to make predictions about the next 12 months about what I think we're going to see, I think we're going to see a lot of discussion in the economy. I think we're going to see a lot of discussion about AI and whether or not it's taken jobs away or not, and I leave that to the very smart prognosticators who are out there who are dedicating themselves to this. But I think that the world of recruiting, as we've been talking about, is going through a sea change right now and the technologies that are available are not only making it way faster for us to identify who should be talking to who, but to actually drive them to do it. And that just excites me from a product standpoint.

Great. Well, I always appreciate the opportunity to have a conversation. Please join me in thanking ZipRecruiter for being part of the conference this year.