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Edited Transcript of DHX earnings conference call or presentation 2-Aug-18 12:30pm GMT

Q2 2018 DHI Group Inc Earnings Call

New York Aug 23, 2018 (Thomson StreetEvents) -- Edited Transcript of DHI Group Inc earnings conference call or presentation Thursday, August 2, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Art Zeile

DHI Group, Inc. - President, CEO & Director

* Luc D. Grégoire

DHI Group, Inc. - CFO

* Rachel Ceccarelli

DHI Group, Inc. - Former Director of Corporate Communications

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Conference Call Participants

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* Douglas Middleton Arthur

Huber Research Partners, LLC - MD & Research Analyst

* Kara Lyn Anderson

B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group

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Presentation

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Operator [1]

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Good morning, and welcome to the DHI Group Inc. Second Quarter 2018 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

I'd now like to turn the conference over to Rachel Ceccarelli. Please go ahead, ma'am.

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Rachel Ceccarelli, DHI Group, Inc. - Former Director of Corporate Communications [2]

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Thanks, Keith. And good morning, everyone. Welcome to our second quarter earnings call. With me today are Art Zeile, President and Chief Executive Officer; and Luc Grégoire, Chief Financial Officer.

Today's call includes certain forward-looking statements, particularly statements regarding future financial and operating results of the company and its businesses. Listings are based on management's current expectations or beliefs and are subject to uncertainties and changes in circumstances. Actual results may differ possibly materially from those expressed or implied in these forward-looking statements due to changes in economics, business, competitive, technological and/or regulatory factors.

For a discussion of the principal risks and factors that could affect the company's future results, please see the description of risk factors in our current Annual Report on Form 10-K for the year ended December, 2017, and for our quarterly report on Form 10-Q in the section entitled Risk Factors, Forward-looking Statements and Management's Discussion and Analysis of Financial Conditions and Results of Operations. The company is under no obligation to update any forward-looking statements, except where required by the federal securities laws.

During today's call, we'll be referring to certain financial measures, including adjusted EBITDA and adjusted EBITDA margin that are not prepared in accordance with U.S. GAAP. Information and reconciliations of these non-GAAP measures to the most directly comparable GAAP measure are available in our earnings release, which is posted on our website at www.dhigroupinc.com.

Now with that, let me turn the call over to Art.

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Art Zeile, DHI Group, Inc. - President, CEO & Director [3]

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Thanks, Rachel. And thanks to everyone joining our call this morning. On July 19, I completed our first 100 days as CEO of DHI. During this period, I've spent a significant amount of time with our current and prospective clients, tech engineers, sales teams, employees, and our management team doing a deep dive on all aspects of our business and competitive positioning.

Let me start by saying that I am genuinely excited by the prospects for our business and thrilled to be here at such a critical juncture for this company. What I've learned over the last 3 months has confirmed for me that our strategy for growth, growth driven by execution focused on our core strengths rather than through accumulating diverse verticals, is the right one. The market for technology talent is large and expanding rapidly. Just about every employer is in some stage of this shift to digital, which creates an extraordinary demand for job candidates with technology backgrounds.

In the United States alone, the market for online recruiting and job advertising is increasing at a 5% to 10% annual rate, which is in part a function of rapid growth in overall tech employment. The market for technology jobs is expected to grow at 3.5% per year in the U.S. alone compared to 0.9% for the overall jobs market. Specialized, highly skilled professionals create a disproportionate share of the value.

The compensation for positions in the technology sector is significantly higher than average, with 70% of these having a median salary of $80,000 compared with just 23% of all jobs with that same median salary. Tech also has the highest velocity of employee turnover at approximately 13% annually compared to 11% for professional-level positions overall. Because we operate at the intersection of the supply and demand for this market, we have a unique opportunity to capitalize on that growth.

With this as a backdrop, I'd like to share some of my initial conclusions and also review the actions we are taking to move forward. Perhaps the most important is my conviction that the tech-first strategy that the company implemented last year is the right one. Although competitive pressures are high, I believe that market conditions support a business model based on a specialized offering for technology professionals, which plays to our strengths. The decision to divest our nontech brands and narrow the company's focus was the right one.

Doing so eliminated the distraction of trying to build scale in multiple specialized offerings. It also enables us to operate more efficiently by centralizing our engineering, product development and sales teams, so that we could optimize these resources across our brands. However, there is no question that strong execution will be essential to effectively addressing the issues this business faces, so that we can drive growth in the future.

We're off to a good start and the entire team here shares a disciplined and results-oriented mindset. We need to improve execution on a number of fronts, but I do believe the plans we're putting in place are the right ones.

In Dice, there is an opportunity to build a career network and community around tech professionals given that little exists to facilitate career conversations today. Both employers and candidates are searching for better solutions. Dice must continue to focus on the higher end of the tech professional market and specialize in hard-to-find tech professional talent. To do so, we have to invest in the Dice user interface to bring it up to current design standards and offer a better user experience. We must also address client retention and expand our base of direct hire clients, both of which are integral to reversing Dice's revenue decline.

However, the good news is that these are all straightforward and addressable issues.

In ClearanceJobs or CJ, the fundamentals of this business are a relative bright spot with consistently strong revenue growth, including better account growth and sales for new business. Because of its strong community features and outstanding leadership, CJ has been able to innovate quickly and validate several key functions for driving the value of a career network. We are planning to incorporate these features in our other brands. Separately, we are looking at options to expand in order to broaden CJ's client reach.

In eFinancialCareers or EFC, the brand has strong name recognition globally and is influential in delivering relevant thought leadership content to the financial services marketplace. Our focus will be on growing the business in the markets where EFC currently has a strong presence. For example, EFC has made good progress in the Asia Pacific markets, and we will look to build on that.

After careful analysis, I decided that we should close Dice Europe, which will be effective on August 31. We will reallocate our European resources to EFC where we have a strong competitive opportunity to serve professionals in the financial services industry. We believe this will drive a greater future return on investment.

I believe that revenue growth in the near term is achievable with the steps we are taking to restructure our sales activities, increase client retention and create standardized upsell campaigns. I'll provide more color on these initiatives later in my remarks.

Longer term, the growth of our business will be dependent on improving product relevance in creating a career-oriented community business model with high levels of candidate engagement. While we will focus much of our effort on Dice, there are white space opportunities for both CJ and EFC.

We have a lot of work to do, but I'm confident that we are taking the right steps. I believe that this is where the depth of my background in company turnarounds and product development comes into play. We are moving aggressively, focusing our efforts on what I consider to be 3 of our most important initial priorities. The first of these is simplifying our business structure to reduce drags on growth. During the second quarter, we finalized the sale of Hcareers, substantially completing the divestitures of our noncore businesses. We are now focused on our 3 core brands: Dice; CJ; and EFC, which are closely aligned in the engineering and product development resources needed to support them.

We are also streamlining our infrastructure and consolidating our operations globally. We believe it is possible to maintain an adjusted EBITDA margin of 20%, while investing for growth by being smart about reducing expenses.

Luc will provide you with more specifics on this, but these efforts will free up additional resources that we can invest in product development and other areas of the business to drive a much higher return on investment.

Our second priority is generating revenue growth in Dice. We recently put in place a Chief Revenue Officer, expanding Ian Shepherd's role, so that we have a single point of accountability for revenue growth across all our brands. I consider this essential, not just to addressing client retention, but also to adding new relationships.

Dice U.S. has been losing market share and revenues have been shrinking. I believe that there are 2 reasons for this: underperformance in net revenue retention; and insufficient growth in new direct hire clients. While we've seen some improvement in attrition rates and a slower rate of decline in Dice revenue since the beginning of this year, we need to do a better job retaining our existing clients. I initiated a study of our largest clients by fees to make sure we understand the profile of our ideal client. We are also looking at a number of options for improving net revenue expansion in the near term. Longer term, we must establish more robust pricing methodologies combined with creating and sustaining a product that clients find indispensable and are regularly engaged with.

Equally important is the need to increase the number of companies that leverage our brands to hire directly. While we have significant relationships with staffing and recruiting firms and about a quarter of the Fortune 1000, we are underpenetrated among direct hire clients. Direct hiring has become an extremely important way to attract candidates and presents a much broader market than that for staffing and recruiting firms. We recently expanded our enterprise sales team and changed commission plans among other steps to increase our base of direct hire clients.

The third area we are focused on is product development. Historically, we underinvested in this area, and were not as innovative as we should've been. We lost market share as a result. Our product releases have not delivered new features at a steady enough pace in some cases, because we are too focused on fixing the legacy platform issues. We must have a better balance between new feature delivery and "fixing the plumbing." We have completed a competitive benchmarking analysis to identify gaps in both product development and marketing, and we are currently looking for a Chief Product Officer and a Chief Marketing Officer. These functions will be essential to improving our execution in these areas.

We are currently restructuring our product development team to emphasize the core engineering competencies that have the highest user impact.

During the second quarter, we also migrated our San Jose office to our other locations to better integrate and co-locate our technology, engineering and product development teams. This will drive better alignment and more importantly, throughput.

Becoming best-in-class in talent search is a strategic priority for us. We recently initiated beta testing of Talent Search 4.0, Dice's new platform for recruiters, which is scheduled to go live in September. It's the biggest and most innovative enhancement to Dice's talent search capability in years. The platform is based on a single index, combining profiles provided directly by prospective candidates, aggregated data from social sources in addition -- additional licensed data. It also contains new workflow and candidate interaction features to drive greater efficiencies in the time spent searching for relevant candidates by our clients.

New features include IntelliSearch, which has successfully powered our clients' candidate profile search in CJ. IntelliSearch enables employers to copy and paste the text of their job descriptions or ideal candidate resumes and immediately receive the top matching profiles from our database. This makes IntelliSearch invaluable in saving our clients' time so that they can focus on recruiting instead of crafting the perfect online search.

In EFC, we recently launched a new job search platform in 18 countries, which offers candidates a better search and match experience on both desktop and mobile devices. As candidate satisfaction with the platform increases, so does EFC's profile with potential employers.

We appointed longtime term -- team member as a new leader for the EFC platform, George McFerrin, and are identifying additional opportunities to leverage product enhancements and expand that business.

While we won't become a growth company overnight, we have a clear strategy for how to get there supported by a well-defined execution plan and a strong sense of urgency that is shared by both our board and our management team. We believe that DHI can create a competitive set of technology recruiting solutions by offering state-of-the-art capabilities to candidates and employers alike, leading to a superior hiring outcome for hard-to-find positions. We will deliver on this vision by focusing on the highest-quality candidates and improving the user experience through client-focused innovation.

We are moving aggressively to streamline our business, so we have the resources to capitalize on the market opportunity that we see. We're confident that these steps will put DHI at the forefront of online technology recruiting and enable it to grow its business and earnings over time, in turn, leading to superior shareholder value creation over the long run.

With that, let me turn the call over to Luc, who will take you through our quarterly financials and then we'll take any questions you have. Luc?

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Luc D. Grégoire, DHI Group, Inc. - CFO [4]

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Thanks, Art. And good morning, everyone. Today, I'll be reviewing our second quarter 2018 financial results and updating you on several initiatives underway to continue to streamline our operations.

For the quarter, we reported total revenues of $41.6 million, 21% lower year-over-year. The primary reason for this decline was a disposition of our nontech businesses since late last year, including the sale of Hcareers in May for $16.5 million. This sale substantially completes our divestiture process, consistent with our strategy to focus our business on the employment market for technology professionals.

Our tech-focused revenues, which include Dice, Dice Europe, CJ and EFC, were $38.3 million for the 2018 second quarter, a 2% year-over-year decline, which included a 2 percentage point foreign exchange benefit, but were 1% higher sequentially.

Year-over-year revenue growth in CJ and EFC were offset by a decline in Dice. While we have worked to address this decline, we did see improvement in some of the business metrics during the quarter. And the rate of revenue decline has slowed.

The closure of Dice Europe, which was operating at approximately breakeven, is not expected to have an impact on DHI's results of operations in the third quarter or in future periods. Dice revenues were $23.5 million in the second quarter, 8% lower year-over-year. This decrease was due primarily to an 8% decline in the number of recruitment package customers year-over-year. However, on a sequential basis, the customer accounts stayed flat at 6,200 and Dice's revenue increased slightly.

While the renewal rate on customer account remained in the mid-60% range, the revenue renewal rate increased to 78% in the second quarter, up 4 percentage points year-over-year and is the highest level since the third quarter of 2016.

Average monthly revenue per recruitment package customer held at the 1,110 level we've seen for several quarters. We're encouraged by these results and as are detailed, we're moving aggressively to expand our sales with our existing client base, add new clients and improve our product offering.

CJ revenues for the quarter were $5.1 million, which is 23% year-over-year -- up year-over-year for the -- a 10th consecutive quarter with 20%-plus growth. This performance has been driven by consistently high demand for CJ's database, considered the highest-quality and most relevant source of cleared candidates in the industry.

The market for professionals with government clearance continues to be highly competitive with very long lead times to get cleared. For example, a recent government report on clearance processing times noted that it takes 533 days to receive a top secret clearance and 220 days to receive a secret clearance. Against this backdrop, CJ's value proposition is even more evident and its state-of-the-art platform is a significant source of competitive differentiation.

EFC revenues were $8.5 million, up 6% year-over-year, including a 5 percentage point foreign exchange benefit. As Art noted, our near-term focus is on expanding EFC's business in its current markets, particularly in Asia and Europe where it has a solid base.

Our corporate and other revenues, which includes revenues for Hcareers through its disposition date and the remaining Rigzone business were $3.3 million for the quarter compared with $6.6 million for the same period last year. This decline of $3.3 million was due to the divestiture of Hcareers, BioSpace and the RigLogix portion of the Rigzone business. The remaining Rigzone business was flat with the prior year quarter.

Now turning to operating expenses. Our operating expenses for the quarter were $39.7 million, 18% lower year-over-year. The decrease was primarily attributable to a $10.5 million reduction from the divestitures of the company's nontech businesses and $800,000 related to the ongoing Rigzone business. The decrease was -- this decrease was partially offset by $3.1 million of increased operating costs in a tech-focused business, primarily related to higher marketing, product development, professional fees, which are included in general and administrative expenses and disposition related in other costs.

The quarter's effective tax rate exceeded the expected 25% rate because of the impact of divesting of stock-based compensation during the quarter. We expect that our effective tax rate will be approximately 27% in the second half of 2018 and 25% thereafter.

We recorded a net loss of $200,000 for the quarter or $0.00 per share due to lower revenues and increased expenses in our tech-focused business. Also contributing to that loss were $2.6 million or $0.05 per diluted shares of disposition related and other costs, a loss on the sale of Hcareers and higher discrete tax expense related to the divesting of stock-based compensation.

Adjusted EBITDA for the quarter, which includes our tech-focused businesses and the remaining part of Rigzone was $7.5 million for a margin of 19%. We continue to expect an EBITDA margin of 20% for the second half of 2018. Our goal is to ensure that our spending is as efficient as possible, and to that end, we're currently identifying savings in our outside spending base, particularly for technology and marketing costs, where we can refine our spending to achieve a better return on investment.

As Art mentioned, we're also rationalizing our operations, including the closure of our Dice Europe business, the migration of our San Jose office functions and to our other locations and reducing unneeded office space in New York.

For the quarter, we generated operating cash flow of $1.4 million, a decrease of $7.8 million from the prior year period due to approximately $2 million of lower net earnings and working capital changes of $5 million. This change resulted from an adjustment to our billing terms to bring them in line with the market standards. However, this change did not impact the average length of our contract commitments, which remains slightly over 1 year.

Looking ahead, our outlook for the rest of 2018 remains unchanged from our previous communications. We believe that high demand for the tech professionals and the current competitive dynamics will continue. We expect a gradual abatement and the rate of revenue decline for Dice and continued top line growth for CJ, although not necessarily at the 20%-plus range rate given the higher year-over-year comparatives and the extremely tight labor market for cleared professionals. We expect the revenue transfer at EFC to continue for the near term as current growth initiatives ramp up.

Expense management will remain an important focus as will maintaining a 20% adjusted EBITDA margin for the full 2018 year.

Now let me turn briefly to a couple of balance sheet items. The first of these is our debt outstanding. During the second quarter, we repaid an additional $19 million of debt, using the proceeds from the Hcareers sales and cash repatriated from our overseas operations. Our debt outstanding was $19 million at the end of the quarter, a 73% reduction year-over-year, bringing our net debt to approximately $9 million and leverage ratio to above 0.5x.

Our strong liquidity and balance sheet are essential to supporting our strategy execution. The second point on our balance sheet is our share buyback program. In May, we announced a $7 million share buyback authorization. At the time, our removal from the S&P 600 index had caused a significant decline in our stock price, which at one point was getting near $1. We anticipated that our removal from the Russell 2000 might depress the price further. It turned out that this reduction did not occur. As such, we only purchased 55,000 shares during the quarter. While we continue to opportunistically approach buyback of shares, we'll also carefully evaluate our first use of cash with the priority being investment in our business.

In closing, I'd like to echo Art's sentiment that we're excited about the prospects for our business. First, we continue to believe that our 3 great brands have a strong competitive differentiation with the right level of focus on investment.

Second, our new CEO leadership is already bringing a renewed level of energy and increased product execution capability to the company.

Finally, with the divestitures and structural reorganizations of the last 18 months behind us, together with the current projects we have underway to streamline our business and reduce expenses, we're able to fully shift our attention to tech-first growth. For these reasons, I am confident that we'll be able to capitalize on the market opportunity in front of us, which we believe will drive superior shareholder value over the long term. As always, I'd like to thank you for your interest today.

And with that, let me turn the call back over to Art.

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Art Zeile, DHI Group, Inc. - President, CEO & Director [5]

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Thanks, Luc. I'd like to close by thanking all of our 500 employees worldwide for their hard work over the last quarter. Without their focus, dedication and energy, we would not have been able to accomplish as much as we did this last quarter.

With that, we're happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And this morning's first question comes from Doug Arthur with Huber Research.

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Douglas Middleton Arthur, Huber Research Partners, LLC - MD & Research Analyst [2]

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Yes, a couple of questions. The -- Luc, deferred revenue on the balance sheet -- I'm just trying to actually find it again. That's down year-over-year, I believe. Is that a function of Hcareers or I guess, it's $64.2 million at the end of the quarter. What sort of explains that?

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Luc D. Grégoire, DHI Group, Inc. - CFO [3]

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Yes. It's a couple of factors. One is, it is Hcareers and the other businesses that we've divested since last year. That accounts for not quite half of the variance. However, another impact is what I talked about in changes in our working capital dynamics, where we're starting to open up the billing terms to our customers to be competitive and while -- so basically, we're looking at some quarterly and some monthly billing situations as opposed to, where in the past, most of the billings were -- and they still are -- most of the billings are billed annually upfront. It's a combination, so the divested businesses are about $9 million worth of that change.

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Douglas Middleton Arthur, Huber Research Partners, LLC - MD & Research Analyst [4]

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Okay, great. And then, secondly, just on a kind of housekeeping. In terms of corporate and other revenues going forward, I think you did $1.3 million in Rigzone, the remaining piece of Rigzone. Is that sort of what we can expect going forward as a run rate for the quarters, give or take?

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Luc D. Grégoire, DHI Group, Inc. - CFO [5]

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That's right. All that's left in corporate and other is the Rigzone business.

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Douglas Middleton Arthur, Huber Research Partners, LLC - MD & Research Analyst [6]

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Okay. Then finally, on eFinancial, I mean, I guess without currency, it's sort of not flat, well, not quite flatlining, but growing very modestly. Why do you -- what's it going to take to get that business growing a little faster?

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Art Zeile, DHI Group, Inc. - President, CEO & Director [7]

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So I think that there's plenty of opportunity. There is kind of geographic opportunity as well as product-based opportunity. What we're seeing is that there is really great growth in Asia Pacific, so we're actually adding sales resources there. We think that we're underpenetrated in that set of geographies. But we also believe that there are a set of managed services that are available to the entire client base there, that we're able to build upon. And that's where we're focused on for the future.

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Douglas Middleton Arthur, Huber Research Partners, LLC - MD & Research Analyst [8]

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And right now, APAC represents how much of that business?

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Luc D. Grégoire, DHI Group, Inc. - CFO [9]

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About 1/3 of that business.

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Art Zeile, DHI Group, Inc. - President, CEO & Director [10]

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1/3.

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Operator [11]

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And the next question comes from Kara Anderson with B. Riley FBR.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [12]

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Can you expand more specifically on the competitive pressures that you're seeing? Is it in price? Is it in share of wallet? And then I guess, to that last point, is there room in the direct hires wallet for Dice, which might stand 1/3 in line?

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Art Zeile, DHI Group, Inc. - President, CEO & Director [13]

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So my view is that we, certainly, attend the 2 different large market segments, the staffing and recruiting and consulting agencies market as well as the direct hire market. I would say that there's probably more competitive pressure in the SRC market. They do a lot more refined return on investment, diligence and analysis, whereas the direct hire market is very desperate to find technology talent and they're willing to essentially take whatever avenues are available for them to do so.

I would say that our movement towards more direct hire customers is solid and fundamental. I would say in both of these markets, the general sense is that they need multiple tools. So it's a matter of share of wallet more than anything else, but there is more, I would say, need and aggressive use of tools on the direct hire side because they understand that they want to, essentially, effectively hire people very quickly.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [14]

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Okay, great. And then when you think about the Talent Search 4.0, rolling that out to Dice, I mean, how do you characterize that in terms of the impact on monetization?

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Art Zeile, DHI Group, Inc. - President, CEO & Director [15]

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So I think that as we roll that out and it's going to be a multistage process as we convert customers over -- 6,200 customers over to that platform by the end of this year, that we will see the improved usage of our platform itself, which will essentially allow for higher retention rates as well as the ability to hopefully expand the customer relationships. We're going to be putting that front and center with all new prospect activity, so we believe that we can essentially retain more, upsell more and then encourage new relationships by virtue of that platform change. So a real huge change for us and been, quite frankly, years in the making.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [16]

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Got it. And then, I guess for Luc, what else comes out of 2Q in the operating expenses, like can we think of it as a reasonable run rate when you consider the investment you're making on products with the rationalization of operations?

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Luc D. Grégoire, DHI Group, Inc. - CFO [17]

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I think it's -- yes, I think it's going to be a reasonable run rate. There's probably a bit more room for us to expand on our technology and product, but at the same time, we're going pretty aggressively after efficiency. So how we're thinking about the business is constantly with that 20% margin, we think we have room. We have the white space, I guess, in our expense base to go and remove some of that. We're thinking in terms of pricing on our vendors, there's some usage management. And for the business, we're able to continue to invest in that -- in the business and like [Genrad] we do have the operating leverage in the business to get back to improving that as we get back on turning our growth trajectory.

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Art Zeile, DHI Group, Inc. - President, CEO & Director [18]

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We're fully focused on making sure that we maintain that margin, but also make all these smart expense reductions, so that we could repurpose them for investment, primarily in sales and product development. So the way that I look at is that we can be more efficient, and as Luc said, we look at deficiency as making sure that our pricing for vendor services is appropriate for market conditions and that we've reduced the demand associated with vendor services to the maximum degree possible, but we believe that those savings are definitely there.

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Operator [19]

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And as there are no more questions at the present time, I would like to return the call to Rachel Ceccarelli for any closing comments.

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Rachel Ceccarelli, DHI Group, Inc. - Former Director of Corporate Communications [20]

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Yes. Thanks for joining us today. For further questions, please e-mail IR at dhigroupinc.com or call (212) 448-4181 to be placed in the queue. Thank you.

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Operator [21]

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Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.