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Edited Transcript of DHX earnings conference call or presentation 1-Aug-19 9:00pm GMT

Q2 2019 DHI Group Inc Earnings Call

New York Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of DHI Group Inc earnings conference call or presentation Thursday, August 1, 2019 at 9:00:00pm 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

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Conference Call Participants

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* Joshua David Vogel

Sidoti & Company, LLC - Analyst

* Marc Wiesenberger

B. Riley FBR, Inc., Research Division - Associate

* Todd Kehrli

MKR Group, Inc. - Co-founder & President

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Presentation

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Operator [1]

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Good afternoon. My name is Kelly, and I will be your conference operator today. At this time, I'd like to welcome everyone to the DHI Group Second Quarter 2019 Financial Results Conference Call. (Operator Instructions)

I would now like to turn the call over to Todd Kehrli, Investor Relations Adviser. Please go ahead, sir.

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Todd Kehrli, MKR Group, Inc. - Co-founder & President [2]

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Thank you, operator. Good afternoon and welcome to DHI Group's Second Fiscal Quarter 2019 Financial Results Conference Call. With me on today's call are DHI's CEO, Art Zeile; and Chief Financial Officer, Luc Grégoire.

Before I turn the call over to Art, I'd like to cover a few quick items. This afternoon, DHI issued a press release announcing its second quarter fiscal 2019 financial results. This release is available on the company's website at dhigroupinc.com. This call is being broadcast live over the internet for all interested parties, and the webcast will be archived on the Investor Relations page of the company's website.

I'd like to remind everyone that on today's call, management will make forward-looking statements that involve risks and uncertainties. Please note that, except for historical information, statements on today's call may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. When used, the words anticipates, believes, expects, intend, future and other similar expressions identify forward-looking statements. These forward-looking statements reflect DHI management's current views with respect to future events and financial performance and are subject to risks and uncertainties, and actual results may differ materially from the outcomes contained in any forward-looking statements. Factors that could cause these forward-looking statements to differ from actual results include delays in development, marketing or sales and other risks and uncertainties discussed in the company's periodic reports on Form 10-K and 10-Q and other filings with the Securities and Exchange Commission. DHI undertakes no obligation to update or revise any forward-looking statements.

Lastly, during today's call, management will be referring to certain financial measures, including adjusted revenues, adjusted EBITDA and adjusted EBITDA margin, which are not prepared in accordance with U.S. GAAP. Information about and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available in our earnings press release, which is posted on our website at dhigroupinc.com in the Investor Relations section.

I'll now turn the call over to Art Zeile, CEO of DHI Group.

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

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Thank you, Todd. Good afternoon, everyone, and welcome to our second quarter fiscal 2019 earnings conference call. We appreciate your interest in DHI.

We are pleased to report our second consecutive quarter of year-over-year growth in revenue, reflecting the solid progress we continue to make on our product, sales and marketing efforts. During the quarter, we further strengthened our product offering by adopting several industry-leading product features from ClearanceJobs into our Dice and eFinancialCareers brands. We continued to build out our commercial sales team, and we significantly grew candidate registrations for all of our sites. While we still have lots of work ahead, we expect these efforts will continue to position DHI to become the industry leader for matching tech professionals with employers.

Now let me elaborate on some of the things we accomplished during the second quarter. Let's start with the progress we made in strengthening our product offering. As many of you know, we have 3 brands: Dice, eFinancialCareers and ClearanceJobs. ClearanceJobs is our strongest product offering from both a user experience and a feature set perspective. As such, we are leveraging the industry-leading product features from ClearanceJobs into our Dice and eFinancialCareers brands to make them more effective for clients and more engaging for candidates and to create the foundation from which we can begin to accelerate revenue growth.

For our Dice platform, which makes up 2/3 of our total revenue, we made several significant product upgrades during the quarter. The first was an upgrade to Job Search and Job Alerts experiences, which were recently launched in beta. The new Job Search and Job Alerts deliver improved search relevance to candidates by applying our proprietary tech skills data model. This feature supplements the power of Candidate Match, which we launched last quarter, allowing candidates to be matched to those jobs that are most relevant to them based on their skill set. Our tech skill data model maps over 100,000 technology skills and their relationships to employer job postings and is the secret sauce that sets us apart from our competition. As a result of this upgrade, we are already seeing better conversion rates for site registrations from beta users and higher job apply rates.

Another candidate-focused upgrade made during the quarter was the launch of our new personalized Dice.com homepage that curates job recommendations, suggests profile updates and provides personalized salary predictions and career paths based on a candidate's skill set.

We also delivered a Dice upgrade this past quarter that provides tools used to automate key aspects of our recruiter workflow. This improved experience includes a new dashboard of key metrics for managing job postings more efficiently and automation of candidate tracking.

These product upgrades were significant and are just the beginning. We have a clear roadmap in front of us, again, based on adopting time-tested ClearanceJobs features into both Dice and eFinancialCareers. In the second half of the year, we will be focused on Recruiter Profile and Messaging, both of which have substantially increased recruiter-candidate engagement on the ClearanceJobs platform. We have already launched Recruiter Profile and Messaging for eFinancialCareers in beta this past month. These are 2 key steps to creating a trusted network between recruiters and candidates. Recruiters can now create a profile on eFC with personalized photos, contact information and job postings that can be shared with candidates. Messaging is an in-platform service that allows recruiters and candidates to chat in real-time. We will be making these 2 features generally available in eFinancialCareers this quarter and working to bring the same features to Dice in the upcoming quarters.

ClearanceJobs also had a major product release this quarter. We introduced BrandAmp, a new client solution which gives employers effective new ways to bring their job postings to life. With large-format photos, videos, social links and featured company recruiters, BrandAmp creates a compelling first impression to potential candidates. The key features that have differentiated the ClearanceJobs user experience are now becoming part of eFinancialCareers and Dice. You will see further innovation through meaningful product releases in upcoming quarters.

Now let's talk about the progress that we're making in developing and growing our commercial accounts sales team. Our new sales strategy, which is focused on those customers that have their own internal recruiting teams, is guided by market research we recently compiled regarding target customer segments and market sizing. While we are still in the very early stages of standing up this new sales team, we are seeing early progress in attracting new direct-hire customers. As a result, we intend to continue adding resources to this organization in the second half of this year.

As we add hunters that are focused on new business development, our goal is to increase the percentage of revenue coming from new customer acquisition. Our market research shows that the online recruiting industry is projected to grow over 7% annually from 2018 to 2023, and that the tech professional subset is actually forecast to grow faster at a rate of approximately 12% annually. So we feel that increasing our percentage of revenue from new customer acquisition is a very achievable goal. We are confident that with our strengthened product platform, we can substantially increase our revenue growth rate and grow at least with the market. It won't happen overnight, but we believe today we are laying the foundation to achieve this growth.

In addition to our investment in commercial sales, we have been refining our marketing programs aimed at new candidate acquisition. We are pleased to report that for the first time in many years, we are seeing our key candidate registration metrics improving. In the second quarter, our digital marketing channels drove double-digit candidate registration growth as we increased and improved our search engine optimization and digital marketing initiatives to better engage tech professionals through mobile and social channels. At the same time, we are driving improved efficiencies in our marketing channels, which allows us to maximize our budget dollars. These improved digital marketing initiatives are driving both candidate acquisition and commercial sales lead growth.

In closing, as we continue to successfully execute on our strategic growth plan, our vision remains the same: to create indispensable career platforms where technology professionals can connect with the right opportunities and where clients have access to the highest quality talent. We believe we are creating the best platform in the market, and we look forward to reporting on our continued progress throughout the remainder of the year.

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 may have. Luc?

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

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Thank you, Art, and good afternoon, everyone. As Art mentioned, we continued to see progress this quarter, especially in the repeat of continued year-over-year revenue growth in our ongoing tech-focused business. As a reminder and for those on the call that may be new to our story, since the end of 2017 and through the third quarter of 2018, we divested 4 noncore brands and closed our Dice Europe business. We're now laser-focused on our 3 tech brands. And as such, my remarks and related revenue comparisons today will refer only to the results of these remaining businesses.

Jumping right in, for the second quarter, we reported tech-focused revenues of $37.4 million, up 2% year-over-year, excluding foreign exchange. Looking at our brands, Dice revenues were $23.2 million in the second quarter, down 1% year-over-year and slightly up sequentially. The stabilizing of Dice revenue represents a much improved performance from the second quarter last year when Dice revenue declined 8% on a year-over-year basis. We are encouraged by the revenue trends we're seeing with Dice and expect the changes in investments we're making to continue to drive improved performance.

The trend in Dice recruitment package customers has also stabilized following many years of decline. We ended the second quarter in line with the first, with 6,100 customers. And our renewal rate on customer count edged up sequentially to 70%, up 4 percentage points over the prior year.

Other improvements to our Dice metrics include our revenue renewal rate, which increased 2 percentage points year-over-year to 80%, and our average monthly revenue per recruitment package customer increasing 2% year-over-year to $1,130 or approximately $13,000 -- $13,600 on an annualized basis. These are key metrics for Dice as over 90% of our revenues are recurring and come from recruitment package customers with an average contract length of slightly over 12 months.

Second quarter revenue for eFinancialCareers was $8.1 million, in line with the prior year quarter, excluding the impact of foreign exchange rates. We continued to see growth in Asia-Pacific, buoyed by strong demand in Tier 1 banks and growing penetration in Tier 2 banks, which represent a substantial untapped pool of potential clients. This growth was offset by macro headwinds in Europe and competitive challenges in North America. We're introducing new offerings and pricing models in these markets to address these challenges.

ClearanceJobs second quarter revenues were $6 million for an increase of 17% year-over-year. This continued solid revenue growth is reflective of ClearanceJobs' strong product innovation and competitive differentiation, and we continue to see strong prospects for this brand going forward.

While the substantial changes we've made over the past year won't result in an immediate jump to industry growth rates, we believe we're turning the corner and are at the beginning of sustained long-term revenue growth. We expect that our business will continue to achieve modest revenue growth in the second half, with Dice expected to turn to positive year-over-year revenue growth in the fourth quarter.

Turning to expenses. Second quarter total operating expenses were $33.1 million, a reduction of $6.6 million or 17% year-over-year, of which $4.1 million related to our divested business and the closure of Dice Europe last year. The decline in operating expenses in our remaining core business came from spending efficiencies generated from the expense reduction project we discussed on our last few calls, which also helped fund the ramp-up of our sales capability.

As Art mentioned, we're seeing good initial traction from the commercial team, and we intend to incrementally add sales heads, which will drive some increased sales expense in the coming quarters. Many of our realized efficiencies came from marketing, even as we started seeing positive trends in candidate metrics. We will look to add to these higher-yielding marketing resources in the second half of the year to further bolster our business.

As a result of efficiencies and the timing of hiring, we improved our adjusted EBITDA margin to 24% for the quarter, up 4 percentage points from the same quarter of last year. Looking to the second half of 2019, we still expect our adjusted EBITDA margin to be approximately 23% as we increase our product and engineering capacity as well as invest in more sales and high-yielding marketing resources to accelerate growth.

Tax expense for the second quarter of 2019 was $500,000, reflecting an effective tax rate of 14%, which was below our expected rate of 25% driven by discrete tax benefits relating to share-based awards.

Net income for the quarter was $3.1 million or $0.06 per diluted share against a loss of $200,000 or $0.00 per diluted share a year ago. The current quarter earnings were negatively impacted by disposition-related costs, which were partly offset by favorable discrete items, resulting in a net $800,000 of after-tax expense or $0.01 per diluted share. Prior year earnings were negatively impacted by disposition-related costs, a loss on sale of businesses and unfavorable discrete items totaling $1 million after-tax or $0.02 per diluted share. So on a normalized basis, our diluted earnings per share was $0.07 per share on the second quarter of 2019 as compared to $0.02 for the second quarter of 2018.

We generated $11.1 million of operating cash flow in the second quarter, representing a substantial increase of $9.8 million year-over-year, having now normalized the more flexible billing practices introduced last year.

Turning to our balance sheet. First, we expect a modest increase to the current run rate of capital expenditures throughout the remainder of 2019 as we continue to invest in innovation with an increase in product and engineering headcount. As a reminder, our CapEx is mostly made up of capitalized salaries of our development staff.

At the end of the quarter, our debt was $10 million, bringing our debt less cash to about $2 million. Deferred revenue at the end of the quarter was $58 million as compared to $61 million at the end of the first quarter, having now normalized the more flexible billing practices introduced last year.

On the shareholders' equity front, we are pleased to report that at the end of the second quarter, DHI rejoined the Russell 2000 index, reflecting the significant progress we've made over the past year that includes a return to revenue growth, strong profitability and increased pace of innovation. We welcome the increased visibility and investment community exposure our inclusion in the Russell 2000 will bring us as we continue to successfully execute on our strategic growth plan.

In closing, we're very excited by the market opportunities in front of us and confident in our ability to deliver a much improved and differentiated user experience to employers and candidates alike. We're equally confident in our ability to continue to grow revenues going forward as we leverage a stronger product platform and continue to enhance our sales and marketing execution.

As always, I'd like to thank you for your interest today. And with that, let me turn the call back 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 once again thanking all our employees around the globe for their hard work this last quarter. With your focus and commitment, we are off to a solid start for 2019, and I look forward to executing on our plan in the second half of the year. It is a pleasure to be part of such a great team.

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) Your first question comes from the line of Marc Wiesenberger from B. Riley FBR.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division - Associate [2]

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Can you talk about any trends with performance-based pricing, and if that's been rolled out and the reception it has received with your customers?

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

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I sure can, Marc, and I appreciate the question. We rolled that out kind of in the middle of Q1. So it's relatively new days for us and -- or early days, I should say, in terms of our exposure to how that product is really affecting our existing customer base as well as our new business activity. I can tell you that it is the standard product that is being positioned for new business activity. And we have converted a number of existing customers to what we call pay-per-view, or PPV. It appears to be working to our benefit. And we are very excited about continuing forward for the rest of this year and making it a bigger part of our business base.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division - Associate [4]

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That's helpful...

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

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Yes. Marc, this is Luc. I would just add that we're actually on the conversion point, we're actually seeing over 100% retention there. So that's a...

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Art Zeile, DHI Group, Inc. - President, CEO & Director [6]

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Very good point. We're not seeing any attrition. We're making sure that these deals are positioned as being revenue accretive when it's an existing customer.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division - Associate [7]

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Great. That's really good to hear. Moving on to ClearanceJobs, I know in the past, you've talked about potential opportunities with government contracts. Can you provide any update on that front there?

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Art Zeile, DHI Group, Inc. - President, CEO & Director [8]

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Yes. We started an initiative in Q4 of last year to really map out the government agency space and understand their need for clear talent. And as you'd suspect, they have as much of a need as the civilian side of the military industrial complex. And so we were able to essentially start at the beginning of this year with a clear plan as to which agencies we wanted to approach. We actually have a total of 6 pilots that are in motion right now. And so we're making really good headway from my perspective. I'm very proud of the effort of the ClearanceJobs team in a completely new market motion for them. Less than 1% of our revenue on the ClearanceJobs platform has traditionally come from government agencies. So this is definitely a new effort for us.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division - Associate [9]

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That's definitely exciting. Has -- I think you touched on it a little bit. Maybe if you could elaborate on some of the effects of the recent Brexit drama and how that's playing out across the brands?

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

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Absolutely. I will tell you that there's no question that it creates a headway for our U.K. market. And the eFC brand and platform operates across 18 different global markets. But it started in the U.K., and it's our biggest market. So it does have an effect on our performance there. I would say that the U.K. market still remains a thriving financial community. But the individual companies that are our customers are taking a go-slow approach to how they handle themselves in terms of hiring and specifically for the future. I still think that we have to wait to see how that plays out by the 30th of October to see what it really means for the eFC platform.

I have to say that we are the beneficiary to a certain degree of that same headwind in other markets in Continental Europe as well as in the Asia-Pac part of our platform. In fact, we're seeing double-digit growth rates in Singapore, Hong Kong and the individual countries that are being attended to by our Asia-Pac team.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division - Associate [11]

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Great. Last one for me. With regards to kind of deploying some of your really solid cash flows, do you see any interesting M&A targets on the horizon?

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Art Zeile, DHI Group, Inc. - President, CEO & Director [12]

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I'd say that right now, we're heads down really kind of working on the execution of functional excellence across all of our marketing, sales and product activities. And so we are looking opportunistically at acquisitions that are presented to us. There's nothing really that's on our radar at this point in time.

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Luc D. Grégoire, DHI Group, Inc. - CFO [13]

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Yes. We have a lot of -- what's going to help us get to the next level, we're actually working on internally. So we have a lot there. As you know, we're close to -- we're getting close to net $0 -- $0 net debt. And that will start giving us even more capability to go after opportunities in the future.

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Operator [14]

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(Operator Instructions) Your next question comes from the line of Josh Vogel from Sidoti.

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Joshua David Vogel, Sidoti & Company, LLC - Analyst [15]

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So Luc, you mentioned some competitive challenges in the North American market, in particular. I was just wondering if you could talk to that a little bit and how you find your platform differentiated versus some of these competitors? And maybe perhaps, are they taking cues from the successes that you were having in bolstering your business with the new launches and enhancements?

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Luc D. Grégoire, DHI Group, Inc. - CFO [16]

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I'm probably just going to quick start, and I think Art will jump on it. But I think the big presence of eFC has been traditionally in the U.K., and it takes advantage of that into Asia-Pacific now. And I think some of the challenges come from the size. That being said, I think there's a big global presence here. And a lot of our global clients are [helped out of here.] But in the second [Tier] of the U.S., I think it's because the [lesser] side of the business is more competitive. Art, I'm not sure...

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Art Zeile, DHI Group, Inc. - President, CEO & Director [17]

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Yes. I would just add to the fact that the eFC platform, was a platform that was built from the U.K., as we mentioned earlier. And it literally added countries over the course of time. And ironically, North America was one of the last markets to be added to the platform. So I'd say that it's a matter of it just being a little bit behind in terms of the timing of the rest of the regions that we attend to. But it's an area that we're actually investing in.

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Luc D. Grégoire, DHI Group, Inc. - CFO [18]

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The tools that we're talking about following the CJ roadmap, we'll just have -- we'll have just as much revenues here as any other markets, we believe.

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Joshua David Vogel, Sidoti & Company, LLC - Analyst [19]

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Sure. Okay, great. So today, we see a growing tech-focused platform, and of course the new tools and general enhancement.

So when we look at some of your key metrics, and I guess looking back even to 2015 or 2017, you're basically hovering in and around $1,100 in average monthly revenue per recruitment package customer. And we are seeing it starting to trend higher from quarter-to-quarter, especially over the second half of last year and thus far in 2019. I'm curious about you gaining pricing leverage or at least the opportunities to have conversations around higher pricing. Or can you talk to maybe the general discussions you're having today around renewal terms, and any notable changes to the pricing across each platform?

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Art Zeile, DHI Group, Inc. - President, CEO & Director [20]

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Well, that's a great question. I'll tell you that we did enact a pricing increase to our rate card in ClearanceJobs in the first quarter. That's the only platform where we actually increased the rate card itself. I do think that we're seeing a better environment for our larger customers on Dice and eFC, where the value of the platform is shining more than it has done in the past. I think that's a tribute to the fact that our product team, our product and engineering teams are providing releases that visibly show that we're innovating. And so we are seeing a large number of the highest-value customers actually renew at over 100%. They're buying more services. They're buying more capacity from us on both the eFC and Dice platforms. That is definitely happening. In fact, it's a designed part of our sales program where I put out the message that we want to spend more time with our larger customers and really put the focus upmarket, if you will.

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Luc D. Grégoire, DHI Group, Inc. - CFO [21]

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Yes. I would add that we've talked about in the past that we're pivoting a little bit to more quality than quantity on this customer count. And I would tell you that staying flat this quarter, if you think about how we stayed flat, and we shared our smallest customer -- it was about nearly 100 customers that were contracts under $2,000 a year. So that's much lower than the $13,600 yet remained flat. So that tells you that we're adding high-quality customers into the mix.

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Art Zeile, DHI Group, Inc. - President, CEO & Director [22]

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And that's definitely the intent.

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Luc D. Grégoire, DHI Group, Inc. - CFO [23]

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That's by design.

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Joshua David Vogel, Sidoti & Company, LLC - Analyst [24]

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Okay, great. That's helpful. And so based on the guidance commentary around adjusted EBITDA around 23% for the year, I was just wondering if you could walk us through how you anticipate this metric to play out over Qs 3 and 4. As it assumes a slight downtick from what you just put up in Q2, I was just curious what some of the items that may be hitting up here that weren't hitting up in the first half of the year.

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Luc D. Grégoire, DHI Group, Inc. - CFO [25]

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Sure. I think that in my script, I tried to emphasize that yes, we have a lot of efficiency, but also we fell behind a little bit on hiring, particularly for -- in our engineering and product development team. Now the good news about that area is that a pretty good proportion of the salaries of those employees get capitalized in our fixed assets. So it doesn't impact the EBITDA so much. So we're still committed to get on that, but we're also committed to holding our profitability. So that's why we talked about a 23% margin. I think we just benefited from some timing of the hiring in this quarter. And going forward, however, we'll be able to keep bolstering up our capacity while at the same time, holding on to that margin.

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Art Zeile, DHI Group, Inc. - President, CEO & Director [26]

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And I would confirm what Luc is saying is that the trend is that we really want to invest in product, engineering and commercial accounts sales capacity. And that's what's going to be playing out over the third and fourth quarter of this year specifically.

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Luc D. Grégoire, DHI Group, Inc. - CFO [27]

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And for marketing, the marketing, we -- in the first half of last year, the marketing was really high. Art, I think, has mentioned in the past, we were spending a bit of money on empty calories. So we've really found the higher-yielding activities that we're doing. And now we're starting to see where the gas pedal is to start generating registrations or getting them better business leads. And that's what we intend to invest in more in the second half. But this will be done in a progressive, reasonable -- in a sequential level and not -- we're not looking at shocks here. We have the line of sight that there is a -- that we can keep maintaining our margins as we continue to invest here.

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Joshua David Vogel, Sidoti & Company, LLC - Analyst [28]

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Okay, great. That actually led into my last question, just thinking about your efforts towards marketing and not doing anything shocking there. But should we be expecting it to tick up sequentially going forward a little bit, especially as you look to -- more towards the digital marketing campaigns and whatnot?

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Art Zeile, DHI Group, Inc. - President, CEO & Director [29]

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Yes. I think that's a fair assumption. I think that we're getting more efficient as we engage in the different channels associated with digital marketing. But we will be spending more over the course of time.

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Operator [30]

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(Operator Instructions) And there are no further questions at this time. I will now turn the call back to Todd Kehrli for closing remarks.

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Todd Kehrli, MKR Group, Inc. - Co-founder & President [31]

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Thanks, everyone, for your interest in DHI Group. To schedule a meeting with management, please e-mail ir@dhigroupinc.com or call (212) 448-4181. Thanks for joining our call, and have a great day.

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Operator [32]

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This concludes today's conference call. You may now disconnect.