Recruiter.com Group Inc. (NASDAQ:RCRT) Q3 2022 Results Conference Call November 14, 2022 4:30 PM ET
Company Participants
Kirin Smith – PCG Advisory
Evan Sohn – Chairman and CEO
Judy Krandel – CFO
Miles Jennings – COO
Operator
Welcome, ladies and gentlemen, to the Recruiter.com Third Quarter 2022 Financial Results Conference Call.
I will now turn the program over to Kirin Smith with PCG Advisory.
Kirin Smith
Thank you, operator. Good afternoon. Welcome to Recruiter.com’s Third Quarter Earnings Conference Call. [Operator Instructions] On the call today are Recruiter.com’s Chairman and CEO; Evan Sohn; CFO, Judy Krandel and President and COO of Miles Jennings. Company would like to remind everyone that various remarks about future expectations, plans and prospects made on today’s call constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.
Recruiter.com cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated, including risks described in the company’s filings with the SEC. Any forward-looking statements made on this conference call speak only as of today’s date, Monday, November 14, 2022. Recruiter.com does not intend to update any of these forward-looking statements to reflect events or circumstances that occur after today. A replay of today’s conference call will be available through the Investor Relations section of Recruiter.com’s website at investors.recruiter.com. With that, I’d like to turn the call over to Recruiter.com’s Chairman and CEO, Evan Sohn, for opening comments.
Please go ahead.
Evan Sohn
Thank you, Kirin, and welcome to everyone on the call today. I will start the call today with a brief introduction and then hand it off to Judy to review the financials. Miles will then go into some more detail on our core business operations and strategic plan. After that, we will open it up to questions from the audience. For those of you new to the company, a brief overview of our company, Recruiter.com provides on-demand recruiting solutions for employers looking to hire talent.
We offer a new alternative to traditional headhunters and recruiting and staffing providers. Our on-demand recruiting solutions are more flexible than most traditional services, offering employers the ability to ramp up and down at will. We are focused on offering recruiters on an on-demand basis, talent acquisition professionals ready-to-help employers hire and augment their existing recruiting teams. Our recruiters have been trusted by companies like Zoom, Pfizer, [ADP], Cerner, Dentsu and many others. In the third quarter, we delivered 11% year-over-year revenue growth and showed a modest to 2% sequential decline.
We continue to execute against our 2022 objectives and plans and further prioritize the management of our operating expenses to optimize for profitability. With our recently announced strategy being implemented, we are now focused on our segments with the strongest operating margins and client demand. We executed certain cost reductions aimed to accelerate profitability and are concentrating our efforts on our strongest growth drivers. In a more volatile business environment, we are focused on driving efficiencies and communicating the ROI of our solution to the market. We are focused on delivering great results for our clients in the most efficient way possible.
While we improve our business, we also continue to explore strategic opportunities for the company, and we expect to have additional updates in the near future.
I will now turn the call over to Judy, our CFO, to discuss our financial results. Judy?
Judy Krandel
Thanks, Evan. Revenue for the third quarter of 2022 totaled $6.97 million, an 11% increase over the third quarter of 2021. This growth was primarily driven by increased demand for our recruiters on-demand service line. Gross profit for the third quarter of 2022 was $2.2 million, a 4.9% decrease compared to the comparable period of 2021. This reflects the company’s shift away from permanent placement to focus resources on our on-demand business.
Gross margin percentage fell to 31.45% versus 36.82% in the third quarter of 2021. Gross margin was again affected by the reduction in permanent placement and a pickup in lower-margin on-demand talent revenue. Total operating expenses for the third quarter were $7.6 million, a 14% decrease compared to the operating expenses of $8.9 million in the third quarter of 2021 due primarily to the ongoing efficiencies gained from the integration of staff and assets from our 2021 acquisitions. Net loss for the third quarter was $5.6 million, a 26% improvement compared to a net loss of $7.7 million in the third quarter of 2021. In Q2, we began to capitalize our product development expenses in accordance with GAAP policies, and we plan to continue this as a best practice going forward.
During the third quarter, we again invested and capitalized our product development. Overall, we incurred an adjusted EBITA loss of approximately $1.5 million.
With that, I will turn it over to Miles to discuss our business operations. Miles?
Miles Jennings
Judy, thank you very much. This quarter, we saw some moderate decline in demand for our on-demand recruiting solutions, including software and on-demand for an overall approximate 2% sequential revenue decline. We work with many technology oriented start-ups with our managed software service, and these companies slowed down their hiring activity. We also had one large enterprise customer stop all contracted vendor spend, though our project with them was very successful, and we expect to resume activity with this client early next year. Some of our revenue is derived from permanent placement primarily made up of conversion fees for our on-demand recruiters.
This business experienced a decline this quarter as fewer companies opted to retain full-time talent acquisition staff. If employers generally employ fewer staff recruiters, we do feel like our company is uniquely positioned to offer an alternative, which is our flexible on-demand recruiter offering. Healthcare, as an industry is showing signs of being particularly robust in this market, and we intend to pursue additional clients in this sector. On our strategic plan, this quarter, we refocused our priorities and developed a new strategic plan centered around how we manage towards profitable growth. First, we are focused on simplifying our business.
For a growing start-up, we have too many disparate revenue lines, perhaps as a result of acquiring multiple businesses in 2021 last year. We are aligning the business now around our largest and most profitable on-demand product lines and concentrating our marketing efforts in this area. We aim to be the leader in providing on-demand recruiting and on-demand sourcing, and we feel like the market should support good client demand in these areas due to its flexible nature and solid ROI for our clients. Second, we recently announced a reduction in certain staff and operating expenses. Our on-demand business model has quite light operational demand.
So we want to really take advantage of this and do more with fewer people and fewer processes in overall simpler approach. We recently announced about a 30% reduction in staff operational expenses, and we feel we can do this without affecting our revenue or our client results. Finally, we understand that we must prioritize near-term profitability over long-term, more speculative value creation in this market. We’re adjusting our strategy to reduce or eliminate specific research and development expenses that we feel do not provide an opportunity for immediate revenue growth. We are currently evaluating additional strategic opportunities to create value.
Evan Sohn
I’ll now turn it over to Evan. Thank you, Miles, and thank you, Judy. We are on a 3-year mission. Last year, in 2021, our goal is to align our products to best fit the needs of our potential customers. We demonstrated our ability to meet our customers’ needs.
We scaled our revenue, acquired businesses, invested in product development and created a repeatable sales process. We started in 2021 with the objective of reaching $20 million in revenue, uplisting to NASDAQ and having a path towards profitability. In 2022, our objective was very clear, and we know this is extremely important to our investors. This clear goal is to manage our growth towards achieving monthly positive EBITDA. We are committed to obtaining positive monthly EBITDA in the near term and are aligning our cost structure with the gross profit results that we expect to achieve.
Partnerships are an important part of our overall sales development strategy. We are excited to announce a new strategic partnership with Talend, Inc. Talend Inc. is a leading career platform, offering recurring monthly software for job seekers, resume writing services, career development coaching and interview preparation. We signed a partnership agreement that creates a best-in-market affiliate relationship so that we are in a percentage of sales for job seek referrals and allows for Recruiter.com to be a master affiliate to leverage recruiter.com’s network of recruiters to sign up additional partners to Talend Inc.
This is a great opportunity to further monetize our career communities on a partnership that really takes advantage of recruiter.com’s great reach to talent acquisition and recruiting professionals. Our career communities offer great potential for monetization, especially if the job market becomes a bit more weighted towards employers. This is a 100% gross margin business that does not require staff intervention. So we’re excited to expand this revenue line with a market-leading partnership. We are also actively exploring other strategic business opportunities with Talend Inc. that we believe will drive significant value. I would like to close our presentation by reviewing our objectives and discussing our response for the overall market. We are committed to achieving positive monthly adjusted EBITDA in the very near term. On our last call, we discussed reaching this milestone in December. Since there is a variability in resourcing levels and severance arrangements, we do not want to forecast reaching this milestone until early Q1.
However, we are working on a number of strategic opportunities, which could result in a positive revision. We experienced about a 2% sequential reduction in revenue in Q3 and expect a more challenging quarter in Q4 for revenue as we optimize for profitability over growth to close out the year at approximately $25 million. This would represent about a 12% year-over-year growth through 100% organic mean. We have a healthy pipeline of new business opportunities, but some macro conditions such as the capital cycle of tech investments have caused such previous hiring projects to be put on hold. In particular, technology start-ups have slowed some of their hiring initiatives.
However, there are many bright spots in the economy and in general, the overall job market remains incredibly strong. Certain pockets such as health care and retail are proving very resilient and our revenue mix continues to diversifying in these areas. As I mentioned, during an interview with CNBC earlier this month, employees are still demanding high salaries and the job market remains very dynamic with high quit rates and job openings. This type of environment continues, offering solid opportunities for our platform and services. We anticipate a more normalized demand environment in Q2 2023, after an expected decline in Q4 and Q1.
We are managing to this expected market condition by working swiftly to align our operating expenses with our expected gross profit and focusing our resourcing and efforts very clearly on our most successful lines of business. Thank you again for your time today and interest in Recruiter.com. Operator, let’s now open it up to any questions.
Question-and-Answer Session
Operator
[Operator Instructions] We have Aleen Klee of Maxim Group.
Unidentified Analyst
This is [Derek Greenberg] on for Aleen. My first question is just in regards to the recent staff cuts, how that affects your operating expense run rate, what reductions we’ll see there.
Evan Sohn
Thanks, Derek. And please give Aleen our best, and I will answer this question. As Miles mentioned earlier, our on-demand business model really has quite a light operational demand, and we really want to take advantage of this doing more with fewer people and processes. So that really allows us to reduce the actual client delivery because the recruiters that we have out on assignment are really all these on-demand freelance recruiters. We cut about 30% of our staff operational expenses.
This included as we were focusing more on the on-demand revenue and less on less strategic revenue. It allowed us really to have staff cuts that were really not impacting the day-to-day business that we were in. Does that answer your question, Derek?
Unidentified Analyst
Yes, definitely helps. My next question is just in regards to — I know you had, I think, revenue targets of 12% was in the deck for fiscal year. I just wanted to confirm if that was accurate.
Evan Sohn
Yes. So we’re going to have a 12% on a conservative side, a 12% year-over-year increase from 2021. But very important is it’s 100% organic. So we made a number of acquisitions in ’21, our growth in ’22 has been 100% organic.
Unidentified Analyst
Okay. Great.
Evan Sohn
And just a little bit more about what we’re [ talking about ] on the business. We’re really building a business around a much lower operating expense profile. So that’s really how I think you should look at it. We’re focusing the business on our on-demand revenue and knowing what that revenue looks like given our insight into our customers and the healthy pipeline that we have, we’re really building a business around a much, much lower operating expense profile.
Unidentified Analyst
Great. And my next question was just regarding to your current pipeline. I remember, I think on the last call, there was a figure that was thrown out of around 10% of the current pipeline being international and just related to some of the partnerships you had in the past. I was wondering if you had any like color into what that looks like now in terms of how those deals are progressing or perhaps outsourcing?
Evan Sohn
Yes. It’s an excellent question, Derek. We signed a number of partnerships with, let’s call them, international employment organizations, Oyster, Deel, Velocity Global, et cetera. Those were really bringing us a number of interest being hire outside your local region. Not surprised, given some of the market dynamics that has slowed up somewhat.
We’re still seeing a healthy pipeline of leads. I think our international revenue for Q3 was probably under 5% for international for Q3. So we certainly saw an initial pullback. But I also think that really would coincide with the increase of revenue from healthcare. Healthcare is typically delivered very locally.
And so while we’re seeing an increase in the healthcare — the healthcare side of our on-demand revenue related to healthcare, that would actually be more focused on U.S. centric companies.
Operator
And not seeing any other questions in queue. [Operator Instructions] At this time I’m seeing no further questions in queue.
Evan Sohn
Excellent. So let me just close. And I know we focus a lot of attention previously on overall strategy and the position that we’re in. We certainly learnt a lot in the processes that we’ve been involved in over the last quarter about what people like about our company and what we don’t like about our company, but really, really focused on the ability to address and reduce our overall cash burn. And we announced this reorganization of the business as we focused on our on-demand revenue, really aligning the business around our on-demand revenue and our marketplace no touch revenue.
We’re rebuilding the business or building the business around a much lower operating — on a much lower operating expense profile. We expect lower — so while we expect lower revenue for Q4, we’re still expecting to achieve positive EBITDA early Q1, which really we believe is critical objective of revenue growth, especially during these market conditions. So we’re going to start seeing some of the benefits already in November and December. They’ll be able to benefit from many of these cuts. We’ll still have some residual onetime expenses through the remainder of the year, although as we mentioned before, there’s some things going on that we might revise those numbers accordingly.
But again, thank you so much for sharing your insights with us. Your comments and feedback are always welcome. You can visit us at investors.recruiter.com or e-mail me @evan@recruiter.com. Thank you so much for your continued support and feedback. And with that, we’ll close out the call unless there are any other questions.
Operator
At this time, there are no further questions in queue. Well, all right. Ladies and gentlemen, it does appear that, that will conclude your call. You may now disconnect your lines, and thank you again for joining us today.
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