ZipRecruiter Finalizes Plan For Direct Listing

Summary

• ZipRecruiter has filed to effect a direct listing of certain Class A shares owned by shareholders.
• The firm provides an online matchmaking service for employers and persons seeking employment.
• ZIP has grown revenue during the pandemic, is profitable, and is operating in a growing industry, so the listing is worth a close look.
• Looking for more investing ideas like this one? Get them exclusively at IPO Edge. Learn More »

Photo by martin-dm/E+ via Getty Images

Quick Take

ZipRecruiter (NYSE:ZIP) has filed for a direct listing of its Class A common stock, according to an S-1 registration statement.

The firm operates an online work opportunity marketplace.

ZIP has performed admirably through the pandemic, generating growth and profits and is operating in a growing industry, so the listing is worth a close look in the $30.00 to $40.00 per share price range.

Company & Technology

Santa Monica, California-based ZipRecruiter was founded to simplify the job market for both job seekers and employers.

Management is headed by president and CEO Ian Siegel, who has been with the firm since 2010 and was previously Vice President of Web Development at Stamps.com.

Co-founders along with Siegel are Ward Poulos, Willis Redd and Joseph Edmonds.

Below is a brief overview video of how the service works for employers:

Source: ZipRecruiter

The company's service works as a 'matchmaker' of sorts that seeks to curate job opportunities for job seekers and candidates for employers.

ZipRecruiter has received at least $138 million in equity investment from investors including Institutional Venture Partners, and Wellington Management.

Customer/User Acquisition

The company pursues employer and job seeker relationships through job distribution partners, which are third-party sites and applicant tracking systems, and other indirect channels.

Since the firm's 2010 founding, it has served more than 2.8 million employers of all sizes and 110 million job seekers.

Sales and Marketing expenses as a percentage of total revenue have fluctuated but trended lower as revenues have increased, as the figures below indicate:

Sales and Marketing	Expenses vs. Revenue
Period	Percentage
Three Mos. Ended March 31, 2021	50.6%
2020	45.7%
2019	64.3%

Click to enlarge

Source: Company registration statement

The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, swung to positive territory in the most recent reporting period, as shown in the table below:

Sales and Marketing	Efficiency Rate
Period	Multiple
Three Mos. Ended March 31, 2021	0.2
2020	-0.1

Click to enlarge

Source: Company registration statement

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth trajectory.

ZIP's most recent calculation was 24% as of March 31, 2021, so the firm needs some improvement per the table below:

Rule of 40	Calculation
Recent Rev. Growth %	11%
EBITDA %	13%
Total	24%

Click to enlarge

Source: Company registration statement

Notably, management provided no subscriber retention rate figures which are important for understanding the growth efficiency of subscription software services.

Revenue per subscriber (Paid Employer) has been trending higher since 2018 and recently peaked in Q4 2020 at $1,276, as the chart shows here:

Source: Company registration statement

Market & Competition

According to a 2020 market research report by Fortune Business Insights, the market for online recruitment is expected to reach $43.4 billion by 2027.

This represents a forecast CAGR of 7.1% from 2020 to 2027.

The main drivers for this expected growth are an increasing desire of companies to find workers through online means, which has received a major boost in demand as a result of the COVID-19 pandemic.

Also, the online process enables companies to more efficiently discover and screen prospective employees, improving their workforces while potentially reducing hiring costs.

Major competitive or other industry participants include:

• LinkedIn

• CareerBuilder

• Craigslist

• Glassdoor

• Indeed

• Monster

• Google

• Facebook

Financial Performance

ZipRecruiter's recent financial results can be summarized as follows:

• Growing but uneven topline revenue

• Increased gross profit

• Fluctuating gross margin

• Positive operating profit but uneven operating margin

• Flat cash flow from operations

Below are relevant financial results derived from the firm's registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
Three Mos. Ended March 31, 2021	$ 125,372,000	10.7%
2020	$ 418,142,000	-2.7%
2019	$ 429,559,000
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
Three Mos. Ended March 31, 2021	$ 109,411,000	10.7%
2020	$ 363,979,000	-2.9%
2019	$ 374,781,000
Gross Margin
Period	Gross Margin
Three Mos. Ended March 31, 2021	87.27%
2020	87.05%
2019	87.25%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
Three Mos. Ended March 31, 2021	$ 16,466,000	13.1%
2020	$ 64,432,000	15.4%
2019	$ (6,318,000)	-1.5%
Net Income (Loss)
Period	Net Income (Loss)
Three Mos. Ended March 31, 2021	$ 13,398,000
2020	$ 86,048,000
2019	$ (6,349,000)
Cash Flow From Operations
Period	Cash Flow From Operations
Three Mos. Ended March 31, 2021	$ 22,154,000
2020	$ 88,013,000
2019	$ (2,135,000)
(Glossary Of Terms)

Click to enlarge

Source: Company registration statement

As of March 31, 2021, ZipRecruiter had $103.4 million in cash and $107.8 million in total liabilities.

Free cash flow during the twelve months ended March 31, 2021, was $106.6 million.

Direct Listing Details

ZipRecruiter intends to effect a direct listing for existing shareholders of its Class A common stock.

Class A common stockholders will be entitled to one vote per share. Class B shareholders will be entitled to twenty votes per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Assuming a successful direct listing at management's estimate of its fair market value of $25.04 per share, the company's enterprise value at direct listing would approximate $3.1 billion, excluding the effects of underwriter over-allotment options.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 66.69%.

The firm will not receive any proceeds from the shares sold in the direct listing, as the shares will be offered by registered stockholders and not the company.

Management's investor day presentation is not yet available.

The advisors selected by the firm for the direct listing were Goldman Sachs and J.P. Morgan.

Commentary

ZipRecruiter is seeking a direct listing of its Class A common stock to create a public market for its investor and employee shareholders.

The company's financials show moderately growing but uneven topline revenue growth, strong gross margin and consistent operating profit, net income and cash flow from operations since the beginning of 2020.

Free cash flow for the twelve months ended March 31, 2021 was an impressive $106.6 million.

Sales and Marketing expenses as a percentage of total revenue have been uneven; its Sales and Marketing efficiency rate swung to positive territory in Q1 2021.

The market opportunity for matching employers with workers is large and forecast to grow above 7% CAGR through 2027.

As a result of the COVID-19 pandemic, companies will likely continue to increase their adoption of online technologies for finding and hiring the most capable persons for employment.

The primary risk to the company's outlook is competitive entrants into the online recruiting space, some of whom may be very large firms such as Google or Facebook.

As for valuation, a March 31, 2021 aggregate of publicly held SaaS company valuations compiled by SaaS Capital showed the following results:

(Source)

ZIP is seeking an EV / Revenue multiple of 7.32x versus the above median multiple of 14.5x, so the expected listing price of $25.04 appears to be reasonable.

That expected price of $25.04 per share may change based on additional information management obtains from its advisors.

It also implies a potentially higher price per share in trading as the firm's EV / Revenue multiple appears somewhat low compared to the median multiple of 14.5x, even accounting for ZIP's somewhat moderate growth rate.

My expectation is that a fair value for the stock would be somewhere in the $30.00 to $40.00 range, especially so for a firm that is generating earnings and strong free cash flow, so the listing is worth consideration.

Direct Listing Date: May 26, 2021

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.