from DBAB's Andrikopoulos and Berger:
HIGHLIGHTS:
INVESTMENT RATING: We are initiating research coverage on HotJobs.com with
a BUY investment rating on the shares.
A CATEGORY LEADER: As a leading provider of Internet-based online career
solutions, we believe HotJobs.com has created a leading Contextual Career
Network (CCN). We feel the stock should represent a core investment
holding for investors seeking exposure to the rapidly growing online
recruiting market.
A LARGE MARKET OPPORTUNITY: The Company's service is currently aimed at
the $190 billion recruiting market. We estimate online recruitment
advertising to grow to $2.0 billion by the year 2003 from $100 million in
1998 (82% CAGR).
ATTRACTIVE OPERATING MODEL: The Company has established a recurring,
subscription-based revenue model that is built on a fixed-cost operating
platform. We feel the Company can drive 30% long-term operating margins
(equivalent to the Internet Media Networks).
ESTIMATES: Our 1999 EPS loss estimate is $0.69 on revenue of $16.3
million, and our 2000 EPS loss estimate is $0.97 on revenues of $38.0
million.
POTENTIAL UPSIDE DRIVERS AND CATALYSTS: (1) margin expansion, (2) rapid
adoption of the Internet as a recruiting platform, (3) international
expansion, and (4) revenue upside potential.
RISKS: (1) management of hyper-growth, (2) Pricing pressure from free
competitors, (3) Cyclical economic conditions and (4) the difficulty in
maintaining a 100% uptime network.
VALUATION: We feel that HotJobs.com is well positioned as a pure-play
Internet leader. We believe HotJobs.com stock could trade at a 2000
theoretical P/E-to-growth rate multiple of 1.9x. This leads us to a 12
month price target of $40.
DETAILS:
COMPANY DESCRIPTION
HotJobs.com is a premier provider of online career solutions that
facilitate the recruiting process between job seekers (end-users) and
employers (the Company's corporate clients). The Company's comprehensive
suite of services attempts to eliminate many of the inefficiencies created
by traditional recruiting platforms, thus enabling employers to cost-
effectively reach, attract and hire qualified job seekers, in a timely
manner. The Company's online employment exchange, www.HotJobs.com, has
over 2,800 recruiters (subscribers) from over 1,700 companies including
Intel, Nike, General Motors, Hewlett Packard, AT&T, Microsoft, Yahoo!, IBM,
America Online, Amazon.com and Merck.
HotJobs.com. The Company's career contextual network (CCN) allows job
seekers to research, apply for and access a multitude of job opportunities
across various categories. HotJobs.com also enables member corporate
recruiters to manage their recruiting process real-time online by posting,
tracking and updating job openings and provides access to a resume database
of over 450,000 job seekers. The Company charges corporate clients
approximately $600 per month, per seat (each seat is equivalent to 20
simultaneous job listings). This recurring revenue stream accounted for
approximately 70% of the Company's C2Q 1999 revenue and accounts for nearly
75% of our 2000 revenue forecast.
Softshoe software. The Company offers corporate recruiters Softshoe, a
"behind the firewall" software solution which is a Web-based, private label
job board and resume tracking system. Softshoe facilitates a seamless
recruiting process for corporate clients, enabling companies to share
critical applicant/recruiting information across their entire organizations
in one easy-to-use software platform. Softshoe clients include Coors
Brewing Company, DoubleClick, Ford Motor, Humana, Lucent, and Tricon.
WorkWorld is the Company's program of targeted, local physical job fairs
that it leverages to attract and retain corporate clients, as well as build
brand awareness among job seekers. WorkWorld and Softshoe combined account
for approximately 20% of our 2000 revenue forecast.
The Company was formed in February 1997 and is a Delaware Corporation. It
currently has over 110 employees and is located in New York, NY.
INVESTMENT THESIS
Driving The Online Recruiting Evolution-Huge Market Potential and Scaleable
Business Model
We believe that HotJobs.com stock should represent a core investment
holding for investors seeking exposure to the rapidly growing online
recruitment market:
ú A MARKET LEADER WITH A LARGE AND GROWING OPPORTUNITY: With over 2,800
corporate recruiters (subscribers), and a database of 450,000+ resumes,
HotJobs.com has established a leading recruiting network for member
companies and a solid brand among job seekers. We estimate online
recruitment advertising to grow to $2.0 billion by the year 2003 from $100
million in 1998 (82% CAGR). We forecast that long-term, 20-25% of the $190
billion recruitment market will migrate to online solutions.
ú INEFFECTIVE TRADITIONAL RECRUITING PLATFORMS: We estimate that the
HotJobs solution results in a 50-95% cost saving over traditional
recruitment media such as Newspaper classifieds, headhunters, job fairs and
campus recruiting. Traditional platforms also create slow hiring cycles
and as a result of inadequate information dissemination create difficulty
for job seekers in maneuvering through the recruiting process.
ú THE EMERGENCE OF CONTEXTUAL CAREER NETWORKS: We see a new category of
career solution companies emerging, the CCNs. These companies (e.g.,
HotJobs.com, Monster.com, and Career Mosaic) disintermediate traditional
recruiting platforms by providing a more cost effective platform that
facilitates information exchange and enables job seekers and recruiters to
pursue the most appropriate leads, thereby reducing inefficiencies. We
believe HotJobs.com has created a leading CCN.
ú AN ATTRACTIVE OPERATING MODEL: The Company charges corporate clients
approximately $600 per month, per seat (each seat is equivalent to 20
simultaneous job listings). This recurring revenue stream accounted for
approximately 70% of the Company's C2Q 1999 revenue and accounts for nearly
75% of our 2000 revenue forecast. As the Company leverages its fixed cost
operating model across a growing number of corporate clients (subscribers),
we expect the Company to drive long-term gross margins in the 90+% range
and long-term operating margins in the 22-30% range. We believe this
compares favorably to other leading Internet franchises.
ú LONG-TERM UPSIDE POTENTIAL: Potential upside catalysts include (1)
margin expansion, (2) rapid corporate and consumer adoption of the Internet
as a recruiting platform, (3) international expansion, and (4) revenue
upside potential as the Company leverages its technology and loyal
corporate client base into incremental "behind the firewall" value-added
services.
ú RISKS: We believe HotJobs.com could face four primary risks: (1) the
management of hyper-growth, (2) Pricing pressure from free competitors
(such as the free on-line classifieds offerings from the Internet Media
Networks, Yahoo!, Excite, Lycos, Infoseek, etc.), (3) The possibility that
the economic market will change and that recruitment advertising will begin
to drop off as the labor shortage recedes in the U.S. or elsewhere in the
world. and (4) the difficulty in maintaining a 100% uptime network.
ú VALUATION: HotJobs.com most closely compares to other CCNs, such as TMP
Worldwide and Career Builder. However, we feel that HotJobs.com is unique
in its peer group because it has characteristics of a subscription media
model (e.g., AOL), a market-based solution (e.g., eBay), and is behind the
corporate firewall (e.g., Ariba), and is well positioned as a pure-play
Internet leader. We fully expect HotJobs.com to trade up on positive news,
but the recent appreciation in stock price leaves little room for
fundamental valuation upside, in our view. We believe HotJobs.com stock
could trade at a 2000 revenue multiple of 30x and 2000 theoretical P/E-to-
growth rate multiple of 1.9x, which equates to a 12-month price target of
$40. We point out that this represents a well deserved premium to other
CCN companies, which currently trade at an average 2000 revenue multiple of
6.2x and an average 2000 theoretical P/E-to-growth rate multiple of 0.8x.
FINANCIAL MODEL AND ESTIMATES
We forecast 1999 EPS loss estimate of $0.69 on revenue of $16.3 million and
2000 EPS loss estimate is $0.97 on revenues of $38.0 million. We expect
the Company to achieve break-even EPS in 1H 2002 as it enters the harvest
and leverage stage of its business model. We feel that the Company's 3-5
year revenue growth rate will be in the 75-100% range.
We expect that the Company will invest in incremental marketing and mass-
market branding as it solidifies its early critical mass in this attractive
category. As such we anticipate that the Company will invest $45 million
in sales and marketing in 2000. Our model has operating margins going to -
150% in 3Q 1999, to -71% in 2000 and -20% in 2001.
EPS Revenue*
------- --------
1QA 1999 ($0.11) $2.6
2QA 1999 ($0.14) $3.8
3QE 1999 ($0.28) $4.5
4QE 1999 ($0.15) $5.4
CYE 1999 ($0.69) $16.3
1QE 2000 $6.7
2QE 2000 $8.5
3QE 2000 $10.4
4QE 2000 $12.3
CYE 2000 ($0.97) $38.0
*$ in millions.
Source: Deutsche Banc Alex. Brown
HotJobs.com Long-Term Operating Model
1H 1999 1999E Long-Term Model
----------- -------- -----------------
Revenue 100% 100% 100%
Gross Margin 81% 83% 89-90%
G&A 39% 42% 8-9%
Sales and Marketing 113% 132% 45-50%
Product Development 5% 6% 7-9%
Operating Income (76%) (96%) 22-30%
Source: Deutsche Banc Alex. Brown Estimates and Company Reports
REVENUE VISIBILITY IS A HALLMARK--The Company's growing contextual career
network provides a solid recurring revenue stream. Throughout the Internet
industry other job boards (e.g., Monster.com, Career Path, Career Mosaic,
etc.) are driven by the number of ads placed (job postings). We believe
that HotJobs.com's subscription based model provides revenue visibility
that is not found in other models. Recurring revenues accounted for
approximately 70% of the Company's C2Q 1999 revenue and account for nearly
75% of our 2000 revenue forecast.
The remaining 25% is generated through Softshoe, WorkWorld and related
consulting services. We anticipate gross margin (83% in 2Q) to continue to
expand as the Company leverages its technology platform across a larger
base of member companies. We also note that the Company's Softshoe
software product carries a gross margin of 92+%, providing potential gross
margin upside, longer-term.
POTENTIAL REVENUE DRIVERS--ROOM FOR UPSIDE IN A SENSITIVE MODEL
Our revenue model is based on a bottom-up approach that assumes that the
number of subscriber accounts will continue to grow at a compound quarterly
growth rate of 24% through 2000. This is driven primarily by significant
growth in HotJobs.com's number of registered member companies (23% compound
quarterly growth rate, 1999-2000). We are conservatively projecting that
revenue per member company will remain relatively flat at $590 per month.
We believe there could be upside to this forecast given that as
relationships with existing companies mature and Internet recruiting become
ubiquitous, each recruiter is increasingly likely to purchase incremental
accounts.
The Company's Softshoe license fees of $250,000 are generally recognized
over a three-year period, with monthly hosting fees of approximately
$15,000-$20,000 recognized on an ongoing basis. We are conservatively
projecting that the Company will sign 14 Softshoe clients in 2000.
HotJobs.com's traditional job fairs (WorkWorld) garner, on average,
$250,000 of revenue per event. While the Company gains significant cross-
platform branding from WorkWorld, it carries a gross margin of
approximately 80% and could prove to be dilutive to HotJobs.com's overall
business model longer-term. As such we believe, overtime, the Company will
limit the number of WorkWorld events as not to allow WorkWorld to
materially adversely affect overall gross margins. Ramping the number of
events per year is a straight forward exercise and have relied on company
guidance for our 2000 estimate of 13 job fair events.
1999
----------------------------- 2000
1QA 2QA 3QE 4QE Total
----------------------------------------
Corporate Members 1,151 1,700 2,126 2,600 5,870
Sequential Growth 64% 48% 25% 22% NM
Accounts per Client 1.7 1.7 1.7 1.7 1.7
Subscriber Accounts 1,899 2,822 3,614 4,316 9,978
Monthly Revenue/
Member Company $590 $590 $590 $590 $590
Softshoe Licenses Sold 1 1 2 3 14
WorkWorld Shows 1 1 2 3 13
Source: Company reports and Deutsche Banc Alex. Brown
POTENTIAL UPSIDES AND CATALYST
We see five potential stock catalysts and upside drivers to our current
model and potentially the stock.
1. Revenue Upside in Core Business-We believe that as HotJobs begins to
employ its marketing resources, it could drive the number of registered job
seekers higher than we are forecasting. We anticipate that traffic metrics
will be key in attracting corporate recruiters and thus, driving revenues.
We highlight that the Company has built a critical mass of users through an
extremely low marketing budget, which to date has paled in comparison to
most other Internet franchises. For example, CareerBuilder spent roughly
$12.7 million on sales and marketing in 1998, while HotJobs.com spent a
mere $3.1 million. We anticipate the Company to spend upwards of $45
million on sales and marketing in 2000. We highlight that the disparity
between HotJobs' and CareerBuilder's marketing spending would have been
even more pronounced, however, CareerBuilder recognizes the majority of its
commission to sales people as Cost of Goods Sold.
2. Expanded Value-Added Services--These may include incremental consulting
services, Web hosting fees, and e-commerce revenue streams. Overall, we
believe there is significant upside potential for HotJobs.com as it further
expands www.hotjobs.com into a comprehensive, full service vertical
contextual network. Additionally, we believe longer-term, as the Internet
becomes a ubiquitous platform for recruiting, our Softshoe revenue
estimates could prove conservative. Currently Softshoe accounts for only
1.2% (or $475,000) of our 2000 revenue estimate of $38.0 million.
3. Rapid Employer and Job Seeker Adoption of Internet Recruiting--We
believe that because online recruiting eliminates many of the
inefficiencies associated with traditional hiring processes, mass market
acceptance could be accelerated, which should provide a tremendous growth
catalyst for HotJobs.com over a 1-3 year time frame. Early indications
reinforce this thesis: In a recent study conducted by Opinion Research
Corporation, HotJobs.com and Monster.com were the sixth and seventh most
recognized e-commerce brands on the Internet, respectively.
4. Strategic Relationships--We anticipate the Company to continue
partnering with other leading Internet franchises to develop co-branded
career content. For example, HotJobs.com entered into a co-branding
agreement with About.com to build and host job listings sites within the
About.com platform. As a result the Company received valuable advertising
inventory on About.com, which we believe serves as a cost-effective
customer acquisition mechanism. Aside from driving accelerated customer
and revenue growth, these announcements also drive brand awareness and
overall investor interest.
5. International Expansion--We anticipate that HotJobs.com will pursue a
marketing strategy that leverages the uniqueness of the Internet as a
global platform. International markets are the next major battlefield for
Internet growth and we feel there is significant opportunity abroad for the
Company to extend its services. We believe International expansion will
enable Hotjobs.com to better serve its global member companies, while
expanding its existing client base. HotJobs.com is actively building a
local sales team in Australia, and we anticipate they will launch a service
in the near term.
INVESTMENT RISKS
We believe HotJobs.com could face four primary risks: (1) the management of
hyper-growth, (2) Pricing pressure in the Interactive business from free
competitors, (3) potential change in economic markets, and (4) the
difficulty in maintaining a 100% uptime network.
We highlight the risk of operational missteps as the Company continues to
experience double-digit quarterly revenue and employee growth. The
management of hyper-growth may become increasingly difficult as the Company
plans to expand its marketing initiatives. We believe HotJobs.com's solid
management team and its combined extensive industry experience in Internet
technology and consumer industries mitigate this risk.
The hyper-growth of Internet usage coupled with the ability for new
entrants to launch e-commerce/content sites quickly and inexpensively has
created an extremely competitive environment. Over time, this competitive
landscape could result in increased customer acquisition pressures. As
such the Company may find it necessary to increase its marketing expenses
to sustain its industry position.
We note that competitors, such as TMP Worldwide (Monster.com) and the
Internet Media Networks (Yahoo!, Lycos, AOL, etc.) may have access to
capital resources not afforded HotJobs.com. Additionally, the pure number
of competitors (e.g., CareerPath, CareerBuilder, Career Mosaic,
Headhunter.net, Jobs.com and Dice.com) may make it difficult for any single
player to aggregate both dollars from recruiters, as well as consumer
attention. We believe HotJobs.com is committed to leveraging its early
successes into a more aggressive marketing campaign (both online and in
traditional media). We feel this marketing strategy, coupled with its
leading industry position and superior product offering will give
HotJobs.com the needed ammunition to remain a top this competitive online
career market.
We believe the recruiting industry, as a whole, has exposure to cyclicality
in economic markets. For example, recruitment advertising would likely be
negatively impacted if labor shortages recede in the U.S. or elsewhere in
the world. Overall, we feel that the hyper-growth of online recruiting over
the next 5 years will mask the effects of economic market changes which
would typically affect the recruiting industry. As such we are confident
in the Company's ability to sustain our forecasted growth through cyclical
downturns.
We note that the Company faces challenges in maintaining a 100% uptime
virtual career network. HotJobs' technology infrastructure serves as the
backbone for its online career network. Job seekers and corporate
recruiters rely heavily on the Company's technology to enable recruiting
process. The satisfactory performance, reliability and availability of the
Company's Web site is critical to HotJobs.com's reputation and its ability
to attract new registered users/member companies. HotJobs.com has invested
substantial resources in the development of its online career network
infrastructure and should be able to leverage this investment as the
Company scales its network to meet increasing demand for its services. We
believe the Company's redundant technology and remarkable track record in
uptime performance highlight HotJobs.com's commitment to a quality end-user
experience. We note that the Company's career network technology is well
equipped to handle HotJobs.com's forecasted hyper-growth and is designed to
handle millions of simultaneous users.
COMPETITIVE BUSINESS MODELS
We believe that HotJobs.com stock should represent a core investment
holding for investors seeking exposure to the rapidly growing online
recruiting market.
HotJobs.com most closely compares to other CCNs, such as TMP Worldwide and
Career Builder. However, we feel that HotJobs.com is unique in its peer
group because it has characteristics of a subscription media model (e.g.,
AOL), a market-based solution (e.g., eBay), and is behind the corporate
firewall (e.g., Ariba), and is well positioned as a pure-play Internet
leader.
As a leader in the online recruiting arena, HotJobs.com has only scratched
the surface of its growth potential, in our view. Furthermore, we contend
that the Company's ability to leverage its early industry position should
provide significant upside to our current forecasts. Our HotJobs.com model
is based on a long-term 90+% gross margin structure and a 22-30% operating
profit (in-line with the Internet Media Networks). Annual revenue growth
of 100+% over the next several years should be followed by a 3-5 year EPS
growth rate of equal magnitude.
MONSTER.COM---TMP Worldwide (TMP) has clearly established itself as the
benchmark for online recruiting, demonstrated by its 1.6 million resumes
(versus HotJobs' 450,000), 240,000 job postings (versus HotJobs' 50,000)
and our 2000 Interactive revenue estimate of $195 million (versus $38
million for HotJobs.com). TMP continues to reap the benefits of first
mover advantage and scale as it Interactive division recognized $1.2
million in operating profit in 2Q. TMP's Interactive division continues to
realize the fundamental cross-platform synergies of its traditional
recruiting businesses, with its impressive global sales force and extensive
client base. We highlight, however, that from a valuation and investment
perspective, TMP's overall business model differs from that of HotJobs.com:
1. TMP is not a pure-play Internet investment: Monster.com accounted for
only 17% of TMP's 2Q revenue. While we estimate TMP's Interactive division
to post annual revenue growth rates upwards of 70%, its other traditional
recruiting businesses are growing at a mere 5% per annum. Net/net, TMP's
overall valuation parameters (e.g., revenue multiple) are not comparable to
other pure-play Internet franchises.
2. TMP's risk profile hampered by its traditional businesses: As we
outlined above, the traditional recruiting industry if often affected by
cyclical and global economic factors. We feel TMP has exposure to such
market conditions, while HotJobs' hyper-growth is likely to mask affects of
economic turmoil, in our opinion.
3. Ad-based model versus recurring subscription fees: We believe TMP has
demonstrated its ability to deliver on top-line interactive growth. We
contend, however, that HotJobs' subscription fee revenue model provides
significant visibility that is not inherent in TMP's ad-based model.
HotJobs' recurring revenue stream accounts for nearly 75% of our 2000
revenue forecast.
4. Turnkey software solution: We believe, longer-term HotJobs' has the
opportunity to capture a sizeable share of the recruiting enterprise
software market. We note that TMP has not launched a product that directly
competes with Softshoe.
While TMP has built a formidable platform, we remind investors that the
online recruiting industry is NOT a zero-sum game. We believe the current
state of the online recruiting market resembles that of the Search Engine
landscape in 1996 (Yahoo!, Infoseek, Excite and Lycos). Consensus
sentiment was that the second-tier players (Lycos and Infoseek) were going
to be squeezed out of the market. History, however, has proven that hyper-
growth industries, such as Web advertising, have been able to absorb
multiple successful franchises (and investment opportunities). We believe
the online recruiting industry will prove that history repeats itself.
CAREER BUILDER---While we believe there are few similarities between the
business models of Career Builder and HotJobs.com, we feel compelled to
compare the two, as Career Builder is also a publicly traded company
focusing on online recruiting solutions:
1. HotJobs.com Scales Metrics-Career Builder, founded in 1995, had 1998
revenue of $7 million and 2Q revenue of $3.3 million. HotJobs.com, founded
in 1997, had 1998 revenue of $3.5 million and 2Q revenue of $3.8 million.
HotJobs has aggregated 1,700+ corporate clients, while Career Builder has
roughly 645. We highlight that HotJobs.com has delivered superior top-line
growth with minimal marketing spending (it spent $3.1 million in 1998 on
Sales and Marketing, while Career Builder spent $12.7 million).
2. Gross Margin Structure-Career Builder outsources 30+% of its revenue
generation to an external sales group (ADP) and in turn, pays ADP a
commission of 33-50%. This commission is recognized as Cost of Goods Sold,
and significantly dilutes gross margins to approximately 60%. HotJobs.com
posted an 83% gross margin in 2Q, ramping to 90% overtime.
3. Owning the Eyeballs-Career Builder's business model is focused on
aggregating corporate job postings and disseminating them across a core
group of affiliate network sites. As a result Career Builder has limited
connection to, or brand permission with job seekers. In contrast,
HotJobs.com's builds loyal customer relationships through its branded Web
property, which was recently recognized as the sixth most well known e-
commerce franchise on the Web (Opinion Research study cited above). |
