Description

DICE runs a profitable subscription-based recruitment website for IT professionals. In December 2000, the company got rid of its “content” business, which, not surprisingly, bled cash: the content business had a negative EBITDA of ($17.6MM) on revenues of $24MM. The remaining business, Dice.com, is a gem: it is one of the top IT recruitment websites and has been profitable for several years. Dice.com represents 90% of the company’s revenues. Another 10% of revenues comes from the company’s MeasureUp service which provides online IT certification preparation and assessment solutions. To reflect its new focus on the online recruitment business, the company recently changed its name from Earthweb Inc. to Dice Inc.

The play is in the company’s grossly undervalued convertible bonds. The bonds trade at 38 cents on the dollar with a current yield of 18.5% and a YTM of about 43%. They have a coupon of 7.0%, mature in January 2005, and are unsecured. The company’s predecessor, Earthweb, issued $80MM of the convertible bonds to finance its hodgepodge of acquisitions when its stock was flying high on the back of the dotcom bubble. Each $1,000 face value bond is convertible into 25.6 shares at $39.10 per share, so the conversion feature is worthless.

Shown below are Q400, Q101, and management’s estimated 2001 results. The Q400 results are adjusted to exclude the divested content business.

(In Millions) Q400 Q101 2001E
Revenue 16.3 17.1 68
EBITDA 5.2 2.1 7.0
EBITA 4.8 1.7 5.4
Cash 33
Senior Debt 0
Conv. Bonds, Mkt. Value 30.4
Conv. Bonds, Face Value 80.0
Operating Assets 25
Return on Op. Assets 22%

Revenues for Q101 increased by 5% over Q400, but quarterly EBITDA declined to $2.1MM from $5.2MM because of a substantial increase in selling and marketing expenses. The increased marketing is targeted primarily at gaining more “enterprise customers” who sign company-wide contracts. The company began targeting enterprise customers in earnest in Q101 and did sign up new enterprise clients such as Lockheed Martin and America Online. But the increase in the number of enterprise clients was offset by a decrease in the number of other clients, resulting in zero growth in the overall customer base in Q101 (after growing nicely in the previous four quarters).

Management estimates 2001 revenues at $68MM (representing growth of 35% over 2000 revenues) and EBITDA at $7MM-8MM. The estimate of EBITDA factors in a doubling of sales and marketing expenses from 2000 levels. I expect that EBITDA in 2002 and beyond will be significantly higher than estimated 2001 EBITDA as sales and marketing expenses “normalize”. Note that before the increased marketing expenses kicked in, Dice had annualized Q400 EBITDA of $20.8MM on sales of $65.2MM, for an EBITDA margin of 32% and a Return on Operating Assets (EBITA / Operating Assets) of 77%.

No matter, let’s be conservative and use the low end of management’s 2001 EBITDA range of $7MM-8MM to value the bonds. Applying an EV/EBITDA multiple of 6.0X to EBITDA of $7MM, and adding the estimated end-2001 cash balance of $33MM, we arrive at an EV of $75MM. Since there is no senior debt, the EV of $75MM translates into a bond price of 94 cents on the dollar.

Two competitors, Hotjobs.com (HOTJ) and Headhunter.net (HHNT), are losing money even at the EBITDA line, but have EV/Sales multiples of 2.3X and 1.3X, respectively. Applying an EV/Sales multiple of only 1.0X to Dice’s estimated 2001 sales of $68MM, and adding cash, we get an EV of $101MM and a bond price of 100 cents on the dollar.

So, looking up, the convertible bonds could deliver a 150% return while providing a current yield of 18.5%. Looking down, the company’s cash hoard and zero senior debt provide a nice cushion. At their current price of 38 cents on the dollar, the bonds trade near liquidation value.

Risks: The bonds are not liquid. The company is ratcheting up marketing expenses despite the IT slowdown. Dice may be tempted to make stupid acquisitions with the cash sitting on its balance sheet. The company replaced its auditing firm in April 2001 (but the company’s former auditors did provide a clean bill of health stating there were no disagreements between itself and the company.)

Catalyst

Catalysts: Recent sale of the lousy content business. New CEO recruited in April 2001. Potential buyout: as a profitable pure-play online recruiter, Dice should be a good acquisition candidate for the likes of a monster.com (which has been on an acquisition rampage) or for a bricks-and-mortar staffing company that wants to build an online presence.