Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) for ZipRecruiter, Inc. (ZIP) at 'B+'.

The Rating Outlook is Stable. Fitch has also affirmed the company's senior unsecured notes at 'BB-'/'RR3'.

The ratings impact approximately $800 million of debt, including unused capacity on ZIP's $250 million senior secured revolving facility. Fitch believes the company will face revenue pressures on its business in 2023 and possibly into 2024, but management appears focused on maintaining profitability and cash flows via effective cost containment.

ZIP grew meaningfully since its 2010 founding and quickly become one of the leading online marketplaces for U.S. job search. Fitch's ratings reflect the company's revenue growth trajectory, which faces near-term challenges due to slowing macro conditions; a solid margin profile; a history of positive FCF generation; and relatively low leverage. These positive factors are balanced against a competitive end market.

Key Rating Drivers

Near-Term Growth Challenges: ZIP's growth profile has historically been a credit positive, but it is currently hampered by a weaker macro landscape in the U.S. and slowing hiring conditions. ZIP grew meaningfully in recent years with revenue of $905 million in 2022, or more than 3.0x its 2017 revenue. Heavy media advertising spending enabled the company to build brand awareness among U.S. consumers and employers. Sales and marketing spend comprised 53% of 2022 revenue and 65% in 2019 (pre-pandemic). Fitch believes marketing will continue to be a key spend category to drive future growth.

EBITDA also grew meaningfully and is approaching $200 million compared to only breaking even in 2019. This small profit scale, however, is a limiting factor for the IDR. Fitch expects revenue and EBITDA growth to contract in the near term due to a weaker U.S. macro landscape and slowing hiring conditions. However, Fitch believes ZIP is solidly positioned in the industry landscape and its growth profile could improve again in-line with its historic trajectory once U.S. macro and hiring conditions stabilize.

Competitive Landscape: Fitch views the U.S. job recruitment marketplace as highly competitive and fragmented, which constrains the IDR. ZIP established itself in recent years as a well-known online U.S. job search resources, which signals its strong execution capabilities but also points to potential competitive threats over time. Other online marketplace operators faced material execution challenges historically and lost share after establishing a strong online presence, including Monster Worldwide, Inc., CareerBuilder, among others. ZIP also competes with a range of alternative solutions including recruiters, vertical-focused job sites, employer's own sites, LinkedIn, Indeed, and others.

Industry Cyclicality: Fitch views the highly cyclical nature of the staffing industry as a key credit consideration that constrains the IDR. The company could experience material negative headwinds on revenue, EBITDA and FCF in a prolonged recession given employers would meaningfully reduce jobs being advertised. ZIP expects 2023 revenue to decline 13% to 15% YoY while 1Q23 could be worse with revenue projected to decline more than 20%. Peers in online job postings experienced revenue declines of more than 30% during 2009 while staffing companies realized declines as high as 30%-40%. ZipRecruiter was formed in 2010, but Fitch believes the company could be meaningfully impacted during an economic correction.

Moderate Leverage: ZIP's debt/EBITDA near 3.0x is relatively low for the 'B+' rating category, but Fitch believes the staffing industry's cyclicality could lead to meaningfully higher leverage in a relatively short timeframe if economic conditions deteriorate. Revenue declined 14% YoY, for example, in the two quarters following the beginning of the pandemic in the U.S. EBITDA did improve materially during this period as the company reduced marketing spend, but a more prolonged economic correction could negatively impact EBITDA and pressure leverage. Fitch expects EBITDA leverage to remain in the 2.0x-3.0x range in the coming years, although M&A could be a factor over time that impacts its profile.

Solid Liquidity: Fitch expects the company will continue to generate positive free cash flow in the future, helped by low capital intensity and working capital requirements. This should further bolster the balance sheet that had $570 million of cash and investments as of YE 2022. ZIP remains in the early growth stage of its business lifecycle, and Fitch believes the company is likely to prioritize growth spending (organic investments and M&A) in the coming years. However, it has also used excess cash for share buybacks and spent $339 million on share repurchases in 2022.

Derivation Summary

ZipRecruiter competes in a large and fragmented online job search industry. Many of its primary peers including LinkedIn, Indeed, Monster, CareerBuilder and others are private or divisions of larger companies and are not rated by Fitch. Fitch considers ZIP's rating profile relative to a range of business services and technology companies in our ratings universe, comparing factors including growth, margins, business lifecycle, leverage, CF dynamics, competitive position, among others to arrive at our rating. Fitch rates industrial staffing provider EmployBridge Holding Company (B+) and healthcare staffing provider AMN Healthcare, Inc. (BB+), which each operate in recruiting but with traditional staffing business models.

Relative to EmployBridge and AMN, ZIP experienced stronger revenue growth in recent years and has higher EBITDA margins. ZIP's leverage profile is manageable for the IDR relative to peers. ZIP's strong growth and solid margins could position the IDR higher over time. However, the nascent stage of its business in a fragmented and competitive industry, its relatively small EBITDA scale, and cyclicality inherent in the recruiting industry constrains the rating to the 'B+' rating category.

Key Assumptions

Revenues are pressured in 2023 due to slower hiring trends (down low-teens percentage) but growth resumes to mid-teens in FY2024-2026.

EBITDA margins improve in 2023 as the company is expected to focus on costs/profitability, with more modest margin expansion starting in FY2024. The company has targeted EBITDA margins of more than 30% over time but will likely balance the pace of achieving this target with revenue growth.

FCF generation remains solid due to limited working capital, cash taxes and capex requirements.

Capital allocation priorities are likely weighted toward share buybacks and M&A over time. Fitch has not forecasted M&A in its it base case.

Recovery Assumptions:

For entities rated 'B+' and below, where default is closer and recovery prospects are more meaningful to investors, Fitch undertakes a tailored, or bespoke, analysis of recovery upon default for each issuance. The resulting debt instrument rating includes a Recovery Rating (RR) from 'RR1' to 'RR6' that is notched from the IDR accordingly. In this analysis, there are three steps: (i) estimating the distressed enterprise value (EV); (ii) estimating creditor claims; and (iii) distribution of value.

Fitch assumed ZIP would emerge from a default scenario under the going concern approach versus liquidation. Key assumptions used in the recovery analysis are as follows:

Fitch assumes a $95 million going concern EBITDA, which is materially below 2022 EBITDA of $185 million. This meaningful pullback could be driven by macro issues, mis-execution and/or share loss.

Fitch assumes an EV/EBITDA multiple of 6.5x upon emergence from bankruptcy. This multiple is validated based upon comparable public company trading multiples (current & historic), industry M&A, and comparable reorganization multiples Fitch has witnessed historically.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

EBITDA leverage, Fitch-defined as debt/EBITDA, sustained below 4.0x in conjunction with EBITDA scaling to sustainably above $200 million.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

EBITDA leverage sustained above 5.0x;

Sustained deterioration in EBITDA margins to mid-teens percentage or lower, signaling potential competitive and/or market pressures.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Solid Liquidity: ZipRecruiter has a solid liquidity position that should enable it to continue to drive growth in the years ahead. It held $570 million of cash and investments at YE 2022. Additionally, the company has a $250 million senior secured revolving facility in place and generates positive FCF ($126 million in FY2022) that further supports liquidity needs. Given the low capital intensity of its business and limited working capital requirements, there are limited cash flow needs beyond growth investments.

Debt Structure: The company has a relatively simple debt capital structure, with a $250 million senior secured revolving facility (undrawn currently) in place that expires in April 2026. The company also has $550 million of senior unsecured notes outstanding that mature in 2030. The senior notes bear interest of 5% per year. Fitch does not expect any material changes to the company's debt structure in the near-term, although M&A and growth investments could change this over time.

Issuer Profile

ZipRecruiter is a two-sided, online marketplace for work. The company had more than 42 million job seekers engaged on its platform in 2022 and more than 100,000 paid employers as of 4Q22. It generates revenue from employers via flat-rate pricing and performance-based pricing terms.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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