Thursday, May 23, 2013

Professional Diversity Network ( Nasdaq - IPDN )

Professional Diversity Network (IPDN $5.00) is a leading provider of Internet based employment services.  The company specializes on Hispanic and African-American recruiting.  Less trafficked websites serve women, gay, military veterans, and disabled job candidates.   Organizations that seek to hire minority workers pay Professional Diversity annual fees to post their offerings on those sites.  Those deals also allow the organizations to search the company's resume database to find people with particular skills and backgrounds.  A variety of technical services are provided, as well, both for the hiring organizations and the more than 2.5 million job seekers that use the company's websites.  Revenues are augmented by advertising, primarily by on-line education provider Apollo Group.

A cushy deal with Monster recently was terminated by the company, allowing it to address a substantially larger potential market.  The on-line diversity recruiting industry is estimated to be $250-$500 million annually in the United States.  Demand is growing in response to greater regulatory requirements.  Federal hiring practices require "good faith" diversity hiring efforts.  Federal contractors are subject to similar rules.  Natural demand is expanding, moreover, as the U.S. population becomes more diverse.  Consumer oriented companies in particular need that expertise to serve increasingly complex markets.  The poor economy is dampening volume at present.  Still, many companies are expanding their diversity efforts to comply with stricter government regulations, bolstering the segment's growth beyond the pace of new hiring overall.

The Monster deal paid Professional Diversity $4.0 million a year as a fixed fee.  Monster did all the sales and marketing work under an exclusive contract with the company.  Professional Diversity handled the technical operations.  The company earned additional advertising income from Apollo Group.  That relationship has continued.  Apollo advertises on the company's websites, driving job seekers to its career development educational offerings.  Professional Diversity decided to end its relationship with Monster in 2012.  It's initial plan was to establish a direct sales force of its own and retain all of the income generated.  Its confidentiality agreement prevents the company from revealing how much was being left on the table with its Monster contract.  Professional Diversity has indicated, though, that the incremental amount was considerable.

A high potential deal with Linked-In was initiated in January, 2013.  Professional Diversity was approached by the social networking giant last fall.  Linked-In has become the largest job recruiting service in the country over the past few years.  But it doesn't have a specific application for diversity hiring.  Under the Linked-In deal Professional Diversity will receive $2.0 million a year in guaranteed payments plus additional fees based on volume.  The guaranteed payment covers the first $10 million of sales generated by Linked-In.  Anything above that produces an additional 20% commission to the company.  (Above $50 million that rate declines to 15%.)  Linked-In was given a restricted list of 1,000 customers that it has exclusive rights to.  About 200 of the Fortune 500 companies are on that list.  The remainder of the market is available for Professional Diversity to address directly with its own sales force.

Reported results will decline in 2013 during the transition.  Commission payments from Linked-In are deferred 60-150 days under the contract, except for the $500,000 per quarter guarantee.  The two companies sum up Linked-In's sales performance 60 days after the close of each quarter and settle any commissions due at that point.  Professional Diversity's own sales are deferred for accounting purposes, as well.  Most contracts are prepaid, non-cancelable, and extend for twelve months.  But revenues are recognized one month at a time, pushing income into the future.  Expenses are written off as incurred.  The sales cycle tends to be lengthy, moreover, due to all the bureaucratic and compliance factors involved.  Orders also tend to be seasonal, with the greatest activity occurring in Q3 and Q4.  We estimate Professional Diversity will incur a modest loss in 2013 as Linked-In and the company's internal sales force (21 people) build momentum.

Profitability is likely to climb rapidly as volume improves.  In 2014 we estimate revenue will triple to $15 million to produce fully taxed earnings of $.30 a share.  Margins probably will remain below potential as the technology is built out and sales and marketing costs keep rising.  In 2-3 years sales could attain $30-$45 million.  Payments from Linked-In are likely to cover Professional Diversity's entire cost structure, allowing overall margins (pretax) to advance into the 25%-33% range.  Fully taxed income could reach $.75-$1.50 a share.  Applying a P/E multiple of 20x to the midpoint suggests a target price of $22.50 a share, potential appreciation of 350% from the current quote.

 
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