Fitch Ratings has assigned a first-time Long-Term Issuer Default Rating (IDR) to ZipRecruiter, Inc. (ZIP) of 'B+'.

The Rating Outlook is Stable.

ZIP has quickly established itself in the online job recruiting segment, and Fitch expects it to realize continued growth in the coming years. The ratings impact approximately $750 million of debt, including unused capacity on the company's $250 million senior secured revolving facility and the proposed $500 million senior unsecured notes issuance. Fitch has also assigned an issue-level rating of 'BB-'/'RR3' to the senior unsecured notes. Proceeds from the new notes issuance is expected to be used for general corporate purposes.

Key Rating Drivers

Growth Profile: Fitch views ZIP's historic growth profile and trajectory as a credit positive, although its current size with EBITDA less than $150 million is a limiting factor for the IDR. ZIP grew meaningfully in recent years and experienced robust growth YTD coming out of the pandemic, with projected 2021 revenue of more than $700 million versus $430 million in 2019.

Fitch believes a meaningful driver of this growth was heavy media advertising spend that enabled the company to build brand awareness among U.S. consumers and employers. This spending can be seen in its sales and marketing spend, which comprised 55% of YTD 2021 revenue and 64% in 2019 (pre-pandemic). Fitch believes marketing will continue to be a key spend category to drive future growth.

Competitive Landscape: Fitch views the U.S. online job marketplace as highly competitive and fragmented, which constrains the IDR. ZIP's rapid rise in recent years to establish itself as one of the well-known online job search resources in the U.S. signals its strong execution but also signals the potential threat of competitors over time.

The threat of competition is evident in historical fundamentals of competitor online marketplace operators that faced execution challenges historically, including Monster Worldwide, Inc., CareerBuilder, among others. The company also competes with a range of alternatives 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 limits 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. Peers in the online job market segment experienced revenue declines of more than 30% during 2009 while staffing companies realized declines as high as 30%-40%. ZIP was formed in 2010, but Fitch believes the company could be meaningfully impacted during an economic correction.

Moderate Leverage: ZIP's gross debt/EBITDA in the high-3.0x range 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 gross leverage to remain in the 2.0x-3.5x range in the coming years, although M&A could be a factor over time that impacts its profile.

Solid Liquidity: Fitch expects the company should generate meaningful free cash flow in the future approaching $100 million-$200 million per year, helped by low capital intensity and working capital requirements. This should further bolster the balance sheet that should have more than $700 million of cash pro forma for the upcoming $500 million senior notes issuance. ZIP remains in the early growth stage of its lifecycle, and therefore Fitch believes the company is likely to prioritize growth spending (both organic investments and M&A) in the coming years over capital returns to shareholders.

Derivation Summary

ZIP 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 thus 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+/Stable), which operates in the same industry but with a traditional staffing business model. Relative to EmployBridge, ZIP is experiencing stronger revenue growth, has higher EBITDA margins but operates with higher gross leverage. 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

Revenue growth remains strong in the 15%-20% range through 2024.

EBITDA margins pressured in 2022 due to normalization of opex as the economic recovery continues but improves beyond due to increased revenue scale.

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

Capital allocation priorities are likely weighted toward M&A over time, although Fitch has not explicitly assumed M&A in its forecast.

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 or published 'RR' (graded from 'RR1' to 'RR6') and 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 approximately 30% below the company's adjusted EBITDA for the TTM period through September 2021 of $135 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:

Gross leverage, Fitch-defined as total debt with equity credit/Operating EBITDA, sustained below 3.5x in conjunction with EBITDA scaling to more than $200 million.

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

Gross leverage sustained above 4.5x;

Sustained deterioration in EBITDA margins to mid-teens percentage or lower;

Liquidity pressures, as reflected in FCF trending to low-single digit percentage of revenue or lower;

Deterioration in paid employers, revenues per paid employer or other key metrics, 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: ZIP has a solid liquidity position that should enable it to continue to drive growth in the years ahead. Pro forma for the proposed debt issuance, Fitch estimates the company will have approximately $700 million of cash on its balance sheet. Additionally, the company has a $250 million senior secured revolving facility in place 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) outstanding that matures in April 2026. The company also announced a $500 million senior unsecured notes issuance. The notes will mature in 2030 and proceeds will be used for general corporate purposes. Fitch believes ZIP will use the cash to further bolster its balance sheet, invest for organic growth and potentially execute on M&A over time.

Issuer Profile

ZipRecruiter grew meaningfully since its 2010 founding and established a presence in the U.S. online job search market. The company experienced solid growth prior to the COVID-19 pandemic and its growth returned in 2021 as U.S. economic activity improved.

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 our ESG Relevance Scores, visit www.fitchratings.com/esg.

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.

RATING ACTIONS

Entity / Debt

Rating

Recovery

ZipRecruiter, Inc.

LT IDR

B+

New Rating

senior unsecured

LT

BB-

New Rating

RR3

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Additional information is available on www.fitchratings.com

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