Investing.com -- S&P Global Ratings has downgraded the credit rating of Santa Monica-based ZipRecruiter Inc. to ’B’ from ’B+’ due to persistent industry headwinds. The company’s earnings have shrunk as a result of continuing softness in hiring. Increased sales and marketing investments in 2025 are projected to push leverage well above the 5x downside threshold set by S&P.

The downgrade reflects the potential for further lowering of the rating within the coming year if credit metrics remain weak and the likelihood of business recovery appears to be fading. ZipRecruiter’s revenue has continued to fall, with a 26.6% decline in 2024 and a 28.6% contraction in 2023, attributed to weak demand for online recruiting services. Despite the continued year-on-year revenue decline, the rate of decrease has been consistently moderating. S&P forecasts a further reduction of about 6% in 2025.

Projected revenue for 2025 is around $447 million, less than half the amount generated in 2022. This will limit ZipRecruiter’s ability to increase investments in sales and marketing as hiring trends improve, without significantly impacting its EBITDA margin profile. However, S&P expects that stabilizing hiring trends this year will lead to slight revenue growth by the fourth quarter, enabling sustained revenue growth through 2026.

The base case includes an increase in sales and marketing activity to capture market share, leading to EBITDA margin contracting to 6.3% in 2025, 900 basis points less than last year. S&P Global Ratings expects leverage to decrease after 2025 due to growing top line and improving profit margins, even though debt to EBITDA is expected to remain well above 5x over the next few years. Based on this sustained higher leverage, the financial risk profile has been revised to highly leveraged from aggressive.

ZipRecruiter’s revenue fluctuates with hiring levels and job openings in the U.S., where it generates most of its revenues. Falling quit rates and companies’ reluctance to ramp up hiring have led to consecutive declines in monthly hires in the U.S. since 2022. The resulting decrease in job postings has pressured ZipRecruiter’s revenue. S&P Global economists expect 2% GDP growth this year, down from 2.7% in 2024, indicating that while hiring trends are likely to stabilize, they are unlikely to recover to prior years’ elevated levels in the short term.

ZipRecruiter has a flexible cost structure, allowing it to react quickly to unexpected revenue declines. Sales and marketing represent the company’s largest operating expenses, accounting for 45.5% of total sales in 2024. These expenses can be quickly adjusted in reaction to fluctuating demand. In 2025, spending is expected to ramp up, which will pressure profit margin. However, if the hiring environment deteriorates further, management can cut back on spending to preserve margins.

ZipRecruiter’s liquidity position offsets some credit risk associated with its volatile earnings. The company reported a cash balance of $505.9 million (including marketable securities) as of Dec. 31, 2024, and maintains an undrawn $290 million revolver. Some of its cash is expected to fund share repurchases this year while it generates minimal free operating cash flow (FOCF). Despite attractive share prices that incentivize repurchases, ZipRecruiter is expected to maintain a prudent approach to utilizing its capital and will maintain significant cash reserves while pursuing a market recovery.

ZipRecruiter operates in a highly competitive industry with larger, well-capitalized peers, including Indeed and LinkedIn. Despite the competitive landscape, ZipRecruiter continues to invest in its capabilities to serve employers, including AI. Its platform offers integrations with over 180 applicant tracking systems (ATS), allowing for ease of use of its platform while its growing database of active job seekers could increase client wins over time.

The negative outlook on ZipRecruiter reflects the limited visibility of its performance over the next 12 months and the possibility of a downgrade if credit measures do not begin to improve after this year. Further declining demand for recruiting services, overinvestment in its sales and marketing efforts, or lower-than-expected revenue could further pressure earnings and cash flow generation, leading to a downgrade.

The outlook could be revised to stable if U.S. hiring trends stabilize and ZipRecruiter’s profitability and cash generation improve over time. For a stable outlook, S&P expects free operating cash flow to debt sustained above 3%, EBITDA interest coverage sustained above 1.5x, and sufficient cash and marketable securities to offset credit risk associated with further market downturns.

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