Fitch Downgrades ZipRecruiter's IDR to 'B'; Outlook Negative

Published: 2025-04-11 05:17:18 ET ZIP

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

The Rating Outlook is Negative. Fitch has also downgraded the company's senior unsecured notes to 'B' with a Recovery Rating of 'RR4' from 'BB-'/'RR3'.

The downgrade reflects Fitch's expectation that ZIP's revenue and EBITDA will continue to be pressured due to weak hiring amid a more competitive environment and deteriorating macroeconomic landscape, resulting in high leverage. Sharp revenue and EBITDA declines in 2023 and 2024 highlight higher earnings volatility than initially anticipated and suggest some market share erosion, which is also reflected in the downgrade.

The Negative Outlook reflects uncertainty surrounding the timing and pace of a demand recovery and the possibility that EBITDA generation could remain pressured for an extended period.

Key Rating Drivers

Pressured Financial Performance: ZIP's growth profile has historically been a credit positive but is now hampered by a steep reduction in demand for recruiting services, which is likely to continue given the pressured macro picture. Fitch expects revenue to contract to around $400 million in 2025 from a peak of $900 million in 2022, with EBITDA declining close to 70% over that timeframe. The sharp decline suggests higher earnings volatility than various peers in the recruiting industry and the broader staffing space.

Relative Underperformance: Fitch believes ZIP has underperformed the industry and ceded some share in 2023-2024, with public peers in the staffing and recruitment space experiencing revenue declines of 3%-18% per year compared with ZIP's mid-20% declines. The current environment underscores the negative impacts on revenue, EBITDA, and potentially FCF during periods of weak demand. ZIP's exposure to small- and medium-sized businesses increases volatility, as their staffing needs vary widely with the economic cycle.

High Leverage: Fitch forecasts EBITDA leverage to rise to the mid-teens in 2025 and 2026 from 7.1x in 2024. We expect the (CFO-Capex)/debt ratio to remain neutral, compared to 6.6% at the end of 2024. Fitch anticipates CFO less capex will be supported mainly by interest income from ZIP's large cash balance, rather than intrinsic FCF generation. Leverage metrics could improve if hiring increases, bringing paid employers back to ZIP's platforms. However, the timing and extent of recovery are uncertain, with 2025 and 2026 likely to be challenging due to a deteriorating macroeconomic landscape and intense competition.

Solid Liquidity: Fitch expects ZIP to generate neutral FCF over the next two years despite depressed hiring conditions, compared with positive FCF generation historically. This should help to maintain low net debt considering the company's cash and marketable securities balance of $506 million as of YE 2024. ZIP reduced net share buybacks to $35 million in 2024 from $137 million in 2023, and Fitch would expect the company to protect its financial position by maintaining low buyback activity in a scenario of continued weak financial performance.

Competitive Landscape: The U.S. job recruitment marketplace is highly competitive and fragmented. ZIP has established itself as a familiar online job search resource, showcasing strong execution capabilities but facing potential competitive threats. Other online marketplace operators, like Monster Worldwide, Inc. and CareerBuilder, faced execution challenges and lost share after establishing a strong presence. ZIP also competes with alternative solutions such as recruiters, vertical-focused job sites, employers' own sites, LinkedIn, Indeed and others.

Peer Analysis

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 are not rated by Fitch.

Fitch rates healthcare staffing provider AMN Healthcare, Inc. (AMN; BB/Stable), which operates in recruiting but with a traditional staffing business model as well as technology solutions provider for hospitals and other healthcare facilities.

ZIP has higher EBITDA and FCF margins than AMN under normal hiring conditions, reflecting greater operating leverage. Staffing companies derive revenue upon a pass-through spread for employees that are assigned to temporary roles, while ZIP derives its revenue from online platform fees for subscription services and performance-based job postings.

AMN has a much larger EBITDA scale, and ZIP's leverage profile is severely more pressured. Although AMN has also been affected by weak demand for recruiting services recently, Fitch expects AMN's leverage to remain within the 2.5x to 3.5x range. ZIP's rating is constrained to the 'B' category due to its early business stage in a fragmented and competitive industry, its relatively small EBITDA scale, and the recruiting industry's inherent cyclicality.

Key Assumptions

Revenues are pressured in 2025 due to slower hiring trends and macroeconomic headwinds (revenues down to around $400 million with at least roughly 55,000 average paid employers); Fitch assumes only a modest recovery in 2026 reflecting average paid employers of around 60,000 and quarterly revenue per paid employer that does not dip materially below the $1,788 generated during 2024. A more pronounced revenue acceleration occurs in 2027;

EBITDA margins decline in 2025 and 2026 to the high-single digits, with projected expansion to close to the mid-teens or higher in subsequent years;

Neutral to low-single digits positive FCF to revenues in 2025 and 2026 due to limited working capital, cash taxes and capex requirements. Margins expand to mid-single digits in 2027;

Capital allocation priorities are likely weighted toward balance sheet preservation in this scenario with moderate share buybacks. Fitch has not forecasted M&A in its it base case.

Recovery Analysis

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' (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.

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

An $85 million GC EBITDA, which is a depressed, yet realistic estimate driven by macro issues, mis-execution and/or share loss followed by corrective action.

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 & historical), industry M&A and comparable reorganization multiples Fitch has witnessed in the past.

Fully drawn $290 million revolver.

10% administrative claim.

This results in a senior unsecured notes recovery of 'RR4' and a 'B' issue-level rating, in-line with ZIP's IDR.

RATING SENSITIVITIES

Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Expectations of sustained weakness in revenue and EBITDA;

Significant decrease in cash and/or liquidity position;

Mid-cycle EBITDA leverage sustained above 5.5x;

Expectations of sustained neutral or negative FCF.

Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Mid-cycle EBITDA leverage sustained below 4.5x;

Expectations of reduced earnings volatility due to increased scale and/or strong brand recognition, leading to a more stable revenue and leverage profile throughout economic cycles.

Liquidity and Debt Structure

ZIP has a solid liquidity position. It had $506 million of cash and investments at YE 2024 and generates positive FCF ($36 million in FY24) on aggregate through the cycle. Additionally, the company has $287 million available to be drawn under a senior secured revolving facility.

The company has a relatively simple debt capital structure, with $550 million of senior unsecured notes outstanding that mature in 2030 and a $290 million senior secured revolving facility that matures in April 2026 and is undrawn. The senior notes bear interest of 5% per year. EBITDA leverage was 7.1x as of year-end 2024.

Issuer Profile

ZipRecruiter is a two-sided, online marketplace for work. The company had more than 57,000 paid employers as of 4Q24. It generates revenue from employers largely via flat-rate pricing but also performance-based pricing terms (e.g., cost per click).

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.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.