Monster Worldwide: Lowering 2009 Estimates, Staying on the Sideline

Excerpts from Gilford Securities analyst Ashish R. Thadhani's recent note to clients on Monster Worldwide (MNST):

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Investment Conclusion. Based on weak hiring activity amid a global economic slowdown and an acquisition drag – cushioned by reduced marketing & promotion spending – we are adjusting our estimates as follows: 2008 non-GAAP diluted EPS to $1.38 on revenue of $1.384 billion (+2% YoY growth) from $1.35 on revenue of $1.402 billion; and 2009 non-GAAP diluted EPS to $1.20 on revenue of $1.312 billion (-5% YoY growth) from $1.50 on revenue of $1.415 billion. We are also introducing a 2010 non-GAAP EPS estimate of $1.40 on revenue of $1.411 billion (+7% YoY growth). Our non-GAAP estimates exclude employee severance, stock option investigation, security breach and restructuring charges. At this time, we continue to anticipate a gradual resumption of organic YoY revenue growth in 3Q09. Our Hold rating remains in effect. MNST shares remain vulnerable to macro pressures despite an inexpensive valuation ($1.4 billion enterprise value translates into 1.1x 2009E revenue, 4.5x EBITDA and 11.9x non-GAAP EPS). We note that deferred revenue fell 12% QoQ. The domestic Careers segment posted a double-digit YoY revenue contraction while, on the international front (43% of total revenue), growth decelerated for the third straight quarter.

3Q08 Results. Non-GAAP diluted EPS of $0.40 vs. $0.35 a year ago on revenue of $332.2 million (-1% YoY growth) beat our $0.34 estimate on revenue of $335.9 million. Once again, results benefited from lower-than-projected marketing & promotion expenses (+$12.8 million variance or 7.1 cent EPS impact). Revenue was helped by the Internet Advertising segment (+$2.5 million variance resulting from community sites) – offset by Careers International (-$3.6 million) and North America (-$2.6 million). Operating income surpassed our expectation in the Careers International segment – but underperformed at Careers North America and Internet Advertising.

Takeaways. Results reflect -1% YoY growth (vs. +7% in 2Q08), a 21.1% non-GAAP operating margin (vs. 22.1%) and 5% YoY drop in deferred revenue (vs. +4%). Revenue slowed across the Careers businesses: North America (-11% YoY vs. -6% in the immediately prior period) and International (+17% vs. +34%) – while stabilizing at the Internet Advertising segment (-14% vs. -16%). Operating margin on a sequential basis was mixed: -780 bps in Careers North America, +80 bps in Careers International and - 30 bps in the Internet Advertising segment. Company-wide headcount rose 5% QoQ to 5,669 but revenue per employee declined 11%.

Management noted high correlation between recent financial news flow and client spending – including Europe – and severe headwinds going into the important 4Q contract renewal period; a comprehensive site re-launch in January 2009 that should spur client activity; support for future market share gains with continued hiring (even at corporations cutting overall headcount), a superior value proposition vs. print, ongoing vendor consolidation, introduction of new functionality and – if necessary – pricing flexibility; and upcoming stock purchases in the open market by CEO Iannuzzi ($1 million) and CFO Yates ($500K) along with payment of all short-term incentive compensation in the form of equity.

Monster generated strong CFFO of $91.7 million (or $0.76 per share) in the quarter. Key outflows comprised an acquisition payment ($64.6 million), stock repurchases ($41.8 million for 2.2 million shares at an average price of $19.17 each) and capital expenditures ($21.0 million). Before a $174 million payment for ChinaHR in October, Monster exited the quarter with net cash of $346.6 million – down from $396.4 million on June 30. This figure includes auction rate securities valued at $94 million. The balance is invested in U.S. treasuries, sovereign debt and bank deposits...

MNST shares are suitable for aggressive investors. In our opinion, principal risks include the following: slowdown in online help-wanted advertising; increased competition; inability to integrate acquisitions and/or translate margin potential into reality; and a correction in the Nasdaq market.

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ANALYST CERTIFICATION

I, Ashish Thadhani, certify that all the views expressed in this research report accurately reflect my personal views of the subject companies. I certify that I have not and will not receive compensation with respect to the issuance of this report.