Excerpted from Gilford Securities analyst Ashish R. Thadhani's recent report to clients on Monster Worldwide (MWW):
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Investment Conclusion. Our Hold rating remains in effect. Based on severely curtailed demand for recruitment services in a deepening global economic downturn – compounded by the absence of aggressive cost reduction actions – we are sharply reducing our estimates: 2009 non-GAAP diluted EPS to $0.05 on revenue of $892 million (-34% YoY) from $1.20 on $1.312 billion; and 2010 non-GAAP diluted EPS to $0.25 on $877 million (-2% YoY) from $1.40 on $1.411 billion. Our model assumes continued but moderating QoQ revenue declines through 2009, followed by a stable 1H10 and gradual recovery in 2H10.
4Q08 results were ugly: revenue fell 15% QoQ (excluding the ChinaHR acquisition); non-GAAP operating margin contracted 680 bps QoQ (and 390 bps excluding ChinaHR); free cash flow turned negative, even before legal settlements; and liquid net cash stood at just $23 million. The current $992 million enterprise value translates into an unappealing 9.3x 2009E EBITDA. Notwithstanding the likelihood of short-term price weakness and a 1Q09 loss, MWW possesses massive operating leverage in a more normal environment. However, we are disturbed by the unwillingness of management to implement a deeper cost restructuring. On a sequential basis, revenue declined at a faster rate (-15% excluding ChinaHR) than non-GAAP operating expenses (-11%). Additionally, Monster plainly overpaid for ChinaHR (7x unprofitable revenue) in relation to the public valuation of profitable market leader JOBS (<1x). We also have reservations about management being incentivized with several hundred thousand shares just to undo its uninspiring performance. Recent stock awards at depressed prices will allow it to profit from prior miscues.
Quarterly Results. Non-GAAP diluted EPS of $0.24 on revenue of $290.7 million missed our $0.33 estimate on $331.4 million. Of late, we had been bracing for a shortfall. Results were adversely impacted by a currency headwind (-$0.03 per share) and consolidation of ChinaHR, which posted revenue of $11.1 million and an operating deficit of $4.9 million (-$0.03). Revenue and operating income trailed our expectation in all segments.
Takeaways. Results reflect 18% YoY revenue contraction (vs. -1% in 3Q08), a 14.3% non-GAAP operating margin (vs. 21.1%) and 21% YoY drop in deferred revenue (vs. -5%). Revenue weakness accelerated across the Careers businesses: North America (-22% YoY vs. -11% in the immediately prior period) and International (-14% vs. +17%) – while stabilizing at the Internet Advertising segment (-12% vs. -14%). Operating margin on a sequential basis dropped across-the-board: -260 bps in Careers North America, -1,070 bps in Careers International and -240 bps in the Internet Advertising segment. Excluding ChinaHR, non-GAAP operating margin fell to 17.2% despite lower variable compensation, ~100 layoffs and scaled back marketing and travel expenses.
Management noted a sharp slowdown in volume across all regions with clients becoming cautious to commit to recruiting-related outlays. Despite lower overall spending, Monster indicated increased market share at large corporate accounts. During 2008, Careers revenue rose 1% YoY vs. a 5% decline in the global online market. Monster is encouraged by initial client feedback and engagement metrics on its site relaunch. It also admitted that the original ChinaHR buy-out agreement encouraged this unit to pursue unprofitable and unsustainable growth; post-acquisition, Monster intends to improve profitability – beginning with ~300 layoffs (20% of the workforce) that should resize this business with current activity.
Excluding legal settlements, Monster generated weak CFFO of $20.7 million (or $0.17 per share) in the quarter. Major outflows comprised payments for the ChinaHR acquisition ($166.6 million), legal settlements ($35.6 million) and capital expenditures ($22.4 million). Monster exited the quarter with net cash of $113.4 million – down from $346.4 million on September 30. This figure includes illiquid auction rate securities valued at $90.3 million.
Noteworthy developments are summarized below.
In January, Monster unveiled its redesigned site across 24 countries. It promises active and passive job seekers an industry-leading career management platform – including unique career mapping and benchmarking applications – and provides employers a more efficient recruitment process. Monster launched a simultaneous global advertising campaign, including two Super Bowl spots. Monster also suffered a breach of its database. Compromised data did not include sensitive social security or financial information. Regrettably, this lapse comes despite management assurances and a $10 million remediation and security upgrade following the 2007 attack.
Non-farm payrolls fell by 524K in December and 1.5 million in 4Q08. Meanwhile, the U.S. Monster Employment Index fell 8% QoQ and 22% YoY.
In November, Monster announced a 50:50 JV with News Corporation in Australia to provide online and print recruitment services. News Corporation will bring unrivaled reach through 140 newspapers and 12 million readers each week.
To realign the cost structure with current revenue trends, Monster is completing a restructuring program that is expected to generate $150-170 million of gross savings annually. Half of this amount or $80 million will be invested back into the business to revitalize growth by way of new product development (e.g., search engine and content), upgraded technology, global branding, enhanced customer service (two new facilities) and field sales expansion (130 additions). Actions entail workforce reductions (700 positions) and streamlining of administrative functions. Anticipated net savings of $80 million translates into $0.40 per share.
Monster completed settlement of two lawsuits relating to its historical stock option practices. In 2006, Monster admitted to intentional backdating of stock option grants by former officers. The company restated cumulative 1997-2005 net income lower by $271.9 million to reflect additional non-cash stock based compensation. Founder and former Chairman/CEO Andrew McKelvey resigned from the board in October 2006 after declining to cooperate with an internal committee. In April 2007, Monster appointed Mr. Sal Iannuzzi (53) to the position of Chairman/CEO. In January 2008, Mr. McKelvey agreed to convert 4.8 million shares of super-voting stock into ordinary shares – thereby reducing his voting power from 31% to 7%.
MWW 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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Disclosure: 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.