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Monster Worldwide (MNST)

Q2 2006 Earnings Conference Call

July 26, 2006 10:00 am ET

Executives

Andy McKelvey - Chairman and Chief Executive Officer

Lanny Baker - Chief Financial Officer

Bill Pastore - President and Chief Operating Officer

Steve Pogorzelski - Group President International

Doug Klinger - President of Monster North America

Bob Jones – VP, Investor Relations

Analysts

Imran Khan - JP Morgan

Jeetil Patel - Deutsche Bank

Christa Quarles - Thomas Weisel Partners

John Janedis - Wachovia

Steven Barlow - Prudential

Jeremy Davis - CSFB

Bill Morrison - JMP Securities

Mark Mahaney - Citigroup

Peter Appert - Goldman Sachs

Presentation

Operator

At this time I would like to welcome everyone to the Monster Worldwide second quarter 2006 earnings results conference call. (Operator Instructions) I would now like to turn the call over to Mr. Bob Jones, Vice President of Investor Relations.

Bob Jones

Good morning and thank you for joining us on Monster Worldwide's second quarter 2006 conference call. We will have formal remarks from Andy McKelvey, Chairman and Chief Executive Officer; and Lanny Baker, Chief Financial Officer. Bill Pastore, President and Chief Operating Officer; Steve Pogorzelski, Group President International; and Doug Klinger, President of Monster North America will join them in answering your questions following the formal remarks.

In today's news release we have reported full income statement and selected cash flow and balance sheet data for the second quarter and first half of 2006. However, we have not provided comparable figures for 2005 periods in today's release because, as disclosed earlier, the Company's previously reported financial results for 2005 and prior periods may be subject to restatement related to the Company's historical stock option granting practices and related accounting.

The review of the Company's historical options granting practices is ongoing, and the Company is not in a position to quantify the extent or magnitude of the impact, if any, on the Company's financial statements; nor is it in a position to identify the periods that would be affected. Accordingly, we are not republishing or making reference to any financial results prior to 2006 with the exception of historical period revenue.

In view of the ongoing investigation by the special committee of the Board of Directors looking into these matters, we express caution with respect to the ability to rely on historical financial statements until we can determine with greater certainty whether restatement will be required; and if so, the extent of such a restatement and the periods affected.

Finally we note that it is likely that the Company will not be in a position to file it's 10-Q for the second quarter of 2006 on a timely basis.

Before we begin, I would like to remind you that except for historical information, the statements made during this conference call constitute forward-looking statements under applicable Securities laws. Such forward-looking statements involve certain risks and uncertainties including statements regarding the Company's strategic direction, prospects, and future results.

Certain factors including factors outside of our control may cause actual results to differ materially from those contained in the forward-looking statements, including: economic and other conditions in the markets in which we operate; risks associated with acquisitions; competition; seasonality; and the other risks discussed in our Form 10-K and our files made with the SEC.

With that, I would like to turn the call over to Andy for his comments.

Andy McKelvey

Thanks, Bob and good morning all. Welcome to our second quarter 2006 conference call. We reported outstanding financial results for the quarter as we continue to lead a global expansion of the online recruitment market that is certainly still in its early stages of growth and development. So, as pleased as we are about the exceptional results we reported this morning, we are increasingly excited about the global opportunity before us.

Before I discuss the quarter's performance, I would like to comment on the ongoing review of the Company's past stock options grant practices. As you know, this review is being conducted by a committee of independent members of our Board of Directors with the assistance of outside legal counsel; therefore, we are somewhat limited in presenting and discussing historical financial results and certain balance sheet data due to the uncertainty of the eventual outcome of this review.

We recognize that trust and confidence in the management team is core to your decision to invest in Monster, and I want you to know that this team remains committed to providing accurate and transparent financial reporting and communications to our shareholders, employees, and all other stakeholders.

We are cooperating in every way possible with the reviewers and assure you we intend to diligently and thoroughly pursue this matter and update you promptly as we move towards a full resolution.

Now, on another matter, we recently added a sixth independent member to our Board of Directors with the election of Sal Iannuzzi, the President and Chief Executive Officer of Symbol Technologies which is a NYSE listed Company based in New York. Sal has extensive experience in operational and internal control areas and a proven track record in working with government agencies and regulators on a host of corporate issues. I believe Sal will make a valuable contribution to our Board and that his expertise and insight will benefit our Company, our employees, and our stockholders. I'd like to officially welcome Sal on the Board.

Our second quarter results reflect terrific execution of the strategic priorities we have in place. Our financial results and improved outlook for the balance of the year demonstrate both the consistency and the balance that we have achieved in building our business model. All of our business units -- Monster Careers North America, Careers International, internet and advertising fees, and Ad Comms North America showed higher sequential levels of performance and all contributed to our 36% revenue growth and strong earnings in the quarter.

In looking at the highlights of the quarter's performance, we further tightened our focus on Monster for the sale of Advertising Communications business in Europe. Globally, Monster International was a stand-out performer with year-over-year revenue growth of 62%. Our strategy to further monetize the vast global traffic to Monster properties also contributed to the strength in the quarter.

Our internet advertising and fees unit posted revenue growth of 46% and contributed 14% of Monster's revenue in the quarter. At the same time, we continue to invest in sales, marketing and key product areas to build market share globally and widen the gap between Monster and our online competitors which further positions our brand for sustainable long-term growth.

Finally, yesterday's announcement of our strategic alliance with Philadelphia's Hometown Newspapers and leading local online sites serving the nation's fourth-largest metropolitan market supports our commitment to expand the online recruitment market and allows us to serve more customers and job seekers effectively and efficiently.

Overall, Monster revenue grew 39% as we served a growing list of enterprise, medium, and small customers on a global basis and as demand for services increased. Our sales force has developed trusted relationships with HR recruiters and decision makers globally as we deliver quality job candidates and results, particularly in the current tight labor market.

In addition to skillfully managing a growing field and telesales force in North America, Europe and Asia, we continue to leverage our e-business channel, eCOM or Post a Job grew 39% in the quarter and now it represents almost 20% of North America's Career revenue.

Turning to the international market, we continued to make significant strides in transferring best practices across borders to take advantages of the large opportunity that the overseas online recruiting market offers.

We made the decision to aggressively increase our marketing efforts to build greater brand awareness in our top markets across Europe. The results were even better than we anticipated. Increased brand awareness contributed to higher sales productivity, leading to another quarter of exceptional revenue growth in Europe. The good news is that all regions are making solid contributions to our success.

I'm pleased to tell you that every country overseas -- that's both Europe and Asia Pacific -- delivered year-over-year organic revenue growth of at least 24% in the quarter, a terrific accomplishment in a region where relatively high unemployment still exists in major markets.

As we have said on past conference calls and investor meetings, Monster today still touches only a small number of the world's 6 billion people. Our international revenue now makes up 27% of our Monster revenue and is growing twice as fast as North America. We have no doubt that this number will continue to rise as job formation and internet usage continues to grow at even higher rates than here in North America.

We made solid progress towards centralizing key functions such as sales operations, marketing, and our e-commerce and believe that we are on target to show steady margin improvement and higher levels of profitability from international operations as the year progresses.

At the same time that we invested in key areas for the future, our operating efficiency led to market expansion and strong earnings for the quarter. Earnings from continuing operations were $0.31 a share, $0.01 better than the high end of the outlook we provided in last quarter's news release.

I'd like to expand on the important strategy and thoughts behind our alliance for the new owners of the leading daily newspapers in Philadelphia, a rich labor market that has a workforce of nearly 3 million in a large employer base in the healthcare, financial services and educational industries, to name just a few.

As you are all aware, the recruitment industry is evolving and the historic nature of help wanted advertising is experiencing dramatic changes. Change we at Monster pioneered and have promoted all along. Now that change is taking a logical next step, with many market participants evaluating their strategies and seeking to position themselves for the long term in which the Internet will become increasingly more important.

For Monster, the Philadelphia initiative is a first in terms of teaming up the local print media, but it is also very consistent with one of our longstanding strategic strategies: developing and fully leveraging multiple sales channels with the goal of expanding the market and growing Monster.

As you know, we sell through a global force and a growing outgoing telesales force and we have successfully cultivated a highly profitable self-service e-commerce channel that has helped attract thousands of new customers to Monster. Now we are further expanding our distribution capability by partnering closely with a company that has a truly outstanding local presence in a very key market.

We believe that the power of the Monster brand and the breadth of our product offering will provide the local newspaper sales force with a more effective and compelling service to offer their customers. On the Monster side, we gain immediate access to the local market, another of our top priorities as we look towards the future.

Seekers and employers too are certain to benefit from this alliance. We are excited about the partnership and will launch the new website on the 14th of August. We believe both partners will be able to increase job seekers and employer market share.

Above all, this alliance demonstrated Monster's innovation and flexibility in developing important strategic partnerships to grow our business.

Going forward, Monster is eager to expand on this model and we will be selective in signing additional alliances in this area where they make sense for Monster, for seekers, employers and most importantly, our shareholders.

As we look forward, we are optimistic and encouraged by the discussions and feedback we are receiving from our customers. We are, of course, very much aware of the concerns over the direction of the economy and it's impact on the job market. While our crystal ball is no clearer than those of economists and labor market experts, we can tell you that we continue to build our business for the long term.

We will manage the business aggressively and effectively with the goal of capturing increased market share globally but with a keen eye towards further margin expansion in meeting our profitability goals.

The secular shift to the online market is powerful and has been one of the primary drivers of our success. Behind the tight labor market, positive momentum and global job creation and enhanced mobility in the workforce, we believe we are well-positioned to deliver improved operational and financial performance over the balance of the year and far beyond.

Now, I'd like to turn the call over to Mr. Baker, our CFO.

Lanny Baker

Thank you, Andy. Monster Worldwide's strong second quarter financial results showcased the size of our market opportunity and fully displayed the growing attractiveness of the Company's business model. The second quarter results also demonstrate Monster's ability to successfully leverage unique assets and a well-established position to uncover new opportunities that will fuel sustainable growth and add to shareholder value in the long term.

Halfway through 2006, we have exceeded our growth expectations on the top and bottom lines and also in each of the key operating units within Monster. We have grown the business globally and funded increasing investments in sales channels, marketing, and new products. We're pleased to report that these initiatives are already bearing fruit.

We are successfully converting a high proportion of revenue and EBITDA into free cash flow and our balance sheet continues to grow stronger as a result; which in turn enhances Monster's competitive footing and strategic flexibility.

Looking ahead, we are encouraged by our recent momentum and the balance within the business. We're also excited about the wide range of growth opportunities that we will continue to pursue aggressively. While we are mindful of economic concerns in the U.S. and elsewhere, we now anticipate a stronger second half for Monster than we had expected previously and we have increased our full year business outlook as well.

Now, let me turn to the highlights of the second quarter which include overall revenue growth of 36% year-over-year, paved by organic revenue growth of 35% at Monster. Earnings from continuing operations were $0.31 per share, $0.01 above the upper end of our expectations despite the absence of an anticipated $0.01 earnings contribution from Ad Comms Europe.

Overseas, Monster's organic revenue growth continued a 50% year-over-year trend and margins ratcheted further upward.

Overall EBITDA margins expanded to 26% with Monster climbing to a 30% EBITDA margin in the quarter, and free cash flow was healthy, helping to lift the Company's net cash balance to $449 million at the end of the second quarter. With a solid first half in place, we're focused on finishing 2006 with a strong top and bottom line momentum while setting the stage for 2007 and beyond.

Before turning to the details of the quarter and our outlook for the remainder of the year, we have a couple housekeeping items to discuss. First, with respect to the ongoing independent review of the Company's historical stock option practices and the potential outcomes of that review, we're extremely limited in what the we can tell you at this time. As Andy has told you, we intend to fully comply with and actively assist the reviews and investigations. Our objective is to resolve the stock option matter in a comprehensive, accurate and transparent fashion and we'll push to do so promptly.

However, as our second quarter results indicate, we remain focused on running the business, innovating and investing for the long term, and we will not be distracted from the primary priority of building value through sustainable profitable growth of the Monster business.

Recognizing the limitations imposed on us by a still incomplete review and related legal considerations, we can provide the following general comments about the review. The options grant activity under consideration includes that which occurred in 1996-2002, though the effects of any restatements may also carryover to 2003-2005 when some of the options under review were potentially vesting. Accounting for the exercise of certain options could affect cash flow statements and balance sheets beyond 2005.

At this point, however, because all of the Company's outstanding stock options were vested prior to the end of 2005, we believe that any restatements to Monster's income statements, if necessary, should not extend beyond 2005 and would not have a material impact on 2006 earnings.

For this reason, we're able to report the current period income statement in normal fashion, although we presented only select cash flow statement and balance sheet information at this time.

While we cannot provide specifics related to potential financial restatements or give a clear indication of when we might be able to present these if necessary, we can share some general thoughts on the topic.

It's likely the restatement related to accounting for stock option expenses would take the form of recognizing additional non-cash compensation on the salary and related line within historical income statements, and would have the effect of decreasing the reported operating income, net income, and earnings in the Company's historical financial statements.

Additionally, income taxes and deferred taxes reported on the income statement and cash flow statement could be restated, and equity and deferred tax lines on the balance sheet could also be reclassified.

There may be additional adjustments involving items we've not considered or discussed here and this is not intended to be an exhaustive list; but rather, our intention is to shed what light we can on the possibilities if a restatement is necessary. We'll continue to proactively update you on the subject as we know more. However, for the purpose of this call and in the Q&A, we'll not be able to provide further comment on the topic and we appreciate your understanding of this situation.

Second, on May 10th, we announced the sale of the advertising and communication business in the UK, Ireland and Spain. The proceeds net of working capital and other adjustments were $42 million, of which $33 million was received in cash and $9 million was in a note now held by Monster. We recorded a $1 million after-tax loss on the transaction in the second quarter which is included along with a small operating loss from the business on the discontinued operation line in our statements.

In discussing the quarter and in our updated business outlook, we've removed the contributions of AdComms Europe. The business outlook that we provided in April for the second quarter of 2006 anticipated a contribution on the revenue line of about $14 million or $15 million and $0.01 in earnings from the unit during the second quarter.

Last, in keeping with the strategy of building out our Internet advertising and fees business and leveraging existing assets such as Monster's traffic and Fast Web's position in online education, we acquired Education.org for $21 million in April. Education.org added $1 million in revenue to Monster's Internet advertising and fees business in the quarter and we expect a revenue contribution of a little more than $5 million from this business during 2006.

Now let me explain the key trends and factors that contributed to our strong second quarter results. After adjusting for AdComms Europe, total Company revenue of $296 million was about $10 million greater than our outlook for the quarter. On a comparable basis, the Company's revenue growth rate was 36% year-over-year in the second quarter with 90% of that growth coming from organic sources excluding acquisitions and currencies.

We are very encouraged by both the pace and the quality of Monster's revenue growth in the second quarter and believe they point towards significant untapped opportunity residing within the online recruitment market worldwide.

Monster revenue increased 39% in the quarter and was about $10 million greater than we anticipated. Two-thirds of the revenue outside of Monster came from international operations and the reminder of the quarter's upside on revenue was split evenly between Internet advertising and Careers North America.

Total operating expenses rose to $233 million in the second quarter, with about $3 million to $4 million of opportunistic marketing spending above what we had originally planned for the quarter. Salary and related expenses increased to $112 million in the quarter as we added employees in sales, product development, and technology.

In tandem with these planned increases, we streamlined our operations. Operating margins and EBITDA margins continue to improve at about the same rate as in recent quarters. Operating income of $63 million was about 5% greater than we originally expected for the quarter, even without the anticipated contribution of AdComms Europe.

EBITDA was also better than we figured, as stronger profitability in Monster's international business more than offset the difference left by the AdComms divestiture.

Below the line, our 45% share of ChinaHR's net loss was $2.3 million for the quarter and earnings, as we've said, were $0.31 from continuing operations.

Focusing on Monster specifically, we saw well-balanced and strong revenue growth across North America, international and internet advertising and fees as all three units simultaneously achieved higher margins while making considerable internal investments to drive future growth.

Organic revenue growth of 35% at Monster reflects organic growth of 29% in Careers North America, 50% in Careers International, and 41% in Internet advertising and fees. The organic growth rate excludes $6 million or $7 million of a year-over-year pick up in international related to the acquisition of Jobs Korea and $1 million in Internet advertising and fees line related to Education.org.

Compared to the first quarter growth rate, the Careers businesses remained on steady and strong revenue growth trajectories in the quarter, while the organic growth rate within Internet advertising and fees accelerated by about 10 points quarter-over-quarter.

Monster's EBITDA margin was 30.1% for the second quarter with a 9.6% EBITDA margin in the Careers International unit. Given the investments we are making in this business which I'll describe further in a moment, we are very pleased with the margin performance overseas.

Monster's deferred revenue balance was $349 million at the end of the second quarter, an increase of 43% year-over-year. The strong gains in deferred revenue lent a helpful degree of visibility toward our revenue growth in the intermediate term. Year-over-year, most of the growth in deferred revenue has occurred in international where we're seeing very favorable trends in response to investments in sales and marketing overseas.

In North America, the Careers business generated $163 million in revenue and grew 29% year-over-year in the second quarter, matching the solid growth we've seen here recently.

Dissecting Monster's revenue growth in North America reveals a very well-balanced mix. Solid growth in job posting volumes complemented even stronger resume database growth in the quarter. A record number of new customers were attracted, driven primarily by the SMB segment and specifically the e-commerce channel.

E-commerce revenue growth was 1.5 times as strong of that of our other channels in the quarter, with eCOM hovering at 20% of revenue. Further progress was made penetrating accounts in the enterprise category with strong growth in the staffing channel again this quarter. Pricing appears solid across-the-board.

Finally, we're seeing healthy adoption in uptake for new products and partnerships launched this year. All in all, a healthy report on Monster's top line trends in North America during the quarter.

On the user side, Monster's audience trends were also attractive during the second quarter. Total unique visitors in North America rose about 8% year-over-year; and, as we work to deepen more of those user relationships, total My Monster accounts were up 20% year-over-year at the end of the quarter. Resume growth was even stronger in the mid-20% range.

Increasing user engagement is a key operating priority for Monster as this is the kind of job seeker activity that sets Monster apart and which supports Monster's ability to deliver quality results in ample quantity for all types of employers.

Stronger user engagement also helps support improving monetization. Careers revenue per user was up in the mid-20% range year-over-year in the second quarter and now stands at a level that we believe is more than two times the competition’s, speaking to the breadth of our products and the strength of Monster's relationship with employers and seekers.

Careers North America generated operating profit before depreciation and amortization of $62 million in the second quarter with cash flow margins improving to 37.8% for the quarter. The profitability trends at Careers North America are particularly encouraging in light of ongoing investments we're making in the business. These investments cover not only marketing and sales, where we upped ad spending by 25% year-over-year and added about 100 sales people during the quarter, but also include important investments in customer service and product development.

On the product side, in keeping with trends toward greater personalization and localization, we launched My Local Monster in June, a service for job seekers that allows registered users to easily customize the service to focus on the most relevant local areas. Users of My Local Monster are looking at significantly more pages and jobs on our site. They're more likely to apply to a job and are applying to more jobs per visit yielding a benefit for employers as well as the seeker.

In the second half, we'll introduce several enhancements to Monster's job search functionality as we actively explore new ways to categorize, index and search job-related content.

Turning to Monster's international operations, the twin engines of secular growth propelled by online migration and market share gains powered by a carefully refined blend of marketing, sales and product investments lifted revenue to $74 million in the second quarter, a 62% increase over the prior year. It was about 10% stronger than we originally anticipated.

Organic revenue growth in international was 50%, with Europe and Asia on fairly comparable top line trajectories at the moment. In particular, the Netherlands and Germany, which are already among our largest markets overseas, demonstrated outstanding revenue growth in the second quarter, better than 70% on a combined basis, highlighting the potential of all of our overseas markets as online recruitment develops more fully.

With international now generating 27% of Monster's revenue, up from 23% a year ago, these operations represent a significant and growing lever for long-term earnings and cash flow growth. The EBITDA margin in Monster's international business approached 10% in the second quarter, helped by our growing scales and the efforts we've put into building a more efficient platform in Europe. Already in the first six months of the year, we made considerable progress towards the goal of mid to high single-digit margins in international for the year.

As revenue climbed in the past year, more of that growth has dropped to the bottom line in International and we're pleased to see the growing cash flow contribution of the business.

At the same time, we are still very much in the investment mode overseas and we will aim for measured progress and margins alongside more rapid growth in revenue as we seek to widen our long-term advantage overseas.

For instance, we stepped up marketing investments in Europe, in India, and through our equity affiliate in China. We've doubled our marketing spending in Europe in the second quarter as compared to the same quarter of 2005. We'll continue to spend aggressively given the market opportunity.

The strategic and carefully executed spending we've done in Europe has been paying off and we’ve measured that for you along three dimensions:

First, we've seen accelerating growth in the basic metrics of the business since we stepped up our spending. Unique visitors and applies were up 50% year-over-year at Monster Europe in the quarter, with considerably stronger growth in job postings and resume views, indicating that our spending is attracting employers as well as seekers.

Second, that momentum in the metrics has translated into stronger revenue growth, as our organic revenue growth in Europe improved by a couple more points to 49% in the second quarter.

Third, these gains have been realized while the profitability of the business has steadily improved, as you can see in the overall margins of international. We'll continue to pursue that game plan, focusing on revenue growth and market share gains first, while keeping a close eye on the bottom line as we move forward.

Monster's newest subunit, the Internet advertising and fees business, had a stellar second quarter, highlighted by the 10 percentage point acceleration in organic revenue growth I mentioned earlier. At that rate, 41%, IAF is growing as fast as, if not a bit faster than, the overall Internet advertising market, which we believe illustrates Monster's potential to participate in the Internet's growth beyond the friendly confines of employment classified listings.

47 of the 100 leading national advertisers in the United States were active as customers during the quarter, another nice improvement from 39 of the top 100 last quarter. We are making encouraging inroads with our unique online advertising offerings and we still see considerable head room for future growth.

The IAF unit generated $38 million in revenue during the quarter with an EBITDA margin of 38%. We view these operations as a key component of our monetization strategy and will continue to invest for growth in this unit.

Ultimately, we believe the margin potential in Internet Advertising and Fees may be even greater, significantly greater, than where we are today, though we have not yet reached the point where we would prioritize margins over revenue growth in this business.

Turning to Ad Comms division, which now includes only our remaining operations in North America, revenue of $21 million in the quarter was up 9% year-over-year on a comparable basis, and slightly ahead of our expectations. Ad Comms' strategic emphasis on interactive products and services is clearly the right way to go for this business. The agency is well positioned to serve recruiters' evolving needs as more and more recruiting activity moves online. Ad Comms generated an 18% margin in the quarter as the revenue mix shifted toward higher margin interactive products and costs continued to be streamlined in the division.

Moving to the balance sheet, net cash and marketable securities of $449 million at the end of the quarter is $87 million higher than at the end of the first quarter. Solid free cash flow from the business, coupled with $33 million in cash proceeds from the sale of Ad Comms Europe and $32 million in proceeds from stock option exercises were matched against $24 million that went into acquisitions -- notably Education.org -- and $6 million that was invested in open market share repurchases during the quarter. The average price on these share repurchases was $51 per share.

Additionally, the structured share repurchase transaction we entered in the first quarter was completed in June, with Monster receiving 500,000 shares at an average price of $45.50. We still have $63 million of the original $100 million repurchase authorization available.

We made $60 million in capital expenditures in the second quarter and are on track to spend $50 million to $55 million for the full year.

Finally, the weighted average share count was 132 million for the quarter, a 7% increase year-over-year. Just over half of the increase reflects the effect of a higher average share price using the Treasury method of calculation, and the remainder came primarily from stock option exercises over the past 12 months.

Let's turn now to the business outlook. We're introducing an outlook for the third quarter of 2006 and we are updating our full year outlook. In comparing our revised outlook to the ranges provided earlier this year, it's important to remember that we have removed the Ad Comms business in Europe from the current outlook. This has the full-year effect of eliminating about $50 million to $55 million in expected revenue and $0.02 to $0.03 per share in earnings from the full-year picture.

Exclusive of that adjustment, we're raising our full year revenue and earnings per share outlook based upon the strong results of the second quarter as well as stronger than anticipated momentum going into the second half.

Starting with the third quarter, we expect total Company revenue to be between $300 million and $306 million, an increase of 33% at the midpoint of the range. For Monster, we expect third quarter revenue of $280 million to $285 million, an increase of 37% at the midpoint of the range. International and Internet advertising and fees are expected to lead the Company's revenue growth in the third quarter.

At the anticipated revenue levels, we expect overall operating and EBITDA margins to remain even or grow slightly sequentially in the third quarter. The hiring we've done in the first half, particularly in our new Tempe telesales center, will lead to higher salary and related costs in the third quarter, both in absolute terms and relative to revenue, as these new reps come up to speed. However, we've already seen strong progress in productivity in Arizona and we gain confidence from the Company's significant experience and successful track record when it comes to expanding and managing sales capacity.

Marketing expenses will continue to grow year-over-year, especially in Europe, though we currently expect some moderation relative to Monster revenue levels in the third quarter.

Below the operating line, we anticipate $3 million to $4 million in interest income in the third quarter and our tax rate should be 35%. Our share of ChinaHR's losses is expected to be slightly greater than $2 million in the third quarter. Putting the pieces together, we expect Monster Worldwide to achieve between $0.32 and $0.33 per share in earnings from continuing operations in the third quarter of 2006.

Shifting to the full year outlook, we now expect $1.175 billion to $1.2 billion in total Company revenue for 2006, which equates to better than 30% year-over-year growth at the midpoint of the range. While the divestiture of the Ad Comms Europe shaved a little off the full year total revenue outlook, the anticipated revenue growth rate for the Company has increased from what would have been a mid-20% range for the year.

Focusing on Monster, we're increasing our full-year revenue outlook to a range of $1.095 billion to $1.115 billion, up 35% year-over-year at the midpoint. Our prior revenue outlook for Monster reflected a 30% revenue growth rate for the year and the strong second quarter results coupled with the tremendous momentum we're seeing overseas, now support a more optimistic view.

We will continue to invest actively in the second half, with important projects related to Monster's technical platform, support for key partnerships, and new products in the pipeline. We also have plans to further expand our sales force and will keep the traffic and brand pressure on, with aggressive marketing spending in areas that move the needle most.

For the full year, we expect Monster's EBITDA margins to improve in all three subunits, with the greatest margin momentum in International. Monster North America is on track for high 30% EBITDA margins for the year and we remain confident of the mid to high single-digit margins in international we've discussed previously. We continue to see full-year operating margins for the Company in the low 20% range.

Interest income is now expected to be $15 million to $16 million for the year as our cash balances grow and rates move up a little. The full year tax rate should be about 35% and our share of ChinaHR's losses are expected to be about $7 million to $8 million for the year.

Combining all those pieces, we now anticipate earnings per share from continuing operations of $1.26 to $1.30 per share, slightly stronger than our prior outlook, despite the divestiture of Ad Comms in the quarter.

Long term, Monster's strategic operating and financial priorities are unchanged. Strong, primarily organic growth in the Monster business, propelled by increasing user and customer numbers; a focus on new products, partnerships, and services that add to our monetization potential and the balance of the business; and purposeful expansion of the Monster franchise on both a local and global basis.

Executed properly, with the right balances between the long term and the near term between aggressive investments and our sharp focus on increasing efficiency, we believe that our strategic and operating objectives will translate into strong and sustainable secular revenue growth, steady, consistent margin expansion, and increasingly robust free cash flow. In turn, we believe that these are the keys to realizing increased value for the Company's shareholders.

I'll turn the call now back to the Operator for your questions

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Imran Khan of JP Morgan Chase.

Imran Khan - JP Morgan

Yes, hi, Andy and Lanny. Good morning and congratulations, good quarter. A couple of questions. First, I was wondering if you can give some sense, the e-commerce business is growing very significantly and just trying to get a better sense of what kind of margins you have? Because our understanding is that the margins are higher than your traditional Monster business.

Secondly, if you look at the international business, I think you were trying to increase the sales force productivity and I had a conversation with Steve Pogorzelski about that. I was trying to get a sense, like, what kind of sales productivity you were seeing in the international market. Thanks.

Lanny Baker

Sure, Imran, on the e-commerce front, it is a very efficient channel for us. We've laid out the cost structure in the past. The big difference between the eCOM channel and the sales channel is e-commerce takes a lot of incremental marketing to attract customers, but then on the other hand, it doesn't have the same sales load.

I think on average right now, with the scale of the business, e-commerce is probably 1.5 times as productive as the other channels in the business. It doesn't serve every type of customer but it's very attractive from a profitability perspective and we're committed to continuing to grow that. I'll let Steve talk about sales productivity overseas.

Steve Pogorzelski

Imran, thanks for the question. As you know, driving sales force productivity in Europe is one of our operational priorities in 2006, and we're pleased with the performance. The sales rep productivity in Europe increased in the 30% to 33% range in the quarter, which was driven by significant increases in both transactions per rep and average order values.

Imran Khan - JP Morgan

Thank you.

Operator

Your next question comes from the line of Jeetil Patel.

Jeetil Patel - Deutsche Bank

Great. Thank you. A couple of questions. If you look at your third quarter range, it implies strong growth again continuing, maybe a bit of reacceleration. Can you just give us a sense of if there is a reacceleration in growth? It seems like it's logical it would come out of the Career and International side of the equation. Is that a safe assessment to make?

Second, your deferred revenues were up 43% year-over-year. Can you just give us a sense of maybe what that growth rate looks like, international versus domestic, so we get a better picture of how the global market is developing for you, relative to the U.S.? Thanks.

Lanny Baker

In the business outlook for the third quarter, for the total Company, we're looking at a revenue growth rate in the low 30% range and for the Monster business it's in the 36% range, so I'd characterize it as pretty consistent with the kind of growth that the Monster has been achieving.

Obviously, the U.S. business is the biggest piece at the moment, International is the one where the growth has been the strongest and we continue to expect to see stronger secular growth in that business overseas.

We've been putting at the margin probably more incremental investment dollars relative to the size of the business into the International business over the last six or 12 months, and so we're getting some very, very good growth out of that business at the moment.

The overall growth rate in deferred revenue was about 43%. That is roughly the same rate the deferred revenues were increased for the Monster business in the prior quarter and the quarter before that, so very consistent. The growth rate in deferred revenue in North America was very close to that, in the high 30s; international at a higher rate but it's off a smaller base.

Operator

(Operator Instructions) The next question comes from Christa Quarles of Thomas Weisel Partners.

Christa Quarles - Thomas Weisel Partners

Hi. I was just wondering if you could talk a little bit more about Philadelphia and the duration of the deal, how the accounting will work, in terms of when an account comes directly in through Monster versus through the Philadelphia papers?

I'm positively surprised by the strength in Ad Comms North America, particularly when you look at the help wanted declines at the papers, and I was just wondering if (a) are you seeing a softening in a macro orientation and then (b) is that accelerating the secular shift that you would normally see on an ongoing basis? Thanks.

Doug Klinger

This relationship is a long-term relationship and a pretty significant opportunity for us to overnight significantly expand our market share and, over the short term as well as long term, dramatically increase our branding presence in the Philadelphia metro area.

In terms of the accounting, I think the way to look at this kind of an opportunity for us is a way to reach the market, another distribution channel. So we would be looking at Philadelphia in terms of our historical growth rates and how much more growth we can get through leveraging a well-entrenched media partner.

So I don't think there's anything special about the accounting, we just expect to see continued revenue and profit expansion through the relationship.

Andy McKelvey

On the Ad Comms front Christa, the business has been set up a little bit differently from the typical agency and media property. Ad Comms really focuses on interactive product and services. We saw growth in the Ad Comms North America on the interactive side that is in the 30% range. The print side reflects what the overall print market does, but that business is really focused on where the market is going, where the clients needs are moving. It has continued to perform pretty well.

Operator

Your next question comes from the line of John Janedis of Wachovia Securities.

John Janedis - Wachovia

Thank you. Just as you look towards the future, when you think about international versus e-commerce or partner with newspapers, which one do you think offers really the largest opportunity that would drive revenue growth? On Philadelphia, is that something like a $50 million market? Thanks.

Andy McKelvey

Well, I'll start off by telling you that we've got 300 million people here and 1.3 billion people out there. Out there represents an awful lot more for revenue potential growth than here. It's just going to take a while.

Lanny Baker

In the Philadelphia market, I'd say that the size of that market today in terms of current revenues, you're in the right range with that number.

John Janedis - Wachovia

Okay, thank you.

Operator

Your next question come questions from Steven Barlow of Prudential.

Steven Barlow - Prudential

On Europe, could you talk about any opportunity there to raise rates as your penetration, obviously, has increased? You've done your marketing spend, what are your plans there and what have you done so far lately?

Steve Pogorzelski

We have been raising rates in Europe throughout the first and second quarters of 2006 and we're pleased with the fact that not only are we raising rates but they're able to stick within the marketplace. I think as we continue to build our brand awareness and our traffic and increase the value proposition to employers, we'll have more opportunities to raise price in the future.

The other important thing to note in Europe is generally speaking in the largest countries in which we operate, the price for a single job on Monster is significantly more than it is in the United States.

Steven Barlow - Prudential

Thank you.

Operator

Your next question comes from the line of Jeremy Davis of Credit Suisse.

Jeremy Davis - CSFB

You provided a little bit of color on the breakdown of deferred revenue growth for U.S. versus international, but just wondering if you have been getting a sense from any of your customers in the U.S. in terms of maybe a little more caution on the hiring plans for their businesses; or if there's any change in the length of the contracts that they might be willing to sign? Anything to signal that a slowdown might be imminent or if your demand is just as strong as it has been?

Doug Klinger

I think in general we're not seeing any kind of slowdown pattern in the business. Obviously, we've got economic challenges from a macro standpoint relative to interest rates and energy prices, but that's been kind of building for a while.

I think as we look at the employment market, unemployment rate in June edged down to 4.6, so that's still the main driver. Also the quit rate is at a five-year high, so we're seeing continued workforce turnover as employees are taking advantage of the tighter labor market and a lot of opportunities out there.

So I think there's obviously some macroeconomic issues out there but we're seeing continued strong demand. I think the financial health of a lot of the clients we do business with is a driver of that as well. So I think we're not seeing any significant change in the behavior of our clients.

Operator

Your next question comes from the line of Bill Morrison of JMP Securities.

Bill Morrison - JMP Securities

Hi, a couple questions. One, just wondering if you could just comment a little bit about your guidance. It looks like if you put the numbers in the middle of your range, third quarter, with the acceleration in your business this quarter, that it implies a pretty significant deceleration in the fourth quarter to get to your numbers. Just wondering if you could comment on that.

Secondly, Lanny, I was wondering if you could give us a little bit more detail on the free cash flow? If you could characterize what the net working capital to non-monetary working capital change was in the quarter; what the free cash flow actually was, I didn't hear a number.

And maybe why the CapEx leapt up to $16 million in the quarter. It looks to me like your guidance, which I think was at $40 million to $45 million, has gone up substantially? So if you could just help us understand where the investments are going. Thanks.

Lanny Baker

Sure. As you look at the outlook for the final part of the year, the law of large numbers starts to grow in. I think you can look, we had a very strong finish to 2005 and that, to some extent, is reflected in the business. I think the growth that you see moving throughout this year across our businesses remains very healthy and we feel very good going into the second half.

From a free cash flow perspective, we do not provide full cash flow statement nor specifically quantified free cash for the quarter. You can see though that our net cash position improved by $87 million and the cash generation on the business was a very important contributor to that.

The reason we have not provided the cash flow details is there could potentially be some movement in cash flow, the recognition of cash flow, between cash flow from operations and cash flow from financing activities due to the exercise of stock options and deferred tax treatment. So we're not able to provide those figures presently, so I'll kind of leave it at that.

And vis-a-vis the capital expenditures, we're spending money in Europe on a new development center. We've been investing in some software, software licenses, as we rebuild our e-commerce platform for upgrade. We have new call centers around the world that we've been investing in, so it's really a spread of things globally that we've been investing in that led to the increase in the quarter.

As the business looks like it's got more momentum and the margins look very strong, we continue to move ahead aggressively to expand the footprint and, hence, the change in the full year.

Operator

Your next question comes from the line of Mark Mahaney of Citigroup.

Mark Mahaney - Citigroup

Great. Thank you.

As you've been shedding some of the Ad Comms businesses, what's the strategic rationale for maintaining the North American Ad Comms business now?

And then, secondly, in terms some incremental or opportunistic marketing spend during the quarter, any color on where those marketing dollars went? Was it was just more to each of the channels that you use or was there any shift in the channels? Thanks.

Andy McKelvey

On the Ad Comms business, as we've said in the past, the piece that we had in Asia was fairly far flung and not that well-connected with the rest of the business. In Europe, it had a slightly different customer base and it was only in the UK that was not that great.

Here in North America, these two businesses have sort of grown up together to some extent, fed off of each other. We're reviewing it all the time. Thus far we've had the view that there's a good fit between the two businesses, but we're carefully looking at all of our assets all the time. We'll continue to review that business.

In terms of the opportunistic spending as we characterized it that we did in the quarter, it went to all the marketing channels with probably a little bit extra directed toward the online market, where you could be very tactical and you can execute very, very quickly, at least in North America.

In Europe, it probably went to a little bit more off-line media, where we're really focused on driving brand awareness.

So not any big change, just heavying up in the areas that move the needle most.

Operator

We have time for one more question. Your final question will come from Peter Appert of Goldman Sachs.

Peter Appert - Goldman Sachs

You know, Andy, you've got this love of the newspaper industry that you've expressed over the years, so I'm inspired by this deal you're doing with the folks in Philly. The question is, how important is this move? How strategic is it for you? How hard are you going to push to grow this channel? How big could this opportunity be for you?

Andy McKelvey

You notice that we have talked about the newspapers in the past. It's very difficult to answer the question. It's kind of like we're putting our toe in the water and we will see what happens. Today one newspaper is not strategic at all, but we know we're going to increase our market share substantially in Philadelphia, in the local marketplace, so we want to see what that means in terms of market share, what that means in terms of financial. Also, what, if any, additional promotional value can the enquiry give us?

So it's really the beginning of the beginning and we felt we would be remiss if we didn't work with a newspaper to see what kind of potential this might offer. It hasn't shifted overall. What we're doing is taking business away from the newspapers and that strategy certainly hasn't changed. So Philadelphia is kind of on its own and let's see what happens over the next six to 12 months. That's about the best I can answer.

Operator

We have reached the end of the allotted time for questions and answers. I will turn the call back over to Bob Jones for any closing remarks.

Bob Jones

Once again, thank you for joining us this morning. To listen to the replay of this call dial 800-642-1687. The ID number is 2261700. I encourage you to call me or Lanny at any time with any further questions. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference and you may now disconnect.

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Source: Monster Worldwide Q2 2006 Earnings Conference Call Transcript (MNST)
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