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Monster Worldwide, Inc. (NYSE:MWW)

Q3 2009 Earnings Call

October 29, 2009 8:30 am ET

Executives

Robert Jones - Investor Relations

Salvatore Iannuzzi - Chairman of the Board, President & Chief Executive Officer

Timothy T. Yates - Chief Financial Officer, EVP & Director

Darko Dejanovic - EVP, Global Chief Information Office & Head of Product

Mark Stoever - EVP, Internet Advertising & Fees

James M. Langrock - Senior VP Finance and Chief Accounting Officer

Ted Gilvar - EVP, Global Marketing Officer

Art O'Donnell - EVP, Global Customer Service

Lise Poulos - EVP, Chief Administrative Officer

Analysts

Tobey Sommer - Suntrust Robinson Humphrey

James Janesky - Stifel, Nicolaus & Co.

[Unidentified Analyst] - [Unidentified Firm]

John Janedis - Wells Fargo Securities, LLC

[Unidentified Analyst] - [Unidentified Firm]

John Blackledge - Credit Suisse

Matt Chesler - Deutsche Bank Securities

Robert Jones

Good morning and welcome to Monster's 2009 Investment Community Meeting. I'm Bob Jones, head of Investor Relations.

We're extremely pleased that you can join us today. You will find an agenda at your place for those in the room, and an agenda is posted on the IR website for those joining us via the webcast.

As you can see, we will end the day with lunch, which will be in the back of the room. We've built in time for Q&A following the early and midmorning presentations as well as lunch. We encourage you to meet and speak with the Monster executive and senior team members here today.

Before we begin the meeting with a discussion of our third quarter financial results, which were announced earlier this morning, I'd like to remind you that except for historical information the statements made during this meeting 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 the risks discussed in our Form 10-K and our other filings made with the Securities and Exchange Commission.

With that, I'd like to ask Sal Iannuzzi, Chairman, Chief Executive and President, to come up and begin the meeting. Sal?

Salvatore Iannuzzi

Good morning, everyone. Thank you very much for coming this morning and giving us a chance to tell you about the third quarter as well as our products, new products and what's going on at Monster.

Today after two and a half years - it's just about two and a half years since I arrived at Monster - we're going to show you why we can truly say it's a brand-new Monster. The last two and a half years have been centered on rebuilding the company and pulling it ahead of its competition. I think with what we've got to show you today, some of the things you've seen before, some of what you'll be seeing, some of you, for the first time, I think we'll be able to prove that this really is a new company.

What you're going to see today - and I'd appreciate it if, as I call out the presenters, if you'd stand up so people know who you are - first what we're going to do is go through Q3. I'll give you some very brief comments. Tim Yates, our CFO, will go into more detail, particularly as to the numbers. This is a big day for Tim. It's a bit of a homecoming. He remembers this building at its opening in 1905. But it was actually 1955 that he remembers, but that's another issue. So Tim and I and then the rest of the team will do a Q&A with regard to Q3.

Then what we plan to do is have Louis - would you please stand, Louis Gagnon - is going to bring us through our new seeker products and our new employer products and give you some color on that. Some of it you've seen; some of it you haven't. And he'll bring you through that piece.

Ted Gilvar is our head of marketing, our CMO. Ted's going to bring you through how we plan to drive through audience. He's going to bring you through our Affinity sites, our networking capability, and career-based media capabilities that we've been building.

The highlight of today follows, where we have Earl and Jeff. Earl and Jeff are the founders of Trovix, and they're going to tell you a little bit about how this technology was created and then Darko will come up and show you how it works, give you some demonstrations, show you some testimonials from customers as well as a very prominent industry analyst and what they believe the product can do and why so far pretty much every customer that's seen it has viewed it as revolutionary in the field. So Darko will do that.

I'm crossing my fingers for his sake, for my sake, that the demonstrations work. I'd be really pissed off - excuse me, I didn't say that - if they don't. But I think you'll like what you see. My lawyer is looking at me right now saying, "I'm not sure you should have said that," but what the heck? That's why we pay him the big dollars so he can sweat a little bit when I'm up here talking.

Then we're going to have Andrea - where's Andrea - and Steve, Steve Cooker. They're going to talk about our go-to-market strategy, give you a little bit of preview into how we plan on selling, what our reach is, particularly here in North America and in Europe.

You'll notice last time we were here that Rob [Brower] was here representing part of Europe. Recently we had a reorganization. Andrea now runs what I would call traditional Europe, Germany on west, and Rob has taken on new responsibility for developing markets. He's looking after easternmost Europe, Russia and Latin America. We feel that there's huge opportunity in those places and it needs more seasoned management to get involved and exploit those opportunities as much as possible.

I don't want to forget our leadership in Asia, Sanjay running India, Ed Lo, China, and [inaudible] in Korea and Singapore, Malaysia and elsewhere. They are not part of this conversation this morning because really we want to save as much time as possible to talk about the new products and the innovation that we're delivering. They of course will be part of future conferences and discussions that we have. But please don't view that as a lack of interest in Asia; just the opposite. Asia is extremely critical to us. We think it's the single biggest avenue of geographic growth that Monster has in the future, and we are spending a lot of time and a lot of effort in making sure that we exploit those opportunities.

Before I continue, I said before it's a new Monster. The people I want to thank for that and the hard work that's gone on for the past two plus years now are all the associates at Monster, our customers, and of course our investors for having the patience of listening to us talk about why we needed to invest so heavily and do the things that we've been doing. And I think hopefully you'll agree that the investment dollars that we've made are paying off.

So not to waste too much time, why don't we get right into Q3 and let me talk about what we're seeing and what we think is going on.

First of all, the economy. The economy in the United States, North America, Europe remains relatively - I would call it almost flat to Q2 at this point. I think we've seen the bottom. The good news is that the mood, both in North America and in Europe, is much brighter today than it was a year ago. I'm sure that comes through as no surprise to any of you. Things were pretty dark this time last year. That has not yet materialized into employment and to company's [break in audio]. They are being selective. They're filling jobs. We did have over $200 million of revenue, so people are recruiting. They're just not recruiting at normal levels.

We have not seen clear direction of an upswing at this point, both in North America and in Europe. There's a lot of caution out there. Companies are waiting to see. The talk is much more optimistic. There's much more talk about projects, about companies taking new directions and needing talent, but it simply has not yet materialized into recruitment.

The good news is that things have sort of flattened out at this point. It goes up and down a point or two, but we're not seeing the dramatic decreases that we saw previously.

Asia is a slightly different story. India and China appear to be rebounding at this point. There is significant activity, particularly in China. A lot of government money going into particularly the south and the western side of China at this point; again, manufacturing production going again. I would say that the economies there, particularly again in China, has stabilized if not on somewhat of an uptick. And now we've seen that for two quarters, so it's not just based on a week or two's results.

The bright story in Asia certainly for us is Korea. Korea is on a definite upswing. There is just no doubt about it. They have not just stabilized but they're starting to return, not quite but closer, to levels before the recession. Now Korea is not a huge part of Monster, so I don't want to get anybody's hopes up that you're going to see significant improvements in our results because of Korea. But it is an indication, given what Korea means to the world and what it does in terms of production, etc., that there are some signs of improvement out there.

We plan to continue to make aggressive investments. Why? Because we simply think it's the right thing for the longer term. We think that those investments - I hope you'll agree based on what you'll see today - that those investments are being extremely well executed. We're getting value for our dollar. We're not just spending money and some of it's going into a dark hole. We're watching every single dollar and getting results for those dollars. I can honestly say after two years - and I hope I don't jinx us - that everything we've tried to do, every project we've entered into, we've succeeded where we haven't had a major failure of any kind that dollars have been lost. And, believe me, we plan to continue that record.

We think it's the right thing to do. As the economy improves we will reap the benefits. We are the only company - and you'll hear me say this several times today - we are the only company that has the innovation that this one has, the reach, the geographic reach of this company. There's absolutely no one else in the world in our business, in our industry, that has the reach Monster has, and we plan to capitalize on that.

In the interim - and we're not just waiting for the recovery - we're using [break in audio] we're using the progress we've made, the improvements we've made in the company to move forward, to grab market share. And I think we have a very compelling value proposition for our customers that are going to allow us to do that. We're starting to see signs of it already. We've talked about it the last quarter or two. But now with the introduction of Trovix, I think that will accelerate and accelerate at a much more rapid rate.

When the economy turns - plus and you add to it a market share increase - I think we will present you with very pleasant returns. That's the best way that I can say it at this point.

What's our methodology? What are we planning to do? We're going to maintain the same strong financial discipline that we've maintained the past year plus. We're going to watch every sale and try to grab every sale we can possibly get. At the same time we're going to watch every nickel we spend, pure and simple. Everything from the most mundane item we purchase to buying technology or technology licensing, premises - you name it, we watch it. Headcount, I can tell you I think if you talk to any of our managers, our senior managers, here today you'll see that we've been watching headcount very, very closely. Some will argue that maybe we're watching it a little too closely. But that's okay. I'd rather have it that way.

We won't compromise the long term of this company. We think that the proposition that we can bring to the market - and we're convinced of it now with what we've been able to accomplish so far - it would be foolish. We'd really be fools to shortchange to produce a couple of quarters that give you results that are a surprise or better than expected and compromise the longer term. We think that that's just not who we are as a management team and certainly not the right thing for us to do.

We will maintain our balance sheet. We realize that a big part of our strength is our cash position. We do not intend to compromise it. Every month that goes by, the strength of this company increases in terms of innovation and the improvements we've made to the core. Every month that goes by that we keep those investments going, the company gets stronger.

If in 2010 we have a rebound - and I'm talking about a negative rebound, that the economy takes another turn; I'm sure all of you have read is there a second wave to this, what will happen next, we all know that 2010 is not clear what the economy will do - if we see a significant downturn that we think will be protracted, we are prepared to take action to deal with it. We will not compromise our financial position.

Having said that, that will mean compromising some of those investments, but we will be doing it from a position of strength. We will be doing it from a position that we've been investing for over two years. We've built a lot. And the competition is going to have a very hard time catching up. The things that we've done have cost significant amounts of money and they've cost significant amounts of time. They are not the kinds of things that other competitors can catch up in six months. That's just not what we've built. So we will feel safer. The more time goes on, we're able to continue what we're doing, the safer we'll feel in doing that.

So we're ready. We have plans. If things get worse, we will react, but we don't want to be too quick on that and compromise the momentum that we've built thus far. We really believe that would be a mistake. And you'll hear that theme, I'm sure, from Tim. You'll hear it from me later on today. And I think you'll hear it in a lot of things that the presenters will have to say.

So with that I'm going to turn you over to Tim Yates, and I'll talk to you in a little bit.

Timothy T. Yates

Thank you, Sal, and I'd also like to welcome you all to our meeting. I do note some no-shows, particularly from our New York contingent. The only thing I can guess is they're so upset with the loss of the Yankees last night they couldn't get out of bed this morning.

When I started in the business in 1905 - at that time it wasn't - but this is the banking floor of the Public National Bank, which was acquired by Bankers Trust Company in 1955. I spent 25 years, a few years longer than Sal, at Bankers Trust Company. But back when I started in '05 there were teledesks over here, so it was a little different.

Now normally we work off of a script. Today we're working off of slides, and those slides will be posted on the Internet later today. We always do have Bob getting questions about what did Tim say anyway so, since they'll be in writing up here, hopefully it'll be clearer.

We will, however, follow the same order as in our prior calls. We will first walk through our pro forma income statement, then we will highlight the adjustments which reconcile to the GAAP results. We will discuss our operating expense performance during the quarter. We'll briefly cover the results of our operating segments, comment on our balance sheet and liquidity positions, and we'll end with some comments on the fourth quarter of 2009 and provide preliminary context and thoughts for 2010.

Now in each section as I go through this, these are the highlighted line items from the pro forma income statement. And as I go through the [inaudible] slides, I'll highlight the areas that I'm talking about, as you can see.

So turning to revenue, revenue of $250 million was in line with expectations, a 4% sequential decrease and a 35% year-over-year decrease. Revenue and new business activity continue to show signs of bottoming, but our revenue continues to be challenged by the global economy and job market and by a reduction in deferred revenue coming into the quarter.

We did experience an increase in sales during the quarter on a sequential basis.

We have a number of new folk to the Monster story today, so I just want to clarify that throughout this I'm going to be making a differentiation between sales and revenue in our parlance. Just to give a description of that, many clients sign annual contracts for packages of job postings or licenses to job resume database, an annual contract. Some pay upfront; some pay in installments. The contracts typically have no usage restrictions in them. The amount is owed regardless of the usage.

So to illustrate the difference between sales and revenue, assume a client signs a $100,000 annual contract in December. We would refer to that $100,000 as sales during the period. The revenue, on the other hand, is recognized in the case of job postings based on historic usage and on resume database annually equally over the life of the contract. So were a contract signed on December 1, slightly more than a twelfth of that would be recognized in the fourth quarter.

So when I talk about sales picking up a little bit in this quarter, that's what I'm referring to as opposed to revenue.

Expenses were somewhat lower than expectation as a result of continued tight control of operating expense, as Sal has mentioned, and pro forma net income was $1.7 million. As a result, pro forma earnings per share were $0.01 per share.

EBITDA during the quarter was $31 million and our strong liquidity position was maintained.

During the quarter currency negatively impacted our revenue by $7.4 million, largely coming out of Europe, representing a 2.2% reduction in revenue. As an offset, operating expenses were benefited by $6.5 million of currency.

Interest and other during the quarter was flat versus a profit of $5.3 million in Q3 of '08, reflecting the company's lower average cash balance and our continued conservative decisions on the management of our liquidity and our availability - access to liquidity.

Our joint venture with News Corp. in CareerOne Australia had a loss in equity interest in the quarter of $1 million. The joint venture is performing quite well. The new Monster CareerOne site has been launched, and we have overtaken the number two player in the market, MyCareer, and we are beginning to provide real competition to SEEK in that market.

Now there's a lot going on this quarter in the GAAP to non-GAAP reconciliation. This is the overview, and I'm going to go through them one by one.

We've got a $600,000 charge in revenue resulting from the purchase accounting for China HR. Fortunately, this is the last quarter we will have that item. It's run off now.

We had a $5.9 million charge reflected in the salary and related line representing the cost associated with the one-time reduction in technology staffing primarily, coincident with the opening of our Cambridge Center of Excellence, and there are a few other targeted area of headcount reduction.

We have a $6.9 million benefit resulting from the reversal of prior accruals driven primarily from the final settlement of the ERISA case. This ERISA settlement puts behind us all the litigation against the company resulting from the historic stock option backdating issues. It's finished. As of the end of the second quarter, the only remaining open item was our litigation against a former officer, which was settled early in the fourth quarter and will result in a mid seven-figure gain in Q4. And that's cash, as well.

We had a $1.3 million charge primarily resulting from further facilities consolidation.

And adding all of those puts and takes together amounted to a $900,000 charge in the quarter.

On the tax line, we had a $32 million benefit reflecting the reversal of tax reserves previously established, and all of that results in GAAP earnings per share of $0.27.

Now turning to comments on our expense profile - again, this is the overall slide - total operating expenses of $211 million were 2% lower sequentially and 19% lower year-over-year, reflecting our continuing commitment to keep the expenses under control.

Salary and related expenses were 5.8% lower sequentially, representing an approximately 200-person headcount reduction and lower commissions.

Marketing and office in general were both slightly higher sequentially. The combined increase in those two line items were $1.7 million during the quarter.

Organic headcount excludes the acquisition of China HR and Trovix. Year-over-year organic operating expense had been resulted by close to $60 million on a quarterly basis while organic headcount has been resulted by 1,000 heads or 17%. And all of this $60 million of organic expense control has been accomplished at the time when the company has been making the significant investments you will see here today - the new and more engaged seeker site, our new Affinity professional communities, power resume search, important geographic expansions in China and Australia, an increased commitment to our field sales force, and all of this is supported by a global customer service organization and infrastructure.

Turning now to our operating segments, sequentially revenue for both the North America and International segments were down in mid single digits, again reflecting the weak global economy. Within this, as Sal noted, we had relatively stronger performance in the Asia Pacific region.

In terms of the operating income and operating margin, there's really nothing material going on in these. They reflect the overall reduction in revenue and our companywide expense controls, so there's nothing significant to call out from a trend point of view.

IAF revenue was up 6% second quarter. The IAF business continues to rebuild. During the quarter we experienced relatively strong performance in lead generation, which was up 9% on a sequential basis. The operating segment had an 18.8% operating margin.

Our corporate expenses during the quarter were up slightly, about $1 million.

Now turning to the balance sheet and cash flow, net cash and marketable securities at $234 million were essentially flat sequentially. This reflected GAAP EBITDA of $30.5 million, $11.8 million cash provided by operations, offset by capital expenditures of $12 million. Deferred revenue was $266 million, down from $290 million, which is a continuing decrease in the percentage decline of deferred, again reflecting a bottoming of our business.

During the quarter in order to ensure that the company had full access to an unquestioned level of liquidity and Sal has stressed that, we did take down a new $50 million revolving credit and we amended at the same time as taking down the term loan fully repaid the $250 million revolving credit. That gives us complete access to the facility under our current planning scenarios. It's important to point out that we do not have a near-term usage for that credit, but because of the uncertain environment we were willing to pay the increased cost of that to have the insurance and the optionality that it provides. Thus total liquidity, which is the unused credit plus our net cash, at the end of the quarter was $532 million.

So summarizing where we are now and how we're looking at Q4, we'd like to make the following comments:

We do have continued signs of bottoming in our business. Sales, as I noted, in Q3 are up from Q2. New job postings in the U.S. are up slightly sequentially, and that's true also in other countries around the world. Yet the recovery is tentative; lots of uncertainty out there. Our own employment index, while it stopped declining, has not really shown a substantial pickup. One month it's up 1, then it's down. So there's not a significant uptick at this juncture.

We come into the quarter with a lower level of deferred revenue - $265 million versus second quarter end of $289 million. We do expect and it normally is a strong renewal season in Q4, new business opportunity as well, and we're combining that with the momentum which is building around the power resume launch. That activity we expect at this time to largely offset the reduction in deferred coming into the quarter. Of course, the timing of when businesses book during the quarter will have an impact on that.

So putting those factors together, we expect Q4 revenue to be slightly down to flat.

Expenses in the quarter will continue under tight control, but on the margin. We will start to spend a bit more surrounding the launch of power resume search.

On the equity income line, we would expect CareerOne to perform consistent with prior quarters.

And interest and other, reflecting the increased cost of the credit facility, would be between zero and a loss of $1 million.

So putting those factors together and reiterating what I said, sequential revenue is expected to be slightly down to flat and operating expenses to be flat to slightly up. Based on that scenario, we project our cash balance to be up from current levels at year end.

Before moving on to question and answers and then to the main part of today's program, we just want to provide some context and share some comments on how we think about the opportunity for the business in 2010.

At a high level, the total talent acquisition Internet advertising markets are large, fragmented and will recover, yet the timing of the recovery is uncertain. That's particularly true surround the job market. Monster is well positioned to gain market share and you'll see what goes into that commitment and conviction today, and our value proposition for our clients is substantially enhanced.

Stressing the fact that the markets we serve are large and fragmented, I'm going to walk through this slide because there's a lot of information on it. It's the same slide as we showed in last year's conference but updated.

It's the online recruitment market - this says based on our estimates - but the market in 2009 is $2.4 million, which is a 40% decrease year-over-year - it's the global slide - of which Monster has a 30.8% share. Offline recruiting is down 45%. The combination of the online and offline market is the sum of the two. Then over here to the right, the nearest adjacent market to us is staffing and other - that's business which is not done in the advertising market but done through staffing companies. That sums to the total talent acquisition market. And then Internet advertising is a large market.

So the global online and offline market we estimate at $7 billion. And let me just do the comparable numbers here. We're showing Monster's estimated market share of 10.6%. The comparable number we gave you last year was 10%. We're showing 30.8% here. The comparable number we used last year was 28% global market share. This information is based on revenue.

And that's an important point because, when people talk about market share in the industry, they use different metrics. Some use sales; some use posting. We have been looking at market share as global revenue. That in itself is not a precise science. We do two or three different exercise to triangulate. This is a top down model-based exercise which over time has been accurate. We do it from a bottom up basis, testing each deal that comes through and how we're doing against the competition. And based on all of that triangulation - I wouldn't hold it to the last decimal point here - but we're comfortable that we are in fact gaining share, particularly in our core market.

So at last year's meeting, in addition to all the effort we're putting into the core market, we focused on the large adjacent markets of staffing and other - $46 billion - and the Internet advertising market, where we play a bit, $57 billion. In both of those markets we have an insignificant share. And as you're going to see today, much of the investment we make - listen to a couple of the customer testimonials that call this out specifically with regard to the staffing market - the product we have allows us to clearly focus and begin to penetrate this staffing and other market.

I put up here - we did show it last year and I wanted to be consistent with last year - the HR software and e-learning markets. We do not have good data yet on the size of them. I didn't want to take them off because we put them up last year. We do have some irons in the fire going on those. We're going to continue to work on them. But the nearest-term priorities for us are to focus on the core and these two large adjacent markets.

Now this slide I'm not going to spend a lot of time on. It just takes the numbers at a high level and drives them down into regions, and they will provide the construct and tie to the information that Steve Cooker and Andrea are going to be talking about and then drilling down further in their presentation.

So we believe there's substantial market opportunity, but there is also substantial uncertainty about the underlying drivers of our business. I think we know and you all know this what the uncertainties are, but the underlying drivers for us are the GDP, V-shaped recovery or double-dip recession. Pricing is an ingredient in our end result. Are we going to have inflation or deflation? Job creation - are we having a jobless recovery? Job churn - are people going to start to move more or will they stay in place? And in the short term most relevant, recruiting budgets - when will companies start to free up their budget as they go into their annual cycle? So big opportunity; lots of uncertainty.

And as the economy does [break in audio] there will be leads and lags in our business. Job creation historically lags GDP. As I pointed out in going into the detail of sales versus revenue, Monster's revenue lags in an upturning environment, which happened on the downturn the other way around. Monster's revenue will lag sales as a result of lower deferred revenue coming into the year.

Q4 is an important renewal season. We expect an uplift in activity, but the size of the uplift at this time is uncertain and a lot of business goes on in December. These numbers that we're showing you today are based on what we see to date and we do see an uplift, but there's a lot of business to be done in December.

As we all know, Q1 operating expense the last couple of years has been higher both in marketing expense and in salary.

So a substantial market opportunity, near-term uncertainty, but there's a market share opportunity right now. We believe we are well positioned to gain market share and, based on our data and our belief from working with our clients, we have already been gaining market share. As Sal noted, we believe that will accelerate. Market share gains are valuable. You can all do the math off the slides, but a 1% gain share in the online/offline market is $70 million of revenue, no cost of goods sold. Doubling our market share in Internet advertising is $150 million, and our current market share in staffing and other is insignificant.

We are well positioned to after that share, which is available now. We have the best value proposition for our clients. We have the broadest product offering. We have engaged in relevant traffic. We have the global scale and reach. We have the focused and targeted sales group. And, importantly, during this period of time and over the last couple of years our top competition has not been investing in their business. So, as Sal has mentioned, we're going to go for that opportunity. We think it represents a significant opportunity for value for the company; however, we're going to carefully balance that against the environment, against our liquidity, and against the profitability of the company.

So to execute this plan and go after this share, we will need to and want to increase a bit expenses in a couple of areas, and I mentioned a couple of them as we go into Q1 - an increase in Q1 marketing surrounding the launch of power resume search, but it will not be of the same size and magnitude as 2009 or 2008.

Typically, there's a bit higher salary expense in Q1, reflecting benefits. And as the business rebuilds, I think as you all know, in 2009 any incentive comp that is paid to our associates will be in the form of four-year restricted stock, so as the economy rebounds and the business rebounds, we will want to reinstate cash incentive compensation. So there's some built-in increase in operating expense.

Nothing we see, however - stressing the point that Sal made - nothing we see in these scenarios results in any significant reduction in our liquidity.

So to summarize so we can go to the questions, we are well positioned to capitalize on a substantial market opportunity. We are even more confident of the opportunity for growth in our business than we have been - than we certainly were last year at any time.

A couple of factors going on that, when they come together, represent a powerful opportunity: The first is the markets will recover; the timing is uncertain. The second, it is unlikely that the offline sector of the business will regain what it has lost during the downturn. And thirdly, we believe we're positioned to gain market share. When those three factors come together, there's a significant opportunity for this company.

I think I stressed this one enough - near term there's some uncertainties. And after we work through the market uncertainty and the leads and lags, revenue trailing sales, a little bit of a pickup in some expenses, as I've outlined, as the business recovers into a recovered market, we don't see anything which changes the operating leverage and the profitability of the company and its business model. Most of our infrastructure is in place, and the new products provide greater value to our clients.

So in sum, the management group has never been more optimistic about the market potential for our business, yet in the short term, largely because of macro market uncertainties, there are cross currents we will have to navigate through. During this uncertain period, while there's substantial [break in audio] opportunity, we will invest in our franchise prudently because we believe that creates longer-term value. However, we will monitor the business and the environment carefully, and we will take whatever actions are necessary to protect our liquidity and strong balance sheet.

Thank you.

Question-and-Answer Session

Robert Jones

I'd like to take your questions covering Sal's remarks and Tim's presentation, and similar to our regular quarterly calls, I'd like to ask the following members of our executive management team to join Sal and Tim on stage - Darko Dejanovic, Ted Gilvar, James Langrock. Darko is the CIO and head of Product. Ted Gilvar's our Chief Marketing Officer. James Langrock - James is the Chief Accounting Officer. Art O'Donnell - Art's the EVP in charge of Global Customer Service  Lise Poulos, EVP and Chief Administrative Officer, and Mark Stoever. Mark is an EVP responsible for Corporate Development and Strategic Alliance.

Due to the timing of the session - we have allocated 15 minutes - and in the spirit of taking as many as we can - I ask that you limit questions to one per person. And once again, there will be ample time following the presentations and at lunch to ask any additional questions.

After the Q&A session we'll have a very short break and come back with presentations and a demonstration of our search technology.

So I appreciate that cooperation. So with that, we'll take questions.

And please identify yourself, Tobey.

Tobey Sommer - Suntrust Robinson Humphrey

I was just curious if you could talk to the potential for 25% operating margin. In what context or what kind of revenue level or scenario do you need to achieve that type of goal?

Robert Jones

Could you repeat that, please?

Tobey Sommer - Suntrust Robinson Humphrey

In the context of the operating margin potential at the height of an expansion, I was wondering if you could give us some context as far as what kind of revenue or other type environment you may need to be able to achieve that?

Salvatore Iannuzzi

As we return gradually towards the same level of revenue that we had before, I think we can even surpass - at the risk of overextending ourselves - the 25%. I think somewhere, because of the efficiencies that we've created, if you will, during the last year, year and a half, we won't have to go to the same degree of revenue. We certainly plan to. I think somewhere along the way we'll get some of those efficiencies with a lower level of revenue that we'll be able to hit those numbers.

Precisely where that'll be it's hard to tell because along the way there are certain investments that we may wish to make, some opportunities we may want to take advantage of that may change from one level to another temporarily.

Before we committed to that, before we put that up on that slide a little while ago, you can imagine we had quite a bit of conversation. The last time we said we could do that we got overtaken by the economy; this time before we said it we wanted to have a fair amount of certainty that we do believe things will improve, that we'll be able to gain it.

But there may be points along the way where we may want to invest a few extra dollars in marketing, for example, in China because the opportunity for growth is there and we want to take it. So that may cause us to realize it a quarter later than sooner based on a different revenue basis.

Timothy T. Yates

I agree with that. We will get efficiencies out of the spending we've done. A lot of the infrastructure spending does not need to be done again in the near-term future. The amount of new product spending will be somewhat lower. We'll shift the spend over the next period of time from product check and infrastructure into sales and marketing, and you will evaluate that against what you see as the market opportunity. But when we're back to the high point we were the operating margin should be somewhat higher.

Robert Jones

James Janesky?

James Janesky - Stifel, Nicolaus & Co.

Can you tell us anecdotally what customers are indicating for renewal season? I know December is a very important month, but will it be as bad as last year, for instance? And based upon your expectations for the fourth quarter, would you expect that operating income will be positive or negative?

Timothy T. Yates

I think the question was anecdotally what are our customers saying about the renewal season coming in and, based on your comments, is operating income positive or negative? Was that the question?

So I'll allow you to go between the comments that I made, that revenue would be slightly down to flat, and expenses would be flat to slightly up. It depends on which way that breaks, and a lot of that depends on what happens during the renewal season - close.

Salvatore Iannuzzi

I think that one of the things to keep in mind is we think that certainly our expectation is that Q4 sequentially will be significantly more robust from a sales perspective than Q3. Having said that, that does not all materialize - as Tim has said a number of times during his talk - does not all materialize into revenue.

In keeping with my comments, that does not mean we are going to cut costs in order to meet revenue that may drop slightly because the deferred, if you will, has not caught up yet. We're going to continue to do what we're doing. We think it would be a mistake to cut us short just to maintain a penny or two of profitability, so we may have a drift where we may go into negative territory for a penny or two or three. It depends on how things shape up. It depends on when we execute on some expense matters. It depends on what happens and when in Q4 it happens with regard to new sales, new revenue, and I will judge that.

But we don't see anything on the horizon in Q4 that will seriously jeopardize those numbers.

Robert Jones

Andrew?

Unidentified Analyst - Unidentified Firm

A two-parter, if you don't mind. I was wondering if you could put the sequential sales increase in context with the typical seasonality or quantify it, if you would.

And then second if you're able to talk about your views on pricing regarding the new product?

Salvatore Iannuzzi

We can't understand him.

Robert Jones

Maybe if whoever would like to ask a question would come up and just stand right in our face and ask us, then we'll be able to hear it.

Unidentified Analyst - Unidentified Firm

Yes, I was just wondering if you could talk about sequentially what you saw in sales in the third quarter, if you could quantify that and talk about it.

Timothy T. Yates

You're not going to believe this, but I can't hear a word you're saying. Neither can Sal.

Salvatore Iannuzzi

I can't. I'm sorry.

Timothy T. Yates

Come right up here and join us.

Unidentified Analyst - Unidentified Firm

I wanted to understand sequentially what you saw in terms of new sales in the third quarter and maybe quantify that, maybe talk about it relative to normal seasonality.

And then, second, in terms of pricing the new technology what your thoughts are regarding that.

Timothy T. Yates

So now I'll rephrase the question for everybody.

Sequentially, I think I commented that sales were up somewhat. Can I quantify that? And I think the answer to that is I'll leave it at somewhat. Going into the quarter I think it's fair to say we expected them to be a little bit higher than they were and reflected not as quick a rebound in the market. We don't believe that relates to us individually but more so the economy, so up somewhat and a little bit lower than we would have expected coming into the quarter.

The second question was pricing, how we're going to price the new product.

Salvatore Iannuzzi

I think we got the same question last quarter. We have spent a considerable amount of time since then in devising and looking at and examining what we think the pricing should be. We've considered everything from having the pricing flat to current search to increasing it.

We've thought about it in this way. We really don't view Trovix as an extension of the old search product. We view it as a completely new product - I think you'll see why we think that when you see the demonstrations in a little while - and therefore we created a whole new pricing structure.

That new pricing structure, if you were to compare it - and I don't believe it's a valid comparison at all - but if you were to compare it to a current search license it's approximately 30% more.

But as I said, the return on investment for a customer is so significantly different, it makes them so much more efficient, it makes them so much more effective at finding the candidates that they're looking for that the two products really are just not compatible. They're not the same. It would be literally comparing a Chevy Impala with a Cadillac. They're two different ends of the spectrum, if you will.

But in all the deliberations that we had - and you could bet they were considerable and involved virtually every aspect of the firm - we decided that this was our price point. And so far our customers have not reacted negatively to it. As they see what the product is they understand why it's priced different, why it is a different product. And we can report - obviously this is not an indicator of what's to come - but the product will be released tomorrow night and we've already made two sales, one on Tuesday and one yesterday. So hopefully that's a good omen.

John Janedis - Wells Fargo Securities, LLC

Can you guys talk a bit more about the competitive threat of social or new media. What share of the market does it represent, where can it go and how does it affect pricing of the business longer term?

Salvatore Iannuzzi

One of the - and you'll see, again, a little later on - one of the issues that we were confronting since the moment we arrived here at Monster was social media and some of the other methodologies, if you will, that are out there for people to communicate and what the threat was to Monster.

We firmly believe that the core business of Monster, if you will - the search engine, the ability for people to submit their resumes to Monster and be located by an employer - is the key and the most effective and efficient tool that's out there, bar none.

Having said that, we decided to move for a whole host of reasons, including having a more organic methodology in attracting talent to us, to bring candidates, if you will, to our database. So what we did is we acquired Affinity, the Affinity communities, and we've expanded them considerably. There are 18 of them today; there'll be approximately 23 - 24 by the end of the year, and a number more in the pipeline beyond that. The Affinity communities give a platform to talk about and give context within certain professions, occupations - everything from teachers to fire to security police, engineering, etc.

In addition to that we want to give a forum for networking capability within those professions. You've heard me say it, I think, a number of times - we're not a social network, we don't believe that's our space, and we don't believe that that's the answer to substantial recruiting. Can you find a candidate using social media, networking, etc.? The answer is yes. But it's more the exception, not the rule. It's less than 2% of the market today.

We do believe that having networking that is within communities, professional communities, career communities, is the way to go. We have that capability. By the end of this year - in fact, within a month or so - it will be fully integrated into Monster and the core business so that the two will be interlocked, if you will, and we think that that's the way to go. We think that that will present much more of a value proposition to the employer but also to the person looking for a job. They'll be able to connect and communicate with others in their field much more effectively than through other methodologies.

Unidentified Analyst - Unidentified Firm

We can see from the deferred revenues what's going on in terms of the large contract enterprise part of the business, but what's not easy to see is the evolution of what's happening in SMB. What does SMB look like today, and what would your expectation be for SMB as we look out over the next 12 or 24 months assuming the economy has bottomed?

Timothy T. Yates

SMB, in particular e-com, which is our self-serve channel - we do some SMB business in the telesales channel as well - but e-com did pick up earlier in terms of sales and is continuing to gain ground, again, off of a low base. That's happening, I believe, on a global basis for us. So as it did recover a little bit earlier, it's gaining momentum a little bit faster, and I would project  again, barring another significant downturn in the economy - that that will continue to build.

Salvatore Iannuzzi

That is one of the more encouraging points that we see, data points. When the economy started to slow down, SMB was without question the first indicator that things were slowing down. The big companies came afterwards.

Now what we're seeing - and we've seen this now for the second quarter, so we're a little bit more confident that it's not just a sporadic thing, and it's also widespread; as Tim said, it's here in North America and we're seeing it in Europe - we're seeing a pickup. It's not a huge pickup, but it is certainly significant given to the degree of deterioration that we have seen. We have seen deterioration in SMB of upwards of 60% plus, and that is coming back at a fairly decent clip. Not a runaway train or anything like that, but it is coming.

John Blackledge - Credit Suisse

Two questions, one on the pricing environment - renewals or new business, where's your pricing? Are you guys discounting or keeping it the same or is it up slightly?

And then also you talked a lot about investment over the last couple of years organically. Anything that you guys might want to buy versus build going forward?

Salvatore Iannuzzi

First of all, with regard to pricing, we do not envision at this time any increase in pricing in our normal product suite. It's relatively constant. Opportunistically, we will compete for business because I think that we have opportunity to show some of our new products and that will create a longer-term relationship with customers at higher premiums once they see what we have. With regard to power resume search, Trovix, if you will, again, that's a new class of product, and that will be sold at a premium price.

To put that into context for you, Monster spent over $100 million on Trovix - $72 million to buy it and probably somewhere around, this is not a precise number, but somewhere around $30 to $35 million to bring it to market. Now, sometimes you spend that money and you don't increase value to your customer so you can't expect the customer to pay for it. Given what we've done and given what we see in the product, it definitely brings tremendous ROI to the customer, and therefore the premium or pricing it higher, if you will, than other products in our mix we think is definitely wanted given the value proposition that it delivers.

I'm sorry, the second part of the question?

Timothy T. Yates

The second question is anything we want to buy?

Salvatore Iannuzzi

We're always shopping. Tim is always looking, he and his team. I can assure you if the question is driven towards buy versus build, as you can see with what we did with Trovix, we bought it, we seasoned it with the capability and talent that Monster had, and the combination of the two is a tremendous success. We did it with Affinity. We felt we needed to go into community sites. We felt we needed to provide networking capabilities within those communities. We went out and bought it and then we expanded it and enhanced it.

So if the opportunities are there, as we identify those opportunities, as we identify services that we believe are important to our customers, we're certainly open to that.

Robert Jones

I think we'll take one more question.

Matt Chesler - Deutsche Bank Securities

My first question is: Where are we at in the downturn in the U.K. and Germany, and is Europe the reason why collectively company revenue is likely to be flat to slightly down in the fourth quarter?

Timothy T. Yates

I have a reason to be deaf because I'm old, but Sal -

Matt Chesler - Deutsche Bank Securities

Okay, I'll repeat. The question is where about the downturn in Europe, specifically the U.K. and Germany, where are we at in the downturn? And is Europe the reason why company revenue is guided to be flat to slightly down in the fourth quarter sequentially?

Salvatore Iannuzzi

The downturn clearly started in North America. Europe followed. Three to six months is when we started to really see it materialize in Europe. I think that they caught up very, very quickly. And based on what we're seeing today, I would really characterize both Europe and the United States at sort of the same place. We're hoping that what we're seeing is a bottoming; it's sort of bouncing around the bottom. But not a tremendous differential, if you will, of where one is versus another.

Now within Europe some countries are better than others. As the recession hit, it hit first in the U.K. and then sort of went from west to east in Europe. Right now we'd say that most countries in the western part of Europe are more stabilized. Germany is still fluttering; sometimes it goes down a little bit more and pops up again, so it's sort of fluttering more. It's still in the cycle where the curve's a little bit deeper. But overall I would characterize them as pretty much in the same place.

In terms of revenue in Q4, it's normally a big period for renewal of contracts for Monster, first of all, that does not all turn to revenue within the quarter, and depending on when those contracts are renewed, less and less of it materializes in the quarter. So that's why we're never expecting a huge increase in revenue in Q4, if at all. I would say flat to slightly up, as Tim indicated.

Timothy T. Yates

Yes. The primary driver is the reduction in deferred coming into the quarter and the timing of when renewals and business are done during the quarter. We do expect a significant uptick in business sales during the quarter. The size of it - and, you know, you'll see that result in deferred revenue - the size of that uptick is unknown. But we do expect a significant uptick.

Matt Chesler - Deutsche Bank Securities

And going back to your goal, your belief longer term for 25% margins, if you would just highlight for us what you've done operationally in the business to get there as I think that's a level that the business hasn't achieved in the past. And is there an unemployment rate that you think equates to that that you would need to see to be able to operate at that type of level?

Timothy T. Yates

I think we think of it more in terms of as the revenue rebounds. Keep in mind we've cut expense by $60 million, so we're running really at basically, barring another significant step down and a jeopardizing of our liquidity, in order to get the product to the market you will delay that getting the product to the market if you significantly cut expense.

As the revenue recovers, though, most of the expense is in place. I pointed out some things we're going to need to spend. That will be spent most likely in line with sales. Revenue will lag it, as I called out. But the dynamic of the business is such that a significant portion of increased revenue over time drops to the bottom line.

Salvatore Iannuzzi

In terms of sales, Tim indicated we expect a substantial increase -

Timothy T. Yates

Significant, I said.

Salvatore Iannuzzi

A significant increase in sales in Q4. We do mean significant. I mean, we've had a lot of conversations, as Andrea and Steve will be talking to you today. We would be very disappointed if that increase was not a double-digit percentage increase. We have not seen that in some time because of the economy.

Now we have some forces. We have the economy going in one direction, and we have Trovix being introduced. How much momentum will we get in Q4 with Trovix? I think we'll really see it start to kick in in Q1. And in Q2, that's when you really see the success, if you will, of Trovix materialize. Q4 you'll see some of it.

So you'll have some forces going both ways, but we should see on a sequential basis a good increase in sales activity. If not it means that the hesitation to buy is even deeper than we're anticipating at this point, and we're just not seeing that right now.

Robert Jones

So with that, we'll take a short break and then come back for presentations and the demonstration of the search technology products. Thank you.

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Source: Monster Worldwide, Inc. Q3 2009 Earnings Call Transcript
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