Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Monster Worldwide Inc. (MNST)

Q3 2006 Earnings Call

October 25, 2006 10:00 am ET

Executives

Bill Pastore - President and Chief Executive Officer

Lanny Baker - Chief Financial Officer

Steve Pogorzelski - Group President International

Doug Klinger - President of Monster North America

Mark Stoever - Head of International Advertising and Fees

Chris Power - CFO of Global Operations

Analysts

Mark Mahaney - Citigroup

Christa Quarles - Thomas Weisel Partners

Imran Khan - JP Morgan

Steven Barlow - Prudential Equity Group

John Janedis - Wachovia

Jim Janesky - Ryan Beck

Lisa Monaco - Morgan Stanley

Jeetil Patel - Deutsche Bank

Bill Morrison - JMP Securities

Peter Appert - Goldman Sachs

Presentation

Operator

At this time I would like to welcome everyone to the Monster Worldwide Third 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 third quarter 2006 conference call. We will have formal remarks from Bill Pastore, President and Chief Executive Officer; and Lanny Baker, Chief Financial Officer. Steve Pogorzelski, Group President International; Doug Klinger, President of Monster North America; Mark Stoever, Head of International Advertising and Fees; and Chris Power who is the CFO of Global Operations 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 third quarter and first nine months of 2006. However we have not provided comparable figures for 2005 periods in today release because as disclosed in our news release, the company’s previously reported financial results from 2005 and prior years will be restated as a result of the company’s historical stock-option grant practices and related accounting.

Before we begin, I'd 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 and do not include the effect of the outcome of the ongoing investigation or litigation related to past stock option grants.

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 other risks discussed in our Form 10-K and our other filings with the Securities and Exchange Commission.

With that, I'd like to turn the call over to Bill.

Bill Pastore

Thank you, Bob and welcome to our third quarter 2006 conference call. I am real pleased to here addressing you this morning in my new role as Chief Executive Officer of Monster Worldwide. Before discussing our results on behalf of all Monster global employees I would like to recognize Andy McKelvey for his vision and stewardship over the past 39 years. Andy’s unique entrepreneurial instincts were fundamental to creating the powerful brand and global presence that Monster enjoys today. We look forward to Andy’s continued contributions as a board member and Chairman Emeritus.

Now, turning to the business. We’re pleased with the quarter’s strong operating performance and financial results, which reflects superior execution of our growth strategies across the entire Monster organization. The third quarter’s strong results were driven by truly outstanding international revenue growth of 73% and steadily improving profit contributions from these global operations. In addition, we achieved higher growth rates in our Internet advertising and fees business, which posted another very strong quarter.

Careers North America experienced solid revenue despite more moderate demand for help wanted advertising overall; and more importantly, we continued to gain market share among off-line and online competitors. Our 38% total revenue growth and efficiency in operations enabled us show very strong earnings and performance and healthy cash flow again in the third quarter.

In addition, following the sale of the TMP Advertising and Communications business in North America during the quarter, 100% of our revenue was Internet-driven and our resources are focused squarely on monster.com globally and the huge Internet advertising opportunities in front of us.

At the same time, we continue to invest in marketing, sales, product development and technology as drivers for future growth. We remain very excited and confident about the long-term opportunities ahead.

Now, let me take a step back and share with you a little bit about my leadership approach and my values as the recently appointed Head of Monster Worldwide. First, I’m extremely honored and proud to have the opportunity to lead this outstanding organization as its Chief Executive. As you may know, I served as Chief Operating Officer for the past four years and have long been responsible for overseeing strategic planning in global operations on a day-to-day basis. I am passionate about our company. I’m passionate about our people and our future and that passion is evident in the results we’ve achieved to date.

In my new position as member of the Board of Directors, I am fully involved in all this decision-making and I’m actively engaged with our new Executive Committee lead by Sal Iannuzzi, the Committee’s Chairman. I believe that individually and collectively the members of the board offer considerable expertise and experience that will help guide and marks this future growth.

Our strategies and actions moving forwarded will focus on serving our three key constituents: our customers, our employees and our shareholders. I am a firm believer in over-servicing our customers. We will work even harder to earn the respect and business of all employers: small, medium and large. We will magnify and sharpen our focus on job seekers, undertaking a cultural shift to make Monster more fully a true consumer company.

Our goal is to improve customer and consumer satisfaction by attracting quality job candidates presenting the best employment opportunities and providing increasingly innovative solutions to serve the recruitment and career service markets. While we’ve made progress against these goals in the past, we still have a way to go to reach world-class levels. We will achieve that status.

Next, I believe that the strength and caliber of our employees who represent the Monster brand is indeed our greatest asset. Over the past several years, we’ve attracted and retained a very deep pool of talented individuals with significant expertise in both the Internet and human capital markets.

We’ve recently made key additions of talent and leadership both in our North American and international businesses that we believe will further widen the gap between Monster and our competition in this very critical area. We have a high level of confidence in our senior level management team and believe we have both the structure and talent level that will take us well beyond the $1 billion revenue mark we anticipate in this year.

To the third group, our shareholders I feel a deep sense of responsibility and stewardship. We will fulfill our commitment to the shareholders by providing greater corporate transparency, world-class governance behavior and a proactive approach to communication.

On the operational side, we’ve instituted excellent organizational discipline and the highest quality governance practices that I believe are fully transferable to the corporate level. For those of you I haven’t yet spoken with or met I look forward to meeting you and establishing a open dialogue. I also want to thank those of you are who are shareholders for your support of Monster Worldwide.

I would like to share with you my preliminary thoughts on what our shareholders can expect from Monster as we move forward. I don’t anticipate major changes to the key growth strategies we have in place, since these strategies have served us extremely well during the past four years. We produced consistent and strong financial results, which in turn have driven solid returns for our shareholders.

Our growth strategy will be to focus our attention on increasing revenue at higher rates than the overall help-wanted market while improving operating efficiencies to maximize profits. We believe that growth is the number one driver for increasing shareholder value. Accordingly, we will continue to pursue key strategies we have in place.

Internationally, as our recent financial results have demonstrated, we will deliver on our commitment to generate significant revenue growth while continuing to ramp up profitability. In North America, our focus will be on going local and being personal with our customers and job seekers. We will continue to penetrate our enterprise business while broadening our sales channels and coverage of small and medium-sized businesses. We continue to believe that our Internet advertising segment offers significant revenue and profit opportunity as more and more advertising turn to the online market.

Let’s take a closer look at these strategies in detail. In the international business as you can see from the third quarter’s outstanding performance, the opportunity is huge. I am proud to say that the 54% organic growth we have achieved in the quarter was the highest level reported in the past seven quarters and on top of a much higher revenue base. Our decision to double our marketing spend in the top European countries led to market share gains, increased brand awareness and higher traffic levels while we continued to drive strong revenue growth.

Above all the execution of our strategies was terrific as sales productivity increased and new products were introduced to the market. We are committed to continuing the aggressive route we have realized outside of North America while delivering expanded margins and higher profit levels.

We will continue to add new geographic markets in a thoughtful and efficient manner. It’s a rigorous analysis in researching emerging international markets as part of our strategy to expand our international footprint. We considered build versus buy versus partnering. During the quarter, we added Mexico, eight countries in the Middle East and Russia all low-cost launches that were capital efficient and demonstrate the innovative approach we are taking to expand our global reach.

In North America, we’ve invested in sales force expansion and improved our approach to selling. We are very pleased to recently announce a second alliance with a newspaper publisher. Our objective in forming these alliances is to add to the distribution points available to offer Monster products and services to a wider and deeper audience on a market-by-market basis.

The alliance between Monster and the Akron Beacon Journal will deliver more powerful services to advertisers and job seekers in Northeast Ohio, as it combines the power of the Monster brand with the local market knowledge of Akron’s only daily newspaper and its website.

We will also strive to revitalize and deepen our relationship with the consumer. Monster Worldwide and its properties is a top 20 global Internet brand with over 65 million monthly visitors on average. We believe there is a significant opportunity to expand the interaction with our audience beyond jobs or careers to related areas. We have added a diverse group of advertisers in a wide variety of industries who now not only partner with Monster.com but also with Military.com, Tickle, FastWeb and MakingItCount, to reach targeted demographics. We plan on expanding this business to Europe, Asia, and Canada and will continue to commit resources to facilitate its growth.

As we speak, we are in the process of finalizing our long-term strategic plan and the accompanying financial goals, which will serve as the platform for future revenue initiatives as well as operating efficiencies. Near-term, we will reorganize the corporate structure to make the company leaner, faster, and nimble. I believe there is an opportunity to lower our cost base in the corporate level in order to operate more efficiently in 2007 and beyond. While not major, the organizational changes that we will initiate will be meaningful. Lanny will provide further detail on the financial impact of these actions in his formal remarks.

In terms of new priorities we’ll evolve our strategy to include new areas and attention of focus. First of all we will step up our efforts to innovate and introduce new products and services. Innovation and creativity in the selling process is a trademark of industry leadership. I believe that our recent decision to more closely align our product and technology areas will facilitate innovative solutions that will further benefit our customers.

Second, we will become more consumer-focused. Monster enjoys brand awareness above 90% as the top online destination site. We believe we can deepen our relationship with these unique visitors and add new revenue opportunities while improving the economies of our core business.

Third, we look to leverage our brands and our ability to monetize the traffic that comes to Monster and our properties through alliances with Internet and media partners.

Finally, while we believe the lion’s share of our future growth will be organic, we will selectively seek out acquisitions when we have a high level of confidence that the transaction is right for our customers, seekers and our shareholders. We will apply thorough analysis and a high degree of discipline in allocating our capital to grow our business.

In this morning’s new release we provided an update on the ongoing review of the company’s historical stock option practices. We are working diligently with the special committee of independent board members and their outside review team to reach a thorough and prompt resolution of this issue so we can put it behind us before the year’s end.

In summary, we’re extremely excited and encouraged about our future. Looking forward, I believe our brand, our global market expertise and knowledge of the human capital market provides Monster a unique opportunity to innovate and lead the online recruiting market globally. As I’ve said to our employees across the globe I truly believe the best is yet to come.

With that I’d now like to turn the call over to Lanny for a closer look at our financial results for the quarter.

Lanny Baker

Thanks Bill. Monster Worldwide strong third quarter results achieved in an environment of uncertainty about the strength of the US economy, highlights the company’s solid strategic execution and underlines the healthy secular momentum in our business. Internal investments pursued in the last year are paying off in top line growth and the business model continues to generate healthy levels of free cash flow.

Monster’s revenue growth rates in international careers and in the Internet advertising and fees business accelerated in the third quarter. These two segments, built purposely and grown profitably, now combine to generate over 40% of Monster’s total revenue providing not only additional sources of current and future growth for the company, but also an attractive degree of balance that makes Monster stronger and which we believe will benefit shareholders over time.

Meanwhile, Monster’s North America careers business achieved strong top line growth and continued to increase its market share within the recruitment advertising industry. Adjusting for the sale of the AdComms North America business, earnings from continuing operation of $0.31 per share matched the upper end of our expectations for the quarter, despite incurring nearly $4 million in legal expenses for the stock option investigation. That was about a penny more than we’d anticipated.

Before going into the details of our third quarter results and our outlook, we have three housekeeping items to discuss.

First, this morning we announced an update to the independent review of Monster’s stock option grant practices. The review is ongoing, but we now anticipate that the company will restate its consolidated financial statements for the years 1997 through 2005. At this time, we cannot quantify the magnitude of the restatements, although we do not expect any material impact on our 2006 results. We filed an 8-K covering this subject in detail earlier today.

In addition, we have provided an update regarding the NASDAQ hearing panel that recently granted our request for continued listing, subject to conditions that we furnish certain information according to a predetermined schedule. Specifically, the company has until December 13th to restate its financial results and file the June 10-Q in order to continue its NASDAQ listing. We are working diligently with all parties involved to ensure that the restatements and other reports are done accurately and according to the required timeline. Our number one goal is to put this matter behind the company and in the process, demonstrate the very high corporate governance standards by which we operate.

Second, we sold the TMP AdComms business in North America during the quarter in a transaction that put an additional $36 million in cash on the balance sheet. In tandem with that sale we wrote off $133 million in intangibles related to AdComms and that, coupled with AdComms earnings and deal-related costs, is reflected in the loss from discontinued operations in the quarter.

As stated previously, the business outlook provided in July for the full year included an expected earnings contributions from AdComms of $0.08 to $0.09 for this year and the updated outlook provided today now excludes all contributions from AdComms. We’ve now completed the divestiture of all of the company’s lower growth, lower margin offline businesses, and as Bill noted, we’ll take a further step in the fourth quarter to streamline the corporation to match this operating focus.

Finally, the legal and accounting fees arising out of the stock-option investigation are significant and likely to continue for the next several quarters. Monster’s third quarter results include roughly $4 million in such legal and related expenses before tax. These costs were about a penny per share greater than we anticipated for the quarter. We anticipate ongoing legal and related expenses in the fourth quarter. That is included in our business outlook.

Now let me describe the key trends in the development behind the strong third quarter results. Monster’s revenue of $286 million was just above the upper end of our outlook for the quarter and a 38% increase over the prior year. Organic growth accounted for almost 90% of the revenue gain year-to-year and Monster’s organic revenue growth rate was 33% in the third quarter.

The international business again exceeded our expectation. With the UK coming on particularly strong in the quarter. Total operating expenses rose to $226 million for the third quarter as we added about 400 employees during the quarter, with more than half of those hired overseas. Marketing spending grew year-over-year however we eased off on some of the more opportunistic spending in the quarter, given seasonal and economic consideration. The option-related legal cost of $4 million are reflected within office and general costs for the quarter, as well as in the corporate expense in our segment result.

Operating income of $60 million for the quarter represents a 21% operating margin including the impact of the option-related legal fees, which by themselves shave more than a point of margin in the quarter. Operating income before depreciation and amortization was $72 million and the overall EBITDA margin of 25% was down slightly from the first half.

Below line, we generated higher interest income from our cash balances as they grew and the launch from our equity investment in ChinaHR was $2 million in the quarter. ChinaHR is performing well with year-to-date revenue of 75% over the same period of ‘05. Monster’s earnings from continued operations were $0.31 per share and again this includes the impact of about a penny more in legal fees than we originally anticipated.

Now let me discuss the results on a segment basis beginning with Careers North America. Revenue grew strongly up 25% in the third quarter. Those numbers were consistent with our expectations. Now compared with the 29% revenue growth achieved in the first half of the year, revenue and sales growth in North America slowed during the quarter. In particular, we saw activity amongst smaller companies, the ones that normally populate our e-commerce channel, moderate during the third quarter. E-com revenue growth was 19% year-to-year in the third quarter.

At the same time, the enterprise market, where hiring decisions typically have longer lead times, remained strong. We also see certain areas of very strong growth within the mix including healthcare, staffing and Monster Canada.

Significantly, Monster gained market share in overall recruiting ad revenue during the third quarter and we remained committed to outperforming the overall industry in any kind of business climate. In fact, as the US market has cooled slightly, Monster’s market share gains within recruit and advertising have accelerated and year-to-year comparisons of market share show Monster picking up momentum.

The breadth of our product line, the strength of our sales machine and the value proposition contained in Monster’s high quality solutions propelled these gains. So while the overall tone of the US market has softened, we continue to experience solid growth fueled by well-placed investments and ongoing secular migration. We remain confident about Monster’s long-term growth in the core North American market.

Careers North America generated $62 million in operating income before D&A with the 37% cash flow margins in the unit being about even with the first half of the year. Although Monster’s profitability in North America has already at attractive levels, we continue to focus on improving efficiency and plan to use these savings to invest for further growth.

For example, we have added over 200 sales people in North America year-to-date and done so while finding other offsets to maintain our margins as we ramp up productivity in that expanded sales infrastructure.

Let me shift to the Careers International business where we were extremely pleased with performance during the quarter. Here a large and global growth opportunity intersected with Monster’s expected execution to deliver outstanding results, including: accelerating revenue growth and improved profitability in the third quarter. Revenue of $77 million in international in the third quarter was 73% higher then the year ago. Excluding almost $6 million in acquisition-related growth and $1.7 million in currency benefit, organic revenue growth accelerated to 54% in the third quarter, up from 50% it the first half of the year and roughly 45% in the six months before that.

There are several factors underlying this improvement. Our marketing investments in the UK and Ireland are paying off in the form of improved traffic, accelerating revenue growth and growing daylight between Monster and its competitors. In the Netherlands, our efforts to grow the e-Com channel have been highly successful and have added a new engine of growth to what was already a strong unit. In India, our first quarter product redesign and subsequent marketing successes have allowed Monster to begin charging for job postings as well as for resume database access in that country, enhancing monetization and revenue growth. As always, we remain vigilant about improving efficiency while driving that top line growth.

The EBITDA margin in international was 10.7% in the third quarter. Revenue per employee was up 36% in Europe and even more in Asia Pacific during the quarter. These productivity gains in our single largest expense category allow increased marketing spend and simultaneous improvement in profit margins in international, and we look forward to extending this momentum into coming years.

Turning to the area of advertising fees business, we see a key element of Monster’s drive to become the consumer company you heard Bill describe. The IAF unit is also enhancing our ability to monetize the enormous traffic attracted to Monster’s brand and marketing activity.

IAF revenue growth was 49% in the third quarter and organic revenue growth of the unit was 41% matching the second quarter’s growth rate and exceeding online advertising growth rate. As we improved yield through successful lead-gen programs and do a better job of selling Monster’s uniquely targeted display inventory, we’re beginning to build Monster’s presents in the online advertising market.

During the quarter, Monster ran advertising for 52 of the 100 largest national advertisers in the US and 56 of the top 100 advertisers, showing steady progress and considerably room to go further. The IAF business generated $42 million in revenue in the third quarter, with an EBITDA margin of 32.5%. That’s down from 37.5% in the second quarter. The decline reflects increases in marketing spend and investments in infrastructure including our sales force and some product development.

Ultimately we believe the margin potential in IAF will be significantly higher than where we are today, but as we’ve said previously, we believe it makes sense to prioritize revenue growth over short-term margins in this business, recognizing the long-term potential and Monster’s inherent opportunity here.

Moving to the balance sheet, net cash and marketable securities grew to $548 million at the end of the quarter, a $99 million increase over the second quarter. Monster’s healthy free cash flow along with $36 million in net cash from the sale of AdComms drove that improvement.

Deferred revenue of $347 million at the end of the second quarter is 41% higher than a year ago, but down a little over $2 million sequentially. We committed $13 million to capital expenditures in the third quarter and are on track to spend slightly more then $50 million for the full year.

Finally, the weighted average share count rose to 131 million for the third quarter, a 5% increase year-to-year. Our share repurchase transactions in the first six months of ’06 were a modest offset, although we did not repurchase any stock in the third quarter of ’06 and do not anticipate doing so again before we are compliant with our financial filings.

Now turning to the business outlook, we are introducing an outlook for the fourth quarter and updating our full-year outlook. The new outlook excludes any contribution from AdComms, but includes an expected restructuring charge and increased option-related legal costs in the fourth quarter. Excluding these expense items, we expect to finish 2006 toward the upper end of our prior revenue outlook and slightly ahead of where we previously anticipated from an earnings perspective.

For the fourth quarter, we expect revenue of $290 million to $298 million, an increase of 31% over last year at the midpoint of the range. We anticipate that revenue growth in Careers North America will moderate further in the fourth quarter while still showing very strong year-to-year growth and significantly outpacing overall recruitment ad spending. International and Internet advertising fees are expected to pace Monster’s growth in the fourth quarter once again.

For the full year 2006, our business outlook equates to approximately 35% revenue growth for Monster, reflecting solid execution against our global growth opportunity. At the contemplated fourth quarter revenue level, we would normally expect overall operating and EBITDA margins to improve, rising by as much as 2 to 3 points sequentially.

However, with the planned restructuring actions, which will cost $4 million and significantly reduce corporate expenses going forward, and extra legal cost in the fourth quarter Monster’s overall operating and EBITDA margins are likely to be roughly flat sequentially this year. Apart from the one-time expenses, we anticipate further margin progress in international in the fourth quarter and note that marketing expenses are likely to move in sync with revenue growth in the quarter.

Below the operating income line we anticipate $5 million to $6 million in interest and other income in the fourth quarter and our tax rate should hold steady at 35%. Our share of ChinaHR's losses is expected to be about $2 million in the fourth quarter and putting the pieces together we expect Monster Worldwide to achieve between $0.32 and $0.33 per share from continuing operations in the fourth quarter. This is after a $0.02 restructuring charge and ongoing legal and stock-option review charges.

On a full year basis we anticipate total revenue of $1.108 billion to $1.116 billion and earnings from continuing operations of $1.18 to $1.19 per share. This full year outlook includes the legal and related costs associated with the stock options review and a $0.02 charge associated with rightsizing the organization.

As we start the fourth quarter and we look toward 2007 and beyond, we are excited about what lies ahead. Our strategic and operating and financial priorities are very clear: global and local, consumers and employers, growth and profitability, innovation and partnership. Our market position, management team and financial resources are as strong as ever and we intend to fully capitalize on Monster’s current momentum, sizeable user base and talented employees to extend the company’s industry leadership and further build long-term value for shareholders.

We’ll now ask the operator to poll the audience for their questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mark Mahaney - Citigroup.

Mark Mahaney - Citigroup

Great, thank you very much. Could you talk about two things please? First, any thoughts or experiments with tiered pricing, potentially in some of the new markets that you entered? That is tiered pricing for the job posting product? And then secondly, could you provide little bit more detail or color around some of the organizational changes or the restructuring that you want to put in place? Are there particular areas that you think have the greatest additional leverage opportunities? Thank you.

Steve Pogorzelski

Mark its Steve Pogorzelski. With respect to your question concerning what we are doing in some of the new market launches we are experimenting with various pricing models. I think the one that holds the greatest promise at this time is differential pricing where we will attempt to charge more for one job category than another.

Bill Pastore

On the corporate restructuring or just general right sizing, we are taking out essentially a layer of the organization across the company where I find that it gets in the way of us being as nimble and quick as we can. I can’t get into how significant the number is but its cost us about $4 million in restructuring costs. We will maintain an operation in New York City. However, there will be some severance-related charges that I think will be healthy for the company going forward and help us move more quickly and more nimbler.

Mark Mahaney - Citigroup

Thank you very much.

Operator

Your next question comes from the line of Christa Quarles - Thomas Weisel Partners.

Christa Quarles - Thomas Weisel Partners

I was just wondering if you could highlight, I think you had a lot of sales force investment over the past year or so and I was wondering if you get more specific about some of the product in technology investments that you plan to undergo. I guess all of that within the context of the fact that you are planning to reduce headcount.

And then also just on the deferred revenue line, I was wondering if you guys could give some color on the domestic versus international split. I think you guys have a pretty tough comp rather on the deferred revenue line in Q4 and I was wondering if you could comment that as well? Thanks.

Bill Pastore

Christa, let me be clear about the reduction in headcount, the reduction headcount will be fixed headcount that absolutely no impact, from my perspective and the management team perspective, on the growth of the business i.e. infrastructural headcount. As I’ve said to you all over the last four years, our strategy is to have as little fixed cost as possible and as much variable cost that drives revenue and customer satisfaction.

We will continue to invest in sales and the growth of sales both in North America and internationally. In terms of product, we are working on product innovation now that I am not free to speak of both in North America and internationally as well as the Internet Advertising & Fees business.

Lanny Baker

On the deferred revenue Christa, the totaled deferred revenue balance is down about $2 million from June to September. Within that we saw North America down more, and we saw a very strong growth in international and also in the Internet Advertising & Fees business. We’ve stay away from providing guidance on deferred revenue, it’s not a number that we think is necessarily that useful. The fourth quarter of last year was, you are right, a very strong year for sales and we’re benefiting from that still today. The fourth quarter is always a big seasonal period for us and it’s just gotten underway. Doug, did you want to talk about the fourth quarter environment.

Doug Klinger

I think overall we feel pretty good about the start really across all the segments. We see particular strength coming out of Q3 in staffing in some of the large enterprise business we do both domestic and selling international out of the US, in Canada. I think we see a good momentum particularly coming from our increasing sales force SMB component.

Christa Quarles - Thomas Weisel Partners

That’s wonderful.

Lanny Baker

The international perspective we see little impact on the moderating American economy and our ability to continue to execute and grow the top lines on an international basis.

Christa Quarles - Thomas Weisel Partners

That’s really helpful. Thank you, guys.

Operator

Your next question comes from the line of Imran Khan - JP Morgan.

Imran Khan - JP Morgan

Good morning everybody. A couple of questions, Bill you have been talking about increasing the client facing headcount and I was wondering if you can give us some sense, are you increasing the sales force in any specific categories that you can talk about, or any specific geography in North America?

Second is, it’s probably a harder question to answer, but I was wondering the international growth rate accelerated for the second quarter in a row. Can you give us some sense like is it because of the improving economy in the Continental Europe or are you gaining a market share?

In terms of ad revenue growth rate acceleration, Lanny can you give us some sense is it because of the improving rate card or better monetization rate tiers?

Bill Pastore

I am not sure I got the first question but I think it was regarding headcount. I’ll answer it generally. We will continue invest in headcount in North America sales and international sales where we have the appropriate opportunity as we have done in the past year. We measure that very, very carefully that to make sure that investment meets the return that we want. I believe that was your first question.

Imran Khan - JP Morgan

Bill I was wondering if you are seeing any specific category that you see more opportunity over the next six to nine months that you are thinking to beef up the sales force, like an industry category?

Lanny Baker

From an international perspective we are seeing strong category growth in particularly Asia Pacific in knowledge workers across a spectrum of a variety of different occupations. And in Europe very much like America, we are seeing strong growth in accounting and auditing. And we are creating vertical sales channels to take advantages of those opportunities in various parts of the world.

From your question regarding how is international doing in this environment, we believe that we are taking advantage of rapid GDP growth in Asia Pacific, primarily in India. While we don’t have rapid GDP growth in Europe, we believe that we are executing very well against the economy and we are picking up market share against our competitors in the markets that matter in Europe.

Mark Stoever

So from a standpoint of how the ad revenue is growing, pages versus price, I would say that it is a little bit of both. Obviously as we have been saying for a while now we have got more feet on the street. We have invested; you have seen some of that this quarter, we have invested in sales people, we have much more coverage now reaching out to many more clients so we are selling through a lot more of the inventory.

So I think primarily that is the reason. However, we have also seen some price improvements as we start to sell out less remnant inventory into higher targeted brand advertisers.

Imran Khan - JP Morgan

Great. Thank you.

Operator

Your next question comes from the line of Steven Barlow - Prudential Equity Group.

Steven Barlow - Prudential Equity Group

Thank you. Can you talk about just what percent of your revenue came from the e-Com via the channels. Secondly, is there a way to discuss the productivity in Europe, sort of where you are on a relative basis to your North American sales force and how far we need to go? Thanks.

Mark Stoever

Let me take the second question, Steven. In terms of productivity in Europe, we saw increased sales productivity in Europe from tenured sales reps. It increased 39% year-over-year in Q3. Its not, because of the size of a number of markets that we are in Europe, I think looking at international productivity versus US is not really the benchmarks and of course the cost differential is different. I think the key point is to understand is that our sales force continues to become more productive which is helping to drive the scale and the margins in this business.

Bill Pastore

If I could add to that, I would say that you could expect across the globe better productivity of our sales force as we get smarter even in North America in terms of our telesales operations and we are investing time, effort to improve the productivity and technology and tools we give that important resource in our company.

Steven Barlow - Prudential Equity Group

With the 39%, what kind of metrics gets you to being able to say that you have that measurement of a plus 39%? Is it number of calls, transactions, how would I think about that?

Mark Stoever

I would think about it as sales per head and there is a variety of different metrics and standard operating procedures that we use on a total basis that helped drive that increase in sales per head.

Lanny Baker

Steve, the e-Commerce number was 18% of North America revenue in the quarter. It’s growing overseas but is still a smaller level.

Steven Barlow - Prudential Equity Group

Thank you.

Operator

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

John Janedis - Wachovia

Hi, thank you. Lanny, can you talk about margins in the Monster North America segments? Ex the charge, are you investing to the point where margins are going to be steady state or do you still have several hundred basis points of upside?

And then one quickie on Europe. Others have talk about somewhat of a slowing in France and the UK, you commented a bit on the UK but are you seeing that at all and what is the magnitude of the share gains that you are seeing there? Thanks.

Lanny Baker

Sure. On the margins in North America, as you can see in the quarter the growth rates slowed down in North America from 29% to 25%. We saw the margins flat now in that market. We’re continuing to add to the sales force in there. As I said earlier, the sales force actually is ramping up and we expect that those sales people will be linking to the growth of that business down the road.

We also had a little bit of investment activity in Monster North America this quarter in areas such as infrastructure, our selling infrastructure, some process and those kind of fundamental investments in the structure of our sales force that are in this quarter, they are not recurring costs and we expect to get the benefit of them down the road. So we still expect Monster North America business as one with very strong margin potential. We’re happy with where we are. We’ll continue doing that and we see great long-term potential in the margins there.

Mark Stoever

Regarding your question about the UK and France, I think what you are seeing particularly in France is a strong secular shift between off-line and online. You’ve seen the Monster employment rate its up 37 points year-over-year, its up 19 points since January. At the same time, the unemployment rate in France has dropped from 9.9% to 9%. So, we do have from labor market perspective a favorable environment in France. We believe we are continuing to pick up share against our biggest competitors.

In the UK, I think we are picking up significant gains against our competitors in that economic environment not only in revenue, but things like greater brand awareness, traffic and the size of our CV database.

Doug Klinger

John this is Doug Klinger. Just a couple of quick comments. In the quarter we added quite a few sales people we are now up to over 800 sales-related positions in North America. Typically when we bring sales people and there is a ramp time and we think we’re in the early stage of getting the full benefit of the ramp on those particular people we added in our telesales operation that we built out in Phoenix.

So I think that the investment we are making are largely in frontline resources and go to market resources. As well we made some investments in marketing, particularly in Canada where we have now achieved the number one spot in traffic in the Canadian market as well as in online marketing, which helps drive our SMB business. We have got some investments in developing our newspaper strategy and they are small, but I think will pay big dividends as we move ahead.

John Janedis - Wachovia

A net gain of 800 sales people?

Doug Klinger

800 is where we are in terms of total resources in US. We added about 66 in the quarter.

John Janedis - Wachovia

Thank you.

Operator

Your next question comes from the line of Jim Janesky - Ryan Beck.

Jim Janesky - Ryan Beck

In the North America market, you said that the growth had moderated, yet staffing you mentioned on a couple of occasions on the call remained very strong. That staffing it’s a little odd from my point of view that staffing would be strong despite the North American market moderating. Could you comment on that, have you gained share there or is there something else going on?

Mark Stoever

Sure, I think let me step back for a second and talk about North America. We all read about the economy in the paper and elsewhere. The job market is still a pretty healthy job market here. The unemployment rate in North America is clearly at relative lows to historical patterns and there are sectors within that, staffing may be one of them, where there is real strong growth and in fact, shortages in the labor pool: healthcare, finance, accounting, IT, staffing, transportation, there are these segments that are clearly contributing very strong growth for us.

Doug Klinger

As we look at the quarter, particularly as we reference listings, which is probably one of the best analysis of who has grown what in online recruiting, we saw our market share edge up in the quarter to 31%; particularly relevant relative to the growth that CareerBuilder saw, which was flat. As Lanny said, there are certain components of the economy that are growing strongly in certain regions.

We have, we believe, far and away the largest franchise of staffing companies, they tend to be very big volume buyers of postings and resume licenses and we’ve seen strong growth, particularly in the latter part of third quarter with those partners. As well in healthcare, we saw growth in our healthcare vertical by 50%; our core listings in healthcare grew 42% while CareerBuilder and others were actually down in the quarter.

I mentioned Canada earlier, we are growing in Canada at 50% plus rates and we’re now the number one position. Even in construction, which you know, arguably is something that should be responding to the economy, our postings were up about 18% versus several of our largest competitors, who saw significant and steep declines in their posting in those categories.

So, I think staffing firms have a lot of strength in some segments. You’ve seen some of the reports recently from the main players there and I think what they are getting out of the market and passing on to us reflects the war for talent, the tight labor market even in the kind of an economy that we think we are having now.

Jim Janesky - Ryan Beck

I would imagine that this is your expectation going into the fourth quarter and into 2007, which is the reason why you can continue to invest in the sales fore despite this, to use your words, moderation?

Mark Stoever

I mean, if you look at just in the US, the market for online recruitment is big and growing as people convert away from just a sole print solution to either a combination or online-only. Our objective is clear to take share from other online rivals, we think we have a better product, we know we have a better brand and we think we can get better distribution as well as the partner as we have in Ohio, so that we can reach customers who may want a print solution alongside that.

So we are about taking share in online and we’re about continuing to build the business the way we have in terms of providing a better alternative to prints. As well, I mean the market for online is obviously still growing at an attractive clip, people who already use it are increasing their demand and people are converting away from other means of hiring to online.

So regardless of what we think about the economy certainly we wouldn’t be the ones to try and have a crystal ball in the economy. There are a lot of different ways for us to grow our business, no matter what the market environment.

Jim Janesky - Ryan Beck

Okay, thank you.

Operator

You next question come from the line of Lisa Monaco - Morgan Stanley.

Lisa Monaco - Morgan Stanley

Yes Lanny, can you just give us a little bit more color on what the percentage of either your client base or your revenue base is tied to longer-term contracts? If I recall correctly historically the fourth quarter was a particularly high renewal period for those contracts. If you could just quantify what percentage of renewals occur in the fourth quarter? Thanks.

Lanny Baker

Sure. You were fading in and out a little bit. But I think one helpful way to think about it is that the Careers business globally is running at a revenue rate of probably annualized in the third quarter we just reported about $975 million. The deferred revenue balance that goes out on average 11 or 12 months is $346 million to $347 million right now. So, roughly 35% of the revenue that were generated at this current run rate is in those long-term contracts that are deferred.

It’s not a perfect way to think about it. Our resume business is sold primarily in longer-term contracts, but we have actually grown that business more quickly recently by starting to be a little bit more nimble and selling to some smaller recruiters and smaller companies shorter-term packages at a little bit lower price points to meet their more intermittent need.

As the e-Commerce channel has grown that has meant that more of the revenue is near-term immediate recognition, small job packs to be used right away, one job type things. But I think it gives you a flavor, but we haven’t seen any big change there in the composition or the length of our revenue book.

Lisa Monaco - Morgan Stanley

Okay. Any idea as to what percentage of your contract will come up in the fourth quarter?

Lanny Baker

No it’s hard to say; you are going to renew some early. You going to have some that push out, a very hard number to quantify.

Lisa Monaco - Morgan Stanley

Okay. Thank you.

Operator

Your next question comes from the line of Jeetil Patel - Deutsche Bank.

Jeetil Patel - Deutsche Bank

First of all, can you give us a sense between the database side of the business and the posting side? I guess what is the overall margin profile of those businesses, just trying to get a sense of, I guess which one is more efficient longer-term? Broadly if you look at the business even though both are going to be part of the mix.

Second can you talk about as your sales force goes back for the big renewal push for next year, are they emphasizing database a little bit more aggressively in the sales push as you look at it to next year in that portfolio?

Lanny Baker

Sure, thanks Jeetil. The database business and the hosting business don’t have markedly different levels of profitability. They are really pretty similar. They serve clearly different needs. Historically the database business, that resume access product has sold better and they are more effective for bigger corporations that, as I said, have very frequent ongoing recruitment needs. Our one-off posting business, you see the e-Com has been more for the smaller employer.

Now, we’ve been innovating with the pricing, the product design, the way that we structure it, zip coding into the resume database, constricting its various geographic areas and that has actually helped us expand the market for the database products. Plus you have an environment where in those areas where they come in with a skill shortages the Monster resume access tool is a very unique asset, very unique tool for recruiters to use and that business is growing a bit faster than the overall posting business.

Doug Klinger

In terms of selling priorities, it’s really what the customer wants. We have got a tightening labor market, a decent economy and a really strong economy as we said in certain regions and certain categories in the industry. So I think in general we lead with the posting, it’s the most familiar product, people are comfortable buying it. It’s an alternative to a print-only solution and then we try to aggressively sell on the database.

I think we’ve gotten much more aggressive in the last several quarters around pricing that database and managing the duration of that database license to meet the needs of smaller and mid-sized companies that may not need a year to hire an employee.

I think we’ve seen some good uptake within our SMB telesales and e-Commerce in getting that product out in the market and we’ll continue to do that. Obviously the more products we sell to a customer the quicker we help them find the people they are looking for and the more they are going to come back and the more money we make, so that will continue to be the same strategy we’ve been following for the rest of this year.

Jeetil Patel - Deutsche Bank

Got it. Does the database business in general allow you to decouple the marketing spend in the business in terms of driving resume build-out inside the system?

Second, the small business segment on the e-Com looks like it slowed a bit. What is it about that segment that changed? Is this audience or customer base just more nimble in how they recruit and hire and put the money to work versus the enterprise? Or is there anything else going on there?

Lanny Baker

On the latter quarter, I think you put your figure on it. The smaller companies just tend to be more sensitive, more nimble, more short-term focused. We see that pretty consistently throughout our business and throughout time. On your other question about decoupling the marketing, I don’t think there is any major transformation in model that we see relate to the database product right now. The database product, we’ve spend marketing there to bring seekers in and put the resumes in. We’ve been doing that for a couple of years, we continue to show great success with that. As Steve talked about overseas we’re really seeing some great population of our database rolling forward so no big changes there.

Jeetil Patel - Deutsche Bank

Okay, thanks.

Operator

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

Bill Morrison - JMP Securities

First, could tell us what you are assuming in your guidance for US and North America Careers growth in the fourth quarter?

Secondly, I was curious if you’ve had any other large multi-country deals in the last couple of quarters? I believe you signed up a large Fortune level 2000 company a couple of quarters ago, just curious what the growth looks like in multi-country deals?

Lastly Lanny, at the Analyst Day last November which we are coming up on an anniversary of that, you gave some long-term guidance that you expected the global online help wanted market to grow at around 20% annually for the next three to five years. Within that you expected your business to grow above the market and that you expected your margins I believe in the 30% to 50% range.

So I am just wondering if you could give us an update on your longer-term thinking about the business given all the talk around slowdown in the US? Thanks.

Lanny Baker

Starting with the last one, the long-term view is the long-term view, we really don’t see any change in that. That’s predicated upon major secular forces of job creation around the world, recruitment advertising dollars, Monster’s position, the economics of our business, and those things I think we’re fortunate to say remained very consistent when you look at them over a three to five year period.

In terms of the first question, which is the growth rate that we have assumed for the North America business, the performance of North America in the last three months and in the last nine months it has really been pretty much as expected. So we described an environment where the market has cooled off a bit here in the third quarter and we expect we’ll see that continued through the end of the year. I am not going to break it out anymore specific than that.

Mark Stoever

Regarding the multinational corporation question, throughout the year we’ve been investing and increasing and developing an international sales force to work closely with the North America sales force that’s included moving people from China and India and Europe to the United States to act as subject matter experts working in conjunction with our enterprise team.

When we looked at the results in the current third quarter we were very pleased when from any level that you look at it, from the number transactions, the increase in revenue and the number of countries now in which we are serving multinational companies, all number have grown significantly throughout the quarter and we expect that to continue as the opportunity is quite large as we expand our global footprint and companies begin thinking about their recruiting operations from a more global rather than local basis.

Doug Klinger

This is Doug. Just to add to that. When we are selling in the US to large enterprise companies, we really are the only company in our business that can deliver the kind of global solution set that we can. I mean, far and away the leader and that is increasingly becoming a main topic of discussion both in renewals as well as in sales.

Bill Morrison - JMP Securities

Thanks a lot.

Operator

The next question comes from the line of Peter Appert - Goldman Sachs.

Peter Appert - Goldman Sachs

You’ve obviously had this impressive brand and the profitability in the international business here, so I wonder if you are really thinking the timing or magnitude of the margin upside, specifically how fast can that ramp over the next couple years that’s question one?

Then question two, recognizing it’s still early, any initial feedback from the Philly alliance in terms of any momentum you are seeing from that?

Bill Pastore

Let me answer the question from an overall perspective. We’re never satisfied with the margins in this company. Growth will be our major thrust, but along with that we will continue to deliver the kind of margins you’ve been seeing and we will better them and we have plans specifically in place for this year as well as next year to continue to move the European international margins.

Steve Pogorzelski

I think a little bit of color underneath that is, so we continue to focus on building a scalable infrastructure that will drive North American like margins in the future. So we’re looking at things like how do we back office certain functions; we’re looking at centralization, offshoring shared services, all in a way to be able to build that scalable infrastructure, at the same time given the large opportunity we see or overseas it is imperative that we continue investing in growth in order to take advantages of this opportunities.

Bill Pastore

Just to add on that, we have yet to move our internet advertising and fee business overseas. That will improve the overall profitability of the company but that will be an opportunity for us in 2007 and beyond.

Lanny Baker

Your question on Philly, the overall message is we are excited about that partnership and we are very pleased with results. Since we launch in mid-August traffic has increased 25% year-over-year for Philly.com on their job site. We have now surpassed CareerBuilder for the most job postings in the Philadelphia market less then two months into the partnership. We are now number one in share of audience with more than 60% share and again Philly has an excess of 700,000 and as you know we recently announced the second deal with the Ohio Paper and the number one site in that market, ohio.com.

So I think we’re beyond the financial metrics or the operating metrics. We’re seeing the Monster brand all over the Philadelphia metropolitan market. If you are over there, pick up a paper whether it’s the Daily News or the Inquirer or go into Philly.com and its Monster, Monster, Monster everywhere exclusive. The power of that branding in partnership with a very important and locally trusted brand is compelling and I think long-term offers a lot of opportunities for us to reach the kind of consumers we need to reach and continue to reach the core market.

Peter Appert - Goldman Sachs

The deal in Akron is it the same deal as Philly.com or as these deals go forward do they get more advantageous with your perspective?

Lanny Baker

Obviously the more we do and the more success we have the more interest there is from people looking to take advantage of our product and our brand. So, I think we have got a pretty good team here that will be focused and aggressive in negotiations, but you know we are looking to build long-term relationships as we go.

Peter Appert - Goldman Sachs

Thank you.

Bob Jones

With that I would like to once again thank you for joining us this morning. To listen to the replay of this call, you can dial 800-642-1687 and the ID number is 7917213. You can also access the replay through our website under the Investor Relations section. Feel free to call me anytime, or Lanny with any additional questions. Thank you.

Operator

This does conclude today’s conference call, you may now disconnect

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Monster Q3 2006 Earnings Call Transcript
This Transcript
All Transcripts