Monster Worldwide Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 6.14 | About: Monster Worldwide, (MWW)

Monster Worldwide (NYSE:MWW)

Q4 2013 Earnings Call

February 06, 2014 8:30 am ET

Executives

Andy Rohr

Salvatore Iannuzzi - Chairman, Chief Executive Officer and President

James M. Langrock - Chief Financial Officer and Executive Vice President

Analysts

William G. Bird - FBR Capital Markets & Co., Research Division

Randle G. Reece - Avondale Partners, LLC, Research Division

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Douglas M. Arthur - Evercore Partners Inc., Research Division

Operator

Good morning. My name is Angel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Monster Worldwide Q4 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to your host, Ms. Andy Rohr. Ma'am, you may begin your conference.

Andy Rohr

Good morning, and thank you for joining us on Monster Worldwide Fourth Quarter 2013 Conference Call. We will have formal remarks from Sal Iannuzzi, Chairman, President and Chief Executive Officer; and James Langrock, Executive Vice President and Chief Financial Officer. In addition to Sal and James, members of our executive management team are available to answer your questions during the Q&A part of the call. They are Ted Gilvar, Mark Stoever and Michael Miller.

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. 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 or dispositions, competition and the other risks discussed on our Form 10-K and our other filings made with the Securities and Exchange Commission.

With that, I'd like to turn the call over to Sal for his comments. Sal?

Salvatore Iannuzzi

Thank you. Good morning, and welcome to Monster's Fourth Quarter 2013 Conference Call. This morning, I'm going to summarize our view of the current business environment, report on our financial results for the fourth quarter and comment on the interim priorities. In his comments, James will provide additional financial details and our EPS outlook for the first quarter of 2014.

The economic environment in most major markets appears to be improving. In North America, the signs are becoming clearer that we are seeing overall confidence and greater demand from our fine community. And while Europe remains [indiscernible] overall, we continue to see signs of an upturn in the U.K. and Germany, and now in other regions such as France. Our focused execution in delivering increased size for our customers, particularly with regards to traffic improvement throughout last year, laid a solid foundation in delivering a strong finish to 2013 and allowing for revenue to grow sequentially across all segments.

Our value proposition for clients is challenging the competition and increasing momentum in North America and in Europe. We are encouraged by these trends and see them continuing into 2014. We are making very significant progress on our new strategy while maintaining cost. This strategy is a set of strategic initiatives designed to drive growth and profitability. Some of these activities have been completed. Others are now entering a beta period, and still more will be completed in the next few months. We expect a full implementation in North America by the fourth quarter with Europe following each North American release by roughly 90 days. We look forward to sharing our complete strategy with all of you, as part of our strategy meeting we have scheduled for May 14.

Summarizing the quarter's financial results. EPS was $0.11. EBITDA was $31 million. Revenue was $199 million. Cash flow from operations, of $25 million. Revenue in North America was up 1% sequentially and flat to last year, with several channels including e-commerce, recruitment media and our government business experiencing double-digit revenue growth year-over-year. We continued to be very encouraged by the trends in our e-commerce business and have communicated previously the importance of the small business as a leading indicator of a broader economic recovery.

In Europe, the U.K. and Germany continued to show stabilization during the quarter. However, the results of all our key markets demonstrate sequential improvement, including France and Sweden. Europe's overall revenue was up 3% sequentially. Our business in Asia remains soft, particularly in India. We are pleased to have completed the sale of 49.9% of JobKorea, Monster South Korean operations and the leading Korea website in that country for an aggregate purchase price of $90 million to H&Q Korea, $87 million net of tax and transaction cost. Equally important is our new partnership with H&Q.

We are aggressively executing our midterm [ph] business priority, focusing on delivering the very best results in the industry for our clients. We finished the year having now achieved traffic leadership in North America for the 23rd consecutive month. And as we've said, most importantly, we are seeing a high conversion of this traffic to quality applicants for our clients, which is paramount to success. This factor is partially responsible for our growth in Q4. Our global membership continues to grow rapidly, adding a new Monster member every 2 seconds.

Mobile continues to be a fast-growing facet of our business, with over 25% of our total traffic occurring via mobile devices. Our Apply with Monster strategy is taking hold, opening up easy access to seekers to become Monster members and apply to our appliance job advertisement from a large and growing network of social, business and corporate career sites across the web.

We have processed more than 1 million job applications, added new partners and are seeing strong acceleration in the growth of applied and new seeker accounts from this strategy. We are seeing returns from an overall effort in helping our clients distinguish the improved value proposition of Monster versus others. Specifically, in the area of source attribution, which tracks the volume of applicants delivered by Monster versus the noise from all other sources, today Monster has a growing number of cases that demonstrate a 5x increase in applies attributable to Monster.

With all these initiatives, we are confident we will continue to drive increased client demand. And as we focus on growing the top line, we are continuing to manage expenses to protect profitability. We are pleased to begin the new year with a corporate restructuring behind us and a strategy entirely focused on growing our core market and gaining profitable market share.

As you'll see and hear in James' comments shortly, our cash flow from operations, which has always been strong, was $25 million in the quarter. Before turning the call to James, you will note in our reported results that we successfully repurchased 8.2 million shares on the open market in the fourth quarter under our previously disclosed $200 million stock buyback authorization. This brings the total number of shares repurchased in 2013 to 20.6 million, approximately 20% of the outstanding shares at an average price of $5.19. We believe continuing to repurchase shares at the current level is very -- is a very attractive investment for Monster, and we'll continue to do so aggressively over the coming months.

And now I would like to turn the call over to James for his comments.

James M. Langrock

Thank you, Sal, and good morning. Slide 1 summarizes the fourth quarter 2013 income statement. EPS was $0.11. EBITDA was $31 million. Revenue was $199 million, an increase of 1% sequentially, driven by increases in both North America and Europe, and a decrease of 6% year-over-year. Careers-North America revenue was flat year-over-year.

Operating expense of $181 million increased 2% sequentially and decreased 5% compared to the prior year. Currency had a minimal impact on operating income during the quarter. Interest and other was a negative $1.7 million. Equity loss was $100,000. Korea's minority interest was $200,000.

Slide 2 summarizes the quarter's pro forma adjustments. During the quarter, there were $8.2 million of stock-based compensation expense, $22 million of a noncash tax expense primarily associated with the Korea transaction. The company will utilize existing NOLs to offset all cash taxes that would have otherwise been incurred relating to the gain on the sale of the minority stake in JobKorea. However, for accounting purposes, the majority of the tax expected to gain is recorded through the income statement as a noncash expense.

Slide 3 shows operating expense trends. Salary-related was $91 million, an increase of 4% on a sequential basis and an increase of 1% on a year-over-year basis. The increase primarily relates to targeted increases in quota bearing headcount. We ended the quarter with headcount of 4,000, up 1% sequentially and down 1% year-over-year. Marketing expense was $39 million, an increase of 2% on a sequential basis and a decrease of 13% on a year-over-year basis. Our ability to continue to drive quality applies for our customers while decreasing marketing spend demonstrates the efficient manner in which -- in which we spend our marketing dollars. Office and general expense was $50 million, a decrease of 2% sequentially and a decrease of 7% on a year-over-year basis. As we have said previously, we will continue to make strategic investments in certain countries as we see improvements in the economic environment.

Slide 4 reviews non-GAAP segment performance. Revenue in our North American Careers business was up 1% sequentially and flat year-over-year. EBITDA was $26 million, and EBITDA margins were a healthy 24%. Revenue from our e-comm business was up 11% year-over-year. As we have said previously, activity from our e-comm channel flows directly through the revenue, and it's often an early indicator of future activity.

Revenue from our Government segment was up year-over-year, reflecting the increasing flow-through from deferred revenue. Going into 2014, we have a healthy pipeline in the Government business. We are encouraged by the North American bookings results in the fourth quarter, a key renewal season, which further validates our belief that we've reached a trough in revenue in Q3 2013, and we should continue this positive momentum into 2014.

Revenue in International Careers segment was up 1% sequentially and down 14% on a year-over-year basis. Europe revenue was up 3% sequentially and down 14% year-over-year. While we continue to operate in a challenging environment in Europe, the stabilization we saw in Q3 continued into Q4 in some of our key countries including Germany, U.K., France and Sweden. APAC revenue was down 4% on a sequential basis and down 15% year-over-year, primarily driven by India. While JobKorea is holding its own, our India business continues to be challenged by the tough macroeconomic environment. Careers-International EBITDA margins were 4% as we strategically invested in certain countries in Europe in Q4.

Revenue from our IAF segment was relatively flat sequentially and down 3% year-over-year. EBITDA was $8 million.

Slide 5 is key balance sheet and cash flow items. Pro forma EBITDA was $31 million in the fourth quarter and $141 million on a full year basis. Net cash provided by operating activities was $25 million. Now that the majority of the onetime cash cost associated with the restructuring had been incurred, we expect to continue to generate $15 million to $25 million of operating cash flow on a quarterly basis. Capital expenditures were $8 million. Free cash flow was $17 million. Deferred revenue was $342 million, up 8% on a sequential basis compared to Q4 2012, where deferred revenue was up only 6% sequentially. Total liquidity was $267 million, an increase of $54 million from Q3 2013.

We returned $46 million to shareholders through share repurchases for a total of 8.2 million shares at an average price of $5.63. We have repurchased 20.6 million shares in 2013 or approximately 20% of our outstanding shares at an average price of $5.19. We continue to believe that repurchasing shares at the current levels is an attractive investment for us, and we'll continue to do so aggressively over the coming months.

I'd like to provide an update on our strategic partnerships. The sale of minority stake of JobKorea closed in December with net proceeds after taxes and transaction cost of $86.5 million. There'll be no more cost associated with this transaction. Going forward, we expect the impact of minority interest on our quarterly results will be between $1 million and $2 million per quarter. We are extremely excited about our partnership with H&Q as we work together to expand the South Korean business.

We previously announced Alma Media transaction closed in January, and we now have an initial equity ownership in this profitable business of 15%, with the opportunity to increase ownership to 20% in the future. Beginning in the first quarter of 2014, we will record our share of profits of the joint venture in our quarterly results in the equity line on the P&L. We will no longer consolidate the results of our contributed Eastern European businesses, which on a full year basis represents approximately $2.5 million of revenue and $3.5 million of expenses.

Slide 6 is our outlook for Q1. First quarter 2014 non-GAAP EPS is expected to be in the range of $0.06 to $0.10, which excludes approximately $9 million of stock-based compensation. Please keep in mind that operating expenses are typically highest in Q1 due to FICA and other seasonal expenses.

Now let's turn the call back to Sal for his concluding remarks.

Salvatore Iannuzzi

Thank you, James. As you know, over the past several years, we have faced a challenging economic environment, both here and in Europe. This, combined with increased competition around the globe, has pushed us to be better executioners, smarter innovators and faster movers. We are increasingly more optimistic the macroenvironment is now moving in the right direction. While only 3 months ago it was unclear if the North America was, in fact, bottoming, we are now seeing a return to growth. And in Europe, where there is certainly still weakness, we see enough indication of stabilization to expect it to begin to recover.

We are rapidly executing our strategic plan designed to provide clients unparalleled access to talent across the globe and bringing the broader set of career opportunities to all job seekers, active and passive. As we begin another new year, our core business is improving and is again showing its potential for significant cash flow generation. We are confident the successful execution of our new strategy, together with the improving economy, will create significant value for our customers and shareholders alike. I'd like to thank our shareholders, global clients and entire employee database for their continued support.

Operator, please open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of William Bird.

William G. Bird - FBR Capital Markets & Co., Research Division

Sal, I was wondering if you could share some of the elements maybe at a higher level of strategy that you're thinking of implementing and particularly as you battle some of the meta search sites. And then just in the short term, just was wondering what your thoughts are on having sequential revenue growth again in Q1.

Salvatore Iannuzzi

I'll -- unfortunately, with regards to your first question, I'd rather not go into too much more detail. And I agree, we haven't given very much. With regards to the new strategy, I think, for a number of reasons, competitive and otherwise, that we'd like to wait until the main meeting and go through it more comprehensively than I can possibly do here in this type of form at that time. I do apologize for the meeting being -- we had promised that the meeting would be at the end of March. But this is one of the few times I get to blame you guys for not being able to do it at the end of March. Due to other commitments, we took a little bit of a poll, and many of you have other commitments and there were other conferences and things. So we pushed it back to May, and we set a date so that hopefully no one else crowds us out, if you will. With regards to revenue, the answer is -- this is the answer I can give you. Yes, we expect revenue growth, a sequential revenue growth this coming quarter -- this quarter that we're in.

Operator

And your next question comes from the line of Randy Reece.

Randle G. Reece - Avondale Partners, LLC, Research Division

The operating expense levels have been creeping up and suggest that you're investing maybe at a faster clip than you had been in the recent past. I was wondering if we could have a little more detail about where that spending is going.

James M. Langrock

So Randy, this is James. So where we started to invest is around quota-carrying sales. People -- as we start to see the economies in certain regions improve, we've been adding very -- targeted some sales heads in those regions to take advantage of the improvement in the economy and the opportunities that we see. So that's where we've been investing a little bit. You see the headcount has been going up a little bit sequentially from a quarter-to-quarter basis. So that's what we've been doing. As we -- as I've mentioned in my prepared remarks, going from Q4 to Q1, there is -- part of that increase that we're talking about is just seasonal as it relates to FICA. In Q1, FICA is the highest. By Q4, it's the lowest point for FICA. So we just have some seasonality going into Q1. Also, we're looking at some additional marketing investments, some key countries, as we try to take advantage of the improving economy, and then some additional -- some sales heads. But we look at that -- it was very opportunistic, and we make those investments as we see the opportunity. And as you know, just to remind you, Randy, is we're taking advantage of the sale, but sometimes there's a little bit of lag with the revenue because you make the investment now, you get the sales now. The revenue then rolls out over the next year. But we have -- as things are improving, we're making these targeted investments to take advantage of the opportunity that presents itself.

Randle G. Reece - Avondale Partners, LLC, Research Division

We saw deferred revenue grow sequentially quite a bit better than it did last year. Do you have any thoughts about how deferred revenue will behave over the next few quarters?

James M. Langrock

I think it will continue -- it should continue to improve, Randy.

Operator

And your next question comes from the line of Glenn Greene.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

I guess maybe just a little bit of color. It sounds like the booking trends were really good in the quarter. Any way you could sort of frame directionally kind of what you saw by the key regions whether it's North America, Germany, U.K., France, Sweden, in terms of directionally how much bookings were up in each of those regions? Maybe q-to-q probably makes more sense.

Salvatore Iannuzzi

I think that the -- and again, I don't want to overstate it, but I think we have some reasons to be -- to have a little bit more confidence, certainly, than the last few years have given us. The increase -- and we saw very positive trends growing, both in North America. And we expected some improvements in Europe, but we even got more than we expected. And it was fairly across the board. We saw it in Germany. We saw it in France, the U.K., Sweden, which is becoming more significant to us. So pretty much most countries saw an improvement. There's still a few, Italy, Spain, a few others that are lagging a little bit behind. But we're pretty happy with what we saw, as I said, in Europe and the fact that it came probably a little earlier than we expected. And so we see that momentum based on certainly what we see as of today continuing into the first quarter and beyond. I think that -- please let's keep in mind, it's -- while the growth was good, it was still what I would consider modest. And I expect that Q1 will also be modest. I don't think the -- I think between the economy and the rollout of our new products, we should expect to see growth. But this is the best way I can describe it, it's going to be a slow burn, so it will be more of a horizontal growth than a spike up, if you will. So I just want to temper that a little bit.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

What do you see in North America?

Salvatore Iannuzzi

North America is the same thing. We see -- we saw North America growth across just about all sectors of the business. There is a much more -- you measure it, obviously, with the numbers. But you also measure it with the conversations, the tempo of the customers. And I think there is just a significantly more positive attitude, and that is somewhat split between the economy. People felt more optimistic, and that is continuing. And we -- also from the standpoint, I mentioned in my comments regarding the attribution to Monster for the number of applicants, there's traffic, and traffic is important because it produces the applicants. But I think that between the increase in applicants that's occurred, and been occurring, and the fact that we can prove to customers that they are getting a much more significant number of applicants from Monster than they previously believed. We made some technology improvements and taken a number of actions to make sure that happens. And we're benefiting from that. Customers are realizing that the value proposition that we have is superior.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

And then the deferred revenue lift, the 8% q-to-q? And I think some numbers were restated. James can help me with that. But a couple of questions. Is that a reasonable proxy for the bookings growth? Or something else we should be thinking about? And is there a way to frame this 8% q-to-q relative to sort of a more normal cycle before?

James M. Langrock

So what I would say, Glenn, is that if you look at last year, the sequential growth was 6%. The sequential -- obviously, Q4 is our largest renewal period. So you would expect that to grow sequentially. This year, it grew -- the sequential growth was in absolute dollars, and in percentage, it was greater than it was in the prior year. So obviously, that's showing a stabilization in some of the improvements we're seeing in bookings, Glenn.

Salvatore Iannuzzi

The momentum is more positive than it was a year ago in the growth of the deferred, and we do expect that adjusted for seasonality and those things. But overall, the momentum, if you will, of deferred should continue to grow.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

All right. Just one more question, and I appreciate that you don't want to share your strategic initiatives or the specifics of that at this point. But is there a way directionally you're thinking about the magnitude of the revenue lift that you'll get in fiscal '15 when they're rolled out?

Salvatore Iannuzzi

Really, and I'm not -- this isn't just a hedge or just not telling you. I -- we really are not thinking about it in terms of revenue increase right now. We -- clearly, that's the objective. But we're -- at this stage of the game, it's really what are we going to deliver to the market, how broad is it going to be. And basically, what I can tell you is the approach that we've taken is deliver a product mix that really makes it hard for a customer to justify going anywhere else to seek talent. And I know that's a broad statement and a grand statement, but that is really the strategy we laid just around very early -- very late in '12 and early in '13. And that's where we're executing on, and as I said, we are making what I would consider very, very good progress. I think we'll demonstrate that in May at our meeting. But certainly, to project revenue implications and things of that nature, way too early in the game.

Operator

And your next question comes from the line of Doug Arthur.

Douglas M. Arthur - Evercore Partners Inc., Research Division

Yes. Two questions. James, you went through some of the categories in the U.S., e-commerce, government, up double-digit. I missed the third one. And so I guess the follow-up question is, what's still down? And is it -- is that category improving? I assume that's sort of the broad corporate work. So that's -- if you could just go through the categories in the U.S. -- North America, that would be helpful. And then, Sal, I mean, you had sequential improvement internationally, but obviously, you've talked about the investments. So your EBITDA was down fairly significantly, sequentially, internationally. Is that something, as you start to get modest improvement, we -- is that a pattern we can expect throughout '14?

James M. Langrock

So Doug, I'll start with the EBITDA question first, and I'll go back to your segment question. So as I said earlier, we look at the EBITDA margin in Careers on a portfolio basis overall. And as we see opportunities, as we see markets improving, we will make strategic investments in those specific countries. So as we start -- as we mentioned, in Europe, we started to see stabilization in Q3, and we saw the opportunity in Q4 that have made sense. We believe we did make some additional investments in Europe, which had an impact on the overall international margin. And obviously, we saw the improvement in the sales and that improvement, from a revenue standpoint, obviously, flows in over time. So several million dollars, which impacted the margin. But as revenue starts to improve, the international margin would obviously improve with that as well. So obviously, we'll look at this on -- we look at it very closely, but when we see things improving, we want to take advantage of it and we'll make those investments. So that's what happened. We saw the opportunity. Things were improving in Europe that we made the investment and saw that in the bookings that we saw in Europe. And we obviously look at that on a quarter-to-quarter basis as the economies are improving or what's going on. So that's what's going on with the international margins. And again, as revenue improves, that margin improves with that. On a sequential basis, Doug, I guess the one thing that we mentioned from being up year-over-year was recruitment media. But on a sequential basis, as Sal mentioned, the government was up, commercial. Everyone was up. All the segments were up sequentially. And on a year-over-year basis, the commercial business was, on a revenue standpoint, overall, we were flat year-over-year, up sequentially. What is still down because of the lag in bookings to revenue, the commercial business was down slightly. So that's what showed up [ph] but on a sequential basis everything was up.

Salvatore Iannuzzi

And Doug, I'd just like to add a little bit more color to what James gave you with regards to the EBITDA margin, Europe versus U.S., or what have you because I think it's an important question. I think you will see more swings back and forth between the 2. We consider the number of dollars, and first of all we are talking about just a few million dollars at the end of the day. Each quarter, that's -- what we try to do is see what the opportunity is, see what the economies in all the countries we operate in are doing. And we'll make judgments as to where to put some of those dollars to work. And they -- the hope is, obviously, that they'll pay dividends in the future. So may not see -- in fact, most of the time, you will not see a correlation between the increase in spend to the benefit in revenue. They lag. But we take very much of a portfolio view of things, and we look at all the countries we have. We look at what we're trying to do, and we make decisions on where we think those, as I said, few million dollars are going to do the most good going into the future. Some of the -- we start to make some investments. So this is just an example. In Europe, in Q3, in terms of adding some sales headcount, James indicated that earlier, we put some more dollars to work in certain countries with regards to marketing because of the improvement in those countries, all because we delivered some new products into that location. So we thought that we needed to give it a little bit of a boost. And most of the time, the investments we're talking about again, to put it into context, is maybe $0.5 million or maybe $0.75 million. It's just that we operate in a number of countries, a couple of hundred here and a couple of hundred there, it adds up to several million. But I think you'll see, as we go forward, particularly as we're introducing more product as a result for our strategy, you will see more of that fluctuation. And what we really look at overall is how we're doing in the whole between Europe and the United States. We start at the individual countries, but what's most important to us because of this methodology is what we do overall.

Operator

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.

Salvatore Iannuzzi

Thank you.

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