Monster Q4 2006 Earnings Call Transcript

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Monster Worldwide Inc. (MNST)
Q4 2006 Earnings Call
February 1, 2007 10:00 am ET

Executives

Bob Jones - IR
Bill Pastore - President and CEO
Lanny Baker - CFO
Steve Pogorzelski - President of Monster International
Doug Klinger - President of Monster North America
Mark Stoever - President of Internet Advertising and Fees
Chris Power - CFO of Global Operations

Analysts

Imran Khan – JP Morgan
Christa Quarles - Thomas Weisel Partners
Mark Mahaney - Citigroup
Matt Litfin - William Blair & Co.
Jeetil Patel - Deutsche Bank Securities
Peter Appert - Goldman Sachs
Tobey Sommer - SunTrust Robinson Humphrey
T.C. Robillard - Banc of America Securities
Lisa Monaco - Morgan Stanley

Presentation

Operator

I would like to welcome everyone to the Monster Worldwide fourth quarter and full year 2006 earnings release 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 fourth quarter 2006 conference call. Our format calls for us to have formal remarks from Bill Pastore, President and Chief Executive Officer; and Lanny Baker, Chief Financial Officer. Joining us for the question-and-answer part of the call is Steve Pogorzelski, President of Monster International; Doug Klinger, President of Monster North America; and Mark Stoever, President of Internet Advertising and Fees. Chris Power, CFO of Global Operations, is also with us this morning.

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. These statements do not include the effect of the defense or outcome of the ongoing investigations, or litigation relating 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 the other risks discussed in our Form 10K(a) and our filings made with the Securities and Exchange Commission.

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

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Bill Pastore

Thank you, Bob. Welcome to Monster Worldwide's 2006 fourth quarter conference call. I'm pleased to be here along with several members of the company's senior management team to discuss our performance and financial results for the quarter and year end, as well as our long-term strategic direction and the outlook for 2007.

We're pleased to say that Monster's performance in the quarter was outstanding, and our fundamentals are strong. 2006 included several significant accomplishments and milestones for the company. Specifically, we surpassed the $1 billion mark in revenue, our international business produced a cash flow north of 10% for the year, and our Internet advertising and fees business emerged as a source of additional revenue growth.

We continue to achieve strong revenue and profitability growth as we realize the benefits of investments in our brand, our people, and technology. With the sale of non-core assets completed, our resources are now solely focused on capturing the huge potential that we see in the core Internet business across the globe. And as pleased as we are with our performance and financial results for the quarter and year, we're even more optimistic about our growth prospects for 2007 and beyond.

Admittedly, the fourth quarter and second half of 2006 presented challenges for Monster that were unanticipated and which unfortunately, will be ongoing. As you're aware, in the past six months, we made significant progress in addressing the company's historical stock option grant practices. We responded to this development and dealt with the situation in a prompt and transparent manner. Today, we're current with all our SEC filing requirements and are fully compliant with NASDAQ's listing requirements.

The focus of the stock option investigation at this stage now centers on the past actions of individuals who are no longer employed with Monster Worldwide. While the matter is progressing, we cannot provide a timeline for its conclusion. While we have no specific insight regarding the efforts of federal prosecutors, I can assure you that no one from Monster Worldwide's current executive management team is the focus of this investigation.

I have the utmost confidence in our senior leadership team, and we are adhering to the highest level of transparency and corporate governance and focusing intensely on all the things we can control. We're diligently working with the organization and the special committee of the board on recommendations to upgrade corporate governance and internal controls.

To this point, in December Philip Lochner was appointed as the ninth member and seventh independent director on Monster Worldwide's Board of Directors. Mr. Lochner previously served as a commissioner at the Securities and Exchange Commission and as Senior Vice President and Chief Administrative Officer of Time-Warner Incorporated. We have new executive leadership, a sharpened focus on executing against a compelling long term growth plan, and an obsession to become a more customer-driven company.

I am particularly proud that the leadership team has not allowed the option issue to distract from growing our business and better serving our customers, our employees, and our shareholders, which is our guiding mission. We are moving ahead as a stronger and better company with a tremendous opportunity before us.

Turning to the current results, we met our commitments and produced strong financial results top to bottom. Our overall revenue came in a bit above the high end of our expectations as global demand for our services increased. We continued to expand our operating margin through higher sales volume and improved efficiency. Diluted earnings per share from continuing operations grew at a healthy rate of 41%, including the effect of significant expenses related to the stock option review. Lanny will explain these costs in more detail shortly.

At the same time, we entered 2007 with a strong, liquid balance sheet and a net cash position approaching $600 million, which provides an attractive degree of flexibility and significant opportunity on the capital allocation front.

Our revenue growth in the quarter was balanced and once again, exceeded industry averages in the U.S. and overseas. In the fourth quarter, the international division achieved an outstanding 63% revenue increase. Monster Europe is the clear number one online career resource, operating in 18 countries and is the leading brand in this largely untapped market where the vast majority of helped wanted advertisers still use print. In the fourth quarter, Monster Europe had almost three times as much career-related traffic as our nearest competitor.

Our international results were fueled by the outstanding execution of our salesforce, which achieved higher productivity levels as our brand awareness and supply of job seekers increased. For the year, cash flow margin in International surpassed 10%, comfortably above the mid to high single-digit goal we committed to a year ago. And as excited as we are about our results, we still have not realized many of the operating efficiencies we expect to eventually achieve as the business across the continent fully scales.

Our Asian business also continues to grow at a very healthy rate. The more we dig into this opportunity in the region, the more excited we become about the longer term aspects for profitable growth in Asia. Today, we're in an investment mode in countries like India and China; however, we expect to benefit in the longer term from the combination of massive workforce formation and the Internet boom that defines much of Asia. The huge labor pools and strong economic growth that the Asia Pacific countries possess leave us little doubt that these markets will one day eclipse the domestic U.S. help wanted market.

As much as we are investing in Asia, we're also seeking to tap the region's dynamic innovation and creativity to elevate our strategy and tactics elsewhere. I, along with the senior management team, recently had a firsthand view of the power of the global Monster brand when we assembled our global business leaders for a Flatten the World Summit, where we shared ideas and best practices under the theme of innovation. It was a first for Monster and a clear sign of an important internal cultural shift that will propel our business forward and serve our customers and shareholders well in the future.

As part of our dedication to be customer driven and commitment to technology innovation, we've created centers of innovation and excellence in our Asian markets to serve as hubs of new product development. We plan to significantly increase investment in research and development in 2007, and we will expand the Monster lab concept into a global R&D operation.

We are determined to leverage our global position and share creative thinking across the organization. We believe this approach will improve our ability to share promising concepts and turn ideas into revenue-producing products and services for our customers. For example, it's already common practice to serve up job postings on mobile devices and PDAs in South Korea, and we are examining a mobile prototype developed by JobKorea for potential deployment in Monster’s other markets.

India, South Korea, and China, all hot spots of innovation, experienced significant growth in revenue during the quarter. The ChinaHR team made strong progress in rapidly developing a telesales and enterprise sales competency, as well as driving higher returns on its increased advertising spend. Additionally, outside tracking sources reported that ChinaHR surpassed the prior market leader in traffic, reach and page views during the fourth quarter. ChinaHR now joins so many other Monster properties as the most visited career-oriented site within its own market.

Our North American Careers business turned in a solid performance in a market that, as anticipated, has moderated. Even as the U.S. economy shows signs of slower growth, it's important to point out that we continue to operate in an environment of low unemployment, tight labor conditions, and acute skills shortages in certain industries. We once again grew market share as the secular shift picked up steam throughout the year and more advertisers realized the value proposition that online recruiting offers.

At home and abroad, our customers are beginning to benefit from Monster's global size and scope, an opportunity that's unique to Monster. We expanded our services to multinational corporations as multi-country cross-selling transaction increased significantly in the fourth quarter. We also expanded our sales distribution points. We now have relationships with seven media companies representing 45 newspapers with a daily print circulation of over 2 million. We are pursuing similar relationships in other markets as the majority of publishers seek to partner with online providers. Here, we believe Monster's brand, career resources, robust resume database and the ability to monetize traffic set us apart from our competitors and offers a compelling alternative.

We also recently announced several website enhancements and introduced new search functionality to further empower job seekers and users. Our goal is to personalize the online experience while providing more quality matches between job seekers and employers.

In a move to balance our revenue sources, our growing Internet advertising and fees business made a solid contribution in its first year as a standalone business segment. IAF clearly emerged as a growth opportunity that diversifies Monster from the careers-only business by speaking to consumers through a new and different experience on Monster. We're broadening our brand and our content to not only serve our consumers when they're actively looking for a job, but also by being there along the way to help them get the most out of their careers. By doing this, we strengthen the business model and allow Monster to serve new and existing customers in exciting new ways.

Internet advertising is a $16 billion market, of which Monster has achieved a 1% market share, solely through our investment in the IAF business and the work completed in the last year. Our large global user base, portfolio of work-life related sites and experience in online advertising, support our investment and optimism in this area. We've invested in building infrastructure, increasing salesforce, and expanding our advertising and promotion which is critical since we are in the very early stage of this game.

This year, we added new customers, expanding our reach in key verticals that you might not expect with Monster's traditional focus in careers. Motion pictures, television, consumer electronics, fashion and retail are just some of the new categories that our IAF division is serving with creative and effective marketing and media solutions.

For example, earlier this year, we ran a campaign for the film The Devil Wears Prada. To support this campaign, we developed a toxic boss contest that used career-related entertainment to drive consumers to Monster, while the advertisers serve contextually relevant advertising and provided a unique and fun promotion for our consumers.

Another example is the Dress For Success section on Monster.com. The section provides tips and advice on what to wear to work or for an interview, complete with integrated and contextually relevant advertising from Brooks Brothers. These are just two examples of how our IAF division is expanding our client relationships in a manner that drives revenue while better serving our consumers.

On top of that, virtually all of the $152 million we generated in IAF revenue during 2006 came from the United States. Most recently, we entered Canada and believe there's a huge opportunity to expand internationally in both Europe and the Asia Pacific region.

In summary, we believe our fourth quarter and year end financial results were solid as we met our goals and commitments, despite the unanticipated distractions due to the stock option investigation.

Looking to 2007 and beyond, we're encouraged by the increasingly global growth opportunities within online recruitment and excited about changes we are making internally to accelerate innovation, expand key partnerships, and sharpen our focus on the customer; job seeker and employer alike.

Before Lanny provides numbers, I think it will be helpful to provide some context to our progress and our plans by outlining the essence of the company's growth strategy and highlighting key areas of focus. We've made early yet significant strides in establishing and executing on the growth pillars that will be the foundation for our long-term strategic plan.

At the top of the list, we are dedicated to becoming a customer driven company and the entire leadership team is focused on achieving levels of customer satisfaction among job seekers that will match the 85%-plus levels we enjoy with our employers.

Innovation is another key priority. We've taken steps to be more personal in our approach to users and faster and more nimble with new product development as evidenced by the enhancement recently made on our website. At the local level, a growing list of relationships with leading media and newspaper publishers is enhancing Monster's local presence and early success encourages us to become even more proactive in this key area, a source of exciting revenue growth potential moving forward.

On the global front, our strategic expansion into new geographic markets like the Gulf region, Mexico, Turkey and Russia enable us to be global and grow our seeker and customer base in new areas. We currently reach only 75% of the world's population, so there's much more opportunity to grow. At the same time, these developing areas are incubators and think tanks for new ideas and ways to enhance and improve existing business models in the more established markets like the U.S. and Europe.

Finally, we will be rigorous, analytical, and disciplined in allocating our capital. We have quietly assembled a first-rate team of smart, savvy, business developers who are charged with taking a proactive approach to identifying and building partnerships and relationships that will help position Monster for continued growth as the online advertising business continues to evolve.

In summary, we believe our performance in 2006 will set up continued strong performance in 2007. We are optimistic the businesses we serve globally are well-positioned to accelerate our growth in 2007. We will invest in our business with a much greater focus on innovation and new product development. Our investments will be disciplined and our analysis rigorous. The opportunity before us is huge, and the market is largely untapped. As our outlook suggests, we are encouraged by what we see and what our customers are telling us. We have built a company that has the ability to generate very strong earnings and cash flow and we are committed to maximizing returns for our shareholders over the long term, while wowing our customers, employers, and consumers alike.

With that, I'd like to turn the call over to Lanny Baker, Monster Worldwide CFO, for a closer look at our financial results.

Lanny Baker

Thanks, Bill. The fourth quarter results highlight several key fundamentals that encourage us about Monster's future. First, the healthy balance and growth potential added by our international expansion and IAF diversification, are visible in a 33% overall revenue growth rate for the quarter, even as job growth in the U.S. moderated.

Second, our ability to drive greater operating efficiency as we grow bigger and focus our priorities, is unmistakable, as overall EBITDA margins improved more than 400 basis points year-to-year on an operating basis, excluding costs associated with the stock option review. Incremental margins close to 50% in North America tell a similar story.

Third, compelling opportunities for internal investment continue to present themselves, whether that means building the IAF infrastructure and linking more closely to Monster, rewiring our local sales strategy to include newspaper partners, or launching four new Monster properties overseas during the quarter.

Fourth, the size of our opportunity, strength of our position, and commitment of our people is clear on the earnings line, where EPS from continuing operations grew 41% year to year, despite the distractions and challenges we faced. In fact, the $0.31 per share reported for the fourth quarter includes a $0.02 per share charge for an option-related expense we disclosed in December, as well as about $0.01 more than we expected in legal and accounting bills related to the investigation -- very strong underlying results.

Fifth, and by no means last, the underlying appeal of Monster's financial model is reflected in free cash flow of $213 million for the year, more than three quarters of EBITDA, and nearly 140% of reported income from continuing operations. Monster's strong conversion of revenue into EBITDA and EBITDA into free cash flow helped lift net cash and securities to $573 million at year end, a store of financial resources which we intend to purposefully allocate toward maximizing shareholder value.

Before discussing our results in more detail, there are a couple housekeeping items to address. First, as we disclosed in our December 26 press release and SEC filing, the company recorded a $5 million pre-tax expense during the fourth quarter related to making whole certain holders of stock options that expired during the period in which Monster's equity compensation programs were recently suspended. The company's equity plans are now active again, and the expense to make these option holders whole is included within the salary and related line in the fourth quarter income statement. This one-time expense, which was not originally contemplated in our business outlook, reduced earnings from continuing operations by $0.02 per share for the quarter and the year. Exclusive of this expense, EPS from continuing operations were at the high end of the outlook provided in October.

Second, the company continues to incur significant legal and professional fees related to the ongoing stock option review. Fourth quarter costs totaling $8.6 million pre-tax for these were recorded within the office and general line on the income statement. These costs amounted to roughly $0.04 per share and were $2.8 million or $0.01 per share greater than we originally anticipated for the quarter. For the full year, Monster incurred $13.3 million in legal and professional services fees associated with the option investigation. On a per share basis, these expenses reduced full year EPS from continuing operations by $0.07 per share, in addition to the $0.10 charge for making whole certain option holders.

Now, turning to the fourth quarter results, total revenue of $229 million increased 33%, and hit the top end of our outlook for the quarter. Overall organic revenue growth was 29% year to year, compared with 33% organic growth rate in the third quarter. Revenue growth of 22% in North America was a bit stronger than we anticipated at the start of the quarter, while the IAF unit was at the lower end of expectations, and international continued to show very strong momentum.

Total operating expenses of $241 million were up 33% year to year, growing in line with revenue for the quarter. However, $13.6 million of the expenses in the fourth quarter relates to the company's stock option review, and the expense growth rate would have been about 25% excluding option review-related costs. We also recorded a $4 million planned restructuring cost in the fourth quarter as we streamlined our corporate infrastructure.

Marketing spend was 22% of revenue in the fourth quarter as we managed our spend in anticipation of the new ad campaign that launched in late December and has grown into January. Operating income of $58 million in the quarter was $71 million prior to the option investigation costs recorded in the quarter. EBITDA of $70 million for the fourth quarter was $84 million excluding the investigation costs. Normalizing for those non-operating costs, the company's margins improved by more than 400 basis points year to year, and EBITDA growth was in the high 50% range for the quarter before the effect of the costs associated with the option investigation.

Below the line, we generated greater interest income on rising cash and security balances, and the equity loss from our investment in ChinaHR was $1.5 million in the quarter. ChinaHR achieved 70% revenue growth for 2006, and its revenue levels would already rank China sixth-largest within Monster's International portfolio.

Digging into the fourth quarter results at the next level, we start with Careers North America where revenue grew strongly to $168 million. Revenue growth of 22% in North America was a couple percentage points better than we anticipated, with Canada and the enterprise channel accounting for the upside. Our revenue growth trend over the last few quarters here has reflected moderating job growth in the U.S, while we continue to clearly outpace overall market growth.

The e-commerce channel grew at a mid single-digit rate in the fourth quarter, and we're examining product and marketing changes that might offset the dampening effect of slower economic growth as we move forward.

With highly targeted marketing and ongoing product enhancements, Monster.com ended the year with traffic growth in the mid single-digits in North America, while My Monster accounts grew at about 10%, and resume volume advanced at a low 20% rate in North America, reflecting broadening engagement levels amongst Monster's users.

Job postings and resume views by employers grew as fast or faster than the seeker metrics, and revenue and profit growth in North America were stronger still, pointing to improved monetization and growing operating efficiency in the core business segment. Careers North America produced $65 million in operating income before depreciation and amortization in the fourth quarter, a 30% increase that puts the unit's cash flow margin at nearly 39% for the quarter.

Shifting to the Careers International unit, well-timed salesforce and marketing investments are paying off in outstanding financial performance. International segment revenue grew 63% in the fourth quarter to $90 million, and international now represents 30% of overall revenue, up from 25% one year ago. Excluding almost $4 million in acquisition-related growth and $4.6 million in currency benefits, organic revenue growth was 47% in the fourth quarter, close to the low 50% organic growth achieved in the first nine months of the year, despite a larger underlying revenue base.

Higher brand awareness and sharply improved traffic and user engagement levels have improved our service offering in key markets overseas, and this has been especially true in the places we've concentrated our spending: the UK, Germany, the Netherlands, India, in particular.

We're also encouraged by the progress of our e-commerce initiatives in Europe. Operating income before depreciation and amortization of $13 million for international in the fourth quarter was up more than threefold year over year and reflects a 14.5% cash flow margin for the fourth quarter, more than double the segment's year earlier profitability. Revenue per employee continued to advance at a 30%-plus clip in Europe, and we gained eight points of margin leverage year to year against our single largest expense category, employee compensation.

Turning to the IAF, internet advertising and fees business, revenue growth of 31% to $40 million was fractionally lower than we anticipated for the quarter. Organic revenue growth was 24%, excluding $2 million of acquisition-related revenue growth. In the prior couple quarters, IAF was growing at roughly a 40% rate and the reduced fourth quarter growth can be attributed to a couple factors.

First, as Monster’s marketing spending moderated late in the quarter, we saw reduced traffic growth and the IAF unit was left with lower than expected levels of advertising inventory to monetize.

Second, our IAF advertiser base, while growing, is still somewhat concentrated and a couple of key advertisers changed their spending in ways that impacted overall revenue during the quarter. We believe both of these are transitory issues within an emerging business, and recent sales trends point to improved growth rates in the future.

The IAF business generated about $13 million in operating income before depreciation and amortization in the fourth quarter, with margin levels dipping compared with the third quarter. During 2006, we organized and expanded the IAF sales capability and we increased the marketing spending on our network of ad-supported sites by over 50%, both of which weigh on near-term profit margins, but which should support stronger growth and greater profit dollars in the coming year.

Turning to the balance sheet, cash and marketable securities, net of debt, totaled $573 million at the end of 2006, almost exactly $300 million greater than at the end of the prior year. Full year free cash flow of $213 million accounted for the bulk of the improvement, with another $110 million in proceeds from stock option exercises and related tax benefits, as well as $69 million in net proceeds from our divestitures.

Offsetting this, we used $55 million in net cash for acquisitions and investments in 2006, and $37 million for share repurchases during the first half. Capital expenditures were $56 million for the year, or about 5% of revenue.

Monster's net cash and securities position relative to the size and profitability of the business, as well as the investment opportunities we see immediately ahead, is now growing beyond what we view as the appropriate or optimal levels. We will be disciplined and proactive in our use and allocation of shareholder capital.

Deferred revenue ended the fourth quarter at $444 million, achieving 36% growth year-over-year and a $97 million increase from September to December, reflecting healthy renewal activity. Finally, the weighted average fully diluted share count was 131.2 million for the fourth quarter and the year, about flat sequentially and up 3% year to year.

I'll now turn to our business outlook. Our 2007 plan includes growth and investment priorities that touch virtually every aspect of our business. They are built on the confidence that comes from a strong competitive position, great customer insight, careful analysis, and a track record of prior success.

Historically, we've shown our ability to invest successfully in the sales model, with the recent addition of our telesales center in Arizona, the growth of e-com, and our new efforts with newspaper partners helping to propel Monster's market share gains in North America. We've shown our ability to invest effectively in the marketing model, with last year's doubling of marketing spend in Europe creating the leading regional brand, powering significant revenue growth acceleration, and paying off in handsome margin improvement in a very short timeframe.

Looking forward, we intend to add investment success in the product arena to Monster's high growth formula. Our near-term investment plans include product and technology, where we'll drive innovation and accelerate new products, while also upgrading storage, search, and advertising systems around the world.

Sales distribution, where we'll add more salespeople and refine our telesales model, while also investing in newspaper partnerships and an enhanced e-com platform in order to increase market coverage and drive overall efficiency.

Marketing, where we'll invest in our brand and our service overseas, rolling the spend from areas of established leadership toward tomorrow's local opportunities.

China and emerging markets. We've created a carefully designed global game plan with several new market entries planned for 2007, as well as increased and timely investments in our biggest long-term opportunities.

As we have in the past, we're introducing an outlook for both the first quarter and the full year. However, we're modifying our approach in an important way. In a break from our practice of the last two quarters, we have decided not to include in our outlook any anticipated costs associated with the stock option review. A primary reason for the change is that the process is moving from an internal review to external investigations focused on the past actions of individuals who are no longer employed by the company. As a result, our visibility into these costs and their size and timing has been dramatically reduced. Accordingly, we do not believe we can accurately provide an outlook range for reported earnings per share.

However, we have provided outlook ranges for other key components of our income statement, including revenue, operating expenses excluding any costs associated with the stock option investigation, as well as other below the line items. As we report future financial results, and in cases where we may become aware of significant option-related costs or expenses that we can identify, we intend to disclose these costs in a prompt and transparent manner, just as we have to date.

Now, for the first quarter of 2007, we expect revenue of $330 million to $338 million, a hardy increase of 30% over last year at the mid-point of the range. We anticipate that revenue growth in Careers North America will ease in the first quarter along the same lines we've seen in the last six months, while showing sustained outperformance relative to overall recruitment ad spending in North America. International revenue growth is expected to continue to lead the company, although the non-organic benefit of our JobKorea acquisition has now fully cycled through the comparison. At IAF, we anticipate year-to-year revenue growth improving from the fourth quarter.

At these revenue levels, and with the investments we have planned for the first quarter, we expect overall operating income before depreciation and amortization margins to be up about 1 percentage point year to year. Please note that these ranges are on an operating basis and exclude likely legal and related costs associated with the stock option investigation.

Below the operating income line, we anticipate $5 million to $6 million in interest and other income in the first quarter; and our tax rate should be steady at 35%. Our share of ChinaHR's losses is expected to increase to about $4 million to $5 million in the first quarter, in tandem with a major marketing and sales push to start the New Year.

For the full year 2007, we're introducing an outlook range of $1.36 billion to $1.41 billion in revenue, growth of about 24% at the mid point of the range. We currently anticipate revenue growth in the mid-teens for Careers North America, though our local newspaper partnerships and other investments should provide some added lift as the year progresses.

Balancing our drive for ever-improved efficiency and near term bottom line results with the desire to invest internally to fuel future growth, we're committed to further margin expansion in 2007, excluding costs related to the ongoing option investigation. In particular, we expect another step upward in international profitability to mid-teens EBITDA margin levels for the full year, while continuing to drive global growth and innovation.

Below the operating line, we expect $22 million to $24 million in interest and other income, a tax rate of 35%, and about $10 million to $12 million in equity losses coming from ChinaHR during what may be that business' peak investment year. Free cash flow should again exceed net income in '07, though our product and technology investment plans call for capital expenditures in the range of $75 million in 2007, a 35% increase from '06 levels.

Finally, as mentioned earlier, we'll continue to monitor and manage the company's excess liquidity with consideration of likely acquisition opportunities on one side and the opportunity to return excess capital to shareholders on the other.

In summary, Monster's strong fourth quarter results capped off an excellent year, a year in which significant transitions took hold across the online recruitment market and the Internet, as well as within Monster's strategies and inside the company's operating and financial formula. As these evolutions proceed into the future, we're focused on strengthening the fundamentals of our business, delivering on near-term financial objectives, and simultaneously laying the foundation for even better performance, sustained long-term growth, and increasing value for the company's shareholders.

Now, we'll be happy to respond to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Imran Khan - JP Morgan.

Imran Khan - JP Morgan

Thank you. Good quarter. Two questions. Lanny, can you give some sense of what the constant currency growth rate is for international business? Secondly, some third-party vendors data is showing that the traffic growth rate deceleration on the Tickle side and I was wondering if you can comment on that; if you're seeing some of the non-core Monster side traffic, can you comment on that? Thank you.

Lanny Baker

Sure, Imran. The currency effect in the fourth quarter, as I said, was about $4.5 million. That added roughly 8 points of growth in the international business in the quarter, and for the total company it was a 3 or 4 point benefit.

On the traffic question, when we look at our marketing spending, we look at the traffic at the Company, we are managing to the business fundamentals of our organization. And as we talked about, the Monster.com traffic in the core careers category showing mid single-digit growth; and most importantly, growth in the engagement of those users is exactly what we're trying to achieve.

On some of the other properties, we've been disciplined about spending and shifted it a little bit in the near term, which has impacted the media metrics view of Monster's traffic, but I think as the financial results show, that's well within reason in terms of the objectives we have for the company.

Imran Khan - JP Morgan

Thank you.

Operator

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

Christa Quarles - Thomas Weisel

I was just wondering if you could illuminate the IAF business a little bit more, specifically categories where you saw weakness? What gives you better outlook going forward? Also if you could highlight some of the changes that you're making to the Monster website, as to whether or not that had any impact? And then just your long term view as to how important that business in aggregate could be to overall Monster. Thanks.

Mark Stoever

I'll take it and feel free, Lanny, to add anything. So, just to reiterate, IAF made solid contribution top and bottom line. We grew 40% over the year, faster than the pace of the market; and we do expect to see that growth continuing to outpace. We think that's about twice as fast as what we're seeing in the online display spend.

Q4, we did grow 31% so faster and pretty strong year over year, and we're just seeing a ton of opportunities still ahead of us. But I think what we have to think about is this is a business built on a diverse set of properties that are just beginning to work together to leverage each other's assets, particularly as it relates to the client base.

So what we saw in Q4 was we're expanding our client list across the network to diversify the offers. As you know, we've been heavily concentrated in the online education space. We introduced for the first time some financial clients as well as some CPG clients. So as the broader set of offers improves the consumer experience, we also see some satisfaction improvements for the client, such that the offers don't get tired. These are the categories that have sort of different business models that may pay a lower price to reflect the lifetime value that they've worked into their models.

So we think it is reasonable to see quarterly fluctuations like this in revenue growth, as we continue to ramp. I think we have to remember that this is a business that is just about a year old with tremendous opportunity in front of it, so we're going to continue to try to diversify and make sure that the satisfaction is there.

As far as the website development, we're seeing some good responses. That's not contributing to any of the traffic problems. In fact we're seeing, particularly in December, some nice upticks.

Lanny Baker

Christa, the one last thing we can add on the growth rate in the fourth quarter is that we saw the lead gen revenue up about 40% and display growth was in the high 20s. So a key thing that we really focus on is presenting advertising offers that matter to our users and I think the success in the lead gen shows you that we're being successful in that area.

Christa Quarles - Thomas Weisel

One quick follow-up there. It looked like the incremental ads and fees EBITDA was a little bit lower. I guess as those revenues re-ramp, I would assume that would also improve?

Lanny Baker

I think that's right.

Christa Quarles - Thomas Weisel

Thanks.

Operator

Your next question comes from Mark Mahaney - Citigroup.

Mark Mahaney - Citigroup

Thank you. I wanted to just go a little bit more into the outlook. Lanny, I think you said EBITDA margins in the first quarter would be up 100 bips year over year. Could you talk about what they would be like on a full-year basis for '07?

And then just as a follow on, the EBITDA and the free cash flow conversion, any thoughts on what that would look like for the full year '07? Thank you.

Lanny Baker

Sure, Mark. You're right on the margins for the first quarter. We are committed to expanding the margins on a full-year basis as well. I think we're looking at margin expansion that'll be steady throughout the year, consistent year-over-year progress. The company's goal is to drive the combination of very strong revenue growth and continued improvements in profitability. That comes from scaling the model. It comes from things we do to reap more efficiency from our existing cost structure, and we remain very committed to that; while at the same time, funding some pretty important investments, so that gives you a picture of the full year profitability.

From a cash flow perspective, Monster's model is a pretty capital efficient one that does generate very strong free cash flow, so as we said, we expect the free cash will be greater than reported net income in 2007, but at this time, we haven't provided anything more specific than that. One of the key components there, of course, is capital expenditures, which should be about $75 million in '07.

Mark Mahaney - Citigroup

Thank you.

Operator

Your next question comes from Matt Litfin - William Blair & Co.

Matt Litfin - William Blair

Yes, hi. Lanny, I had a question on that strong deferred revenue surge in the fourth quarter. Do you have the year-over-year growth rate of the domestic business versus international, or even directionally there?

Lanny Baker

Historically, we've not gone down the road of breaking out the deferred revenue. I'll tell you that the growth rate overseas was at an all-time record level, or certainly since that business has had any scale, very strong growth at the end of the year in sales, particularly in Europe.

In North America, the deferred revenues benefited from a very strong renewal season and are pretty consistent with everything else you're seeing throughout the business in the economy.

Matt Litfin - William Blair

What are the initial results of the new website that was rolled out just a couple weeks ago? Thanks.

Doug Klinger

Mark Stoever from our Internet Advertising and Fees business talked a little bit about the site; but there've been quite a few improvements to the site that have actually improved usability, and we're seeing some of the positive statistics that the we track relative to that.

Specifically, there's a lot more streamlined access to job search and the tools around search and services. We've also added a newly structured career advice section that gets people on the site, keeps them there longer, and improves our opportunity to serve up jobs. We've also integrated the site for the first time in recent years with our advertising campaign, Monster Works For Me, so we're pulling through the branding that consumers see on TV and on the Internet into the site so there's a familiarity there.

Some other features that are really keeping people on the site and attracting them back are the ability for people to track what's going on with the jobs they apply for, employer activity and their application status, which is one of the big things that consumers said they wanted to see from companies like Monster. So I think overall, it's a much cleaner site, much more effective, much more interactive, and importantly, there's a lot more content to keep them coming back and have them stay longer.

Matt Litfin - William Blair

Congratulations on another strong quarter.

Operator

Your next question comes from Jeetil Patel - Deutsche Bank Securities.

Jeetil Patel - Deutsche Bank

Thank you very much. Great quarter, guys. In your guidance you talked about a $200 million expense increase for 2007 and I think Lanny you outlined four different areas that you're investing in for 2007. Is there anyway you can shed some light on how you plan to incrementally spend across those four areas that you talked about: technology, product, sales distribution, marketing in China?

Second, it looked like Asia was about 10% of your international revenues, roughly. What do you think the long-term mix looks like, particularly as you've had a chance to further dig into a lot of these Asia Pacific markets which seem to be growing at a fairly rapid rate?

Lanny Baker

Jeetil, the expense decrease that you see I think is reflective of Monster's mindset, which is we see a huge global opportunity, we're a growth company, and we're going to pursue that very aggressively. There will be expansion in salesforce, which has always been part of the formula, there'll be growth in marketing where it makes sense and we see the return, which has long been part of the Monster formula.

I'd say that perhaps the change -- it's not big in dollars but in percentages, maybe more important -- is our investment in product and technology will probably grow more like 50% year over year. Now, that's the plan. We'll test it. We'll analyze it carefully, and if we see the product momentum paying back in the financial returns that we seek, we'll accelerate that; and if we don't, we'll go back and reanalyze it and take another approach, so it'll be diversified. There isn't any one big chunk that changes that $200 million number, but I've given you some flavor for it.

Steve Pogorzelski

With regards to the potential Asia Pacific and its rising importance to our international revenue base, we've just completed a three-year strategic planning process. We would anticipate that the Asia Pacific business, particularly driven by strengthening revenues in India and China and their respective market opportunities, will someday approach 30% to 35% of our overall international business.

Jeetil Patel - Deutsche Bank

Is it safe to assume with the investment you're putting through this year in that particular region or that area, that is going to be a major investment area for this year, and you may start to see the payback in '08 from an accelerated growth standpoint? Or is that maybe a little bit too optimistic in terms of timeframe?

Steve Pogorzelski

I think we'll continue to see accelerated growth throughout the region, including ChinaHR, in 2007. We invest for both the long term and the short term and investments that we made in '05 and '06 will begin paying off in '07, and you'll see those '06 and '07 investments continue to pay off as well.

Jeetil Patel - Deutsche Bank

Thank you.

Operator

Your next question comes from Peter Appert - Goldman Sachs.

Peter Appert - Goldman Sachs

Lanny, I was hoping you might be able to give us a little more color on the sequential pattern in marketing and promotion spending. Specifically, I see that it's a big increase, obviously, year-to-year in the fourth quarter, but actually down a little bit sequentially. So what do we read into that?

Lanny Baker

Peter, we're having a difficult time hearing you. If you could repeat it one time, that'd be great.

Peter Appert - Goldman Sachs

Okay, sure. I'll try it again. I was just trying to get some color on the pattern in the marketing and promotion expenditures. A meaningful increase year-to-year in the fourth quarter, but it was actually down a little bit, it looks like, sequentially fourth quarter versus third, and I wonder if there's any message in that pattern?

Lanny Baker

I think we saw in this year's fourth quarter is a little bit lower spending as a percentage of the total in North America as we prepared for the large December and into the first quarter launch of the Monster Works For Me campaign. So there was a bit of a wind down of our prior activities and a step-up into the first part of this year.

I think overseas, we continue to follow a typical pattern of pretty strong spending; at the end of the year as you get ready for the new job season that seems to start at the beginning of each year. So there hasn't been any big change there strategically or operationally. I'd say it's a tactical thing reflecting the ad campaign.

Peter Appert - Goldman Sachs

The margin success you're enjoying internationally is impressive. I'm wondering if the momentum you've enjoyed in '06 there makes you more optimistic in terms of the potential target for margins over the next couple of years and the timing of reaching your target margins?

Lanny Baker

We'll continue to balance our margin growth in international with the revenue and strategic expansion opportunities.

Bill Pastore

We will continue to invest internationally and meet our commitments that Lanny gave earlier today on margin, but it's still a significant opportunity, both Europe and the Asia Pacific region.

Peter Appert - Goldman Sachs

Still expect that the international margins, though, could reach the domestic level; is that fair?

Bill Pastore

Yes.

Peter Appert - Goldman Sachs

Is there any timeframe around that?

Lanny Baker

You're looking at a big collection of properties, Peter. Some are already there, and some may not be there for five, six, seven years, so it's hard to say.

Steve Pogorzelski

From an operating standpoint, we're continuing to build scalable models throughout Europe and Asia Pacific. There's three primary levers. There's salesforce productivity based on tenured turnover, increased ROI and better segmentation in coverage. We'll continue to invest in marketing and e-com, and e-com is a particularly good growth lever for margin. We're continuing to centralize back office functions and move some services to low-cost markets.

So if and when we determine that it's the right time to get North American margins will be prepared. At the same time as Bill and Lanny have iterated, the investment opportunities and the outlook is so great in Asia Pacific and Europe, we have to be in this kind of mode.

Peter Appert - Goldman Sachs

Got it. Thank you.

Operator

Your next question comes from Tobey Sommer - SunTrust Robinson Humphrey.

Tobey Sommer - SunTrust Robinson Humphrey

Thanks. I was hoping you could give us a little bit of color on your expectations for the e-com channel proportion of growth coming in both the international segment as well as ultimately where it may end up in Monster Careers North America? Thank you.

Steve Pogorzelski

From an international perspective, particularly in Europe, we expect that e-com growth will continue to double on a year-over-year basis in 2007, and we're starting our initial efforts at building e-com models in India, in China. And of course JobKorea at 85% of its sales come from e-com and that business is quite healthy and we expect that trend to continue.

Doug Klinger

In North America on e-com, the revenue was up, as Lanny mentioned earlier. This channel has been and will continue to be an important channel for us in terms of attracting new customers and also penetrating the small and medium-sized market opportunity.

I think the main story on e-com for us in North America is that we got out early ahead of our competitors with a great product and a great site experience, and that first group of early adopters took it quickly, and we've been able to maintain and expand that base. Now our focus has shifted to driving adoption of other kind of customers to take up the self-service opportunity.

Some specific things we're doing to continue to accelerate the growth in e-commerce is really the process of redesigning the site. One of the major reasons for relaunching the site and relaunching the employer components of the site is to provide an even more attractive and more useful self-service experience and we're already seeing some positive returns there.

As well, we've begun the process of converting our existing book of business. That book of business that's served by telesales and field salespeople increasingly to self-service. There are many aspects of what we do that could be handled by customers online, and we're just beginning the process of introducing the hundreds of thousands of customers we have to the possibilities of doing business with us online. So I think that will open up a whole other traunch of opportunity.

Finally, the way we drive this business is through online advertising, as well as our television advertising and increasingly through CRM and target marketing programs. So we've begun seeing the impact in the first quarter, early part of January, of some of the more sophisticated CRM targeting techniques we developed in fourth quarter last year. So I think those things combined give us optimism about the ability to continue to grow the self-service channel.

Tobey Sommer - SunTrust Robinson Humphrey

One follow-up on your growth targets for Careers North America in '07. That mid-teens kind of figure that you mentioned, do you think that is indicative of market growth or do you think you'll be growing slightly faster or slightly slower than the market in '07?

Lanny Baker

Well, when we look at the North America market, the job growth has moderated over the last few months, but it's still a very healthy job market with 4.5% unemployment and decent job formation so we're growing, we believe, quite a bit faster than the overall recruitment advertising market.

We believe we've widened the difference between our growth rate and the overall market over the last 12 months, and our growth rate is what we're looking for. That mid teens number is our growth for the coming year.

Tobey Sommer - SunTrust Robinson Humphrey

Thank you very much.

Operator

Your next question comes from T.C. Robillard - Banc of America Securities.

T.C. Robillard - Banc of America

Could you update us on your progress in the telesales with respect to improving efficiency there? Have you guys gotten through the heavy lifting phase, or is there still a lot more work to be done? And also, could you just quantify the additions in headcount that you're expecting and where those are? Can you break that down between International and North America?

Lanny Baker

Sure. I'll start with the headcount and then pass it over here. In North America in 2007, in the core careers business, we will grow the headcount but probably not at the same rate that we've grown in the past. I think things like our newspaper partnerships which will help us distribute locally, e-com, those are really key to the sales channel management that we have there, so that's going to be key.

Overseas, there will continue to be rapid expansion and investment in our sales, investment in the training of the salespeople, and that will look a little bit more like that strong momentum of a growth company that we've shown in the headcount overseas historically.

In Asia, we're adding salespeople very quickly. They tend to be a little bit lower cost, so when you convert the numbers in heads to the financial impact, it's not always quite the same, but that gives you a picture of our intentions on headcount in the sales arena.

Doug Klinger

This is Doug. Just to add some additional color for the North America business, in 2006, we added roughly 230 commissioned salespeople. We'll continue, as Lanny and Bill said, to look strategically to expand the salesforce into 2007. Speaking specifically to productivity, given the number of new players we've added, we have very good production in our telesales operation, we think the best in our business, and we made some investments last year and continue to make them into this year to improve the productivity of individual salespeople. We added a very senior leader who had run the small business operations for Oracle to the team to lead telesales and have implemented a specific telesales productivity initiative that will run the course of 2007. So we think we can take a high performing telesales operation and drive productivity to the next level as we move into 2007.

T.C. Robillard - Banc of America

Great. Thank you so much.

Operator

Your final question comes from Lisa Monaco - Morgan Stanley.

Lisa Monaco - Morgan Stanley

Just to be a little bit more specific on the marketing and promotion line for the year. Can we expect that line as a percentage of revenues to go down in '07?

Lanny Baker

In 2005, the number was just under 24%. In 2006, it was just a little bit over 24%, and I think it'll be in those low 20% ranges – 23%, 24% for 2007. In 2006, it ticked up because of that effective 100% increase that we made in Europe. We'll still grow aggressively in the marketing overseas but it won't grow quite that step function level overseas.

Lisa Monaco - Morgan Stanley

I know you said the growth in international slowed a little bit in part because of the size of the business as expanding. Can you just elaborate? I'm just surprised at the year-over-year growth in international was, I think, you said 47% versus 54% in 3Q year over year.

Can you give any color on what you're seeing in the marketplace from the Hot Jobs newspaper partnerships, or is it too early to draw any conclusions? Thanks.

Steve Pogorzelski

From a sales and revenue standpoint, revenue was 47% year over year. We also, though, had a significant sales increase year over year which is reflected in the strong deferred revenue balance that was discussed earlier in the fall. So we don't see that the growth rate is slowing generally on a sales standpoint in Europe or Asia Pacific at this particular time. And we're encouraged by our prospects, and we'll continue to grow.

Doug Klinger

Just a quick comment on the newspaper front. I mean, we have seen tremendous progress with the partners we added. We've got 41 papers in 11 states now. We've launched five co-branded sites, and we're starting to see some significant traction, pretty significantly higher posting growth rates in the markets where we've partnered with papers, about a third higher.

With respect to traffic, in Philly in particular where we've been in business for five months now with our partnership, we've seen mid-30% growth rate in page views versus the page view experience the papers there had with the Career Builder property when they were partnered with them.

We've seen some growth in terms of postings that Yahoo's gotten from the partnerships they have; but again our business model is very different from what our competitors have operated. We're operating fully integrated co-branded solutions which bring the two best brands in a market together: Monster and the partner's brand. The customer has a completely different experience than they've had in the past, and we're able to leverage our combined salesforce as well.

So we think we've got a more sophisticated model that leverages all of the learnings of what people have tried in the past and takes it to the next level, and we will continue to expand those relationships.

Operator

This concludes today's question-and-answer session. Mr. Jones, do you have any closing remarks?

Bob Jones

Yes. Once again, thank you for joining us this morning. To listen to a replay of this call, you can dial 800-642-1687 and the ID number is 5847883. You could also access the replay through our website under Investor Relations, and feel free to call me anytime at 212-351-7032. Thank you.

Operator

Thank you for participating in today's teleconference. You may now disconnect.

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