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Monster Worldwide Inc. (NASDAQ:MNST)
Q2 2007 Earnings Call
July 30, 2007 10:00 am ET
Bob Jones - IR
Sal Iannuzzi - Chairman, CEO
Tim Yates - EVP, CFO
Brad Baker - EVP, Product, Marketing, Customer Service
Steve Pogorzelski - EVP, Global Sales, Customer Development
Peter Appert - Goldman Sachs
Imran Khan - JPMorgan Chase & Co.
John Janedis - Banc of America Securities
Christa Quarles - Thomas Weisel Partners
Mark Mahaney - Citigroup
Mark Marcon - Robert W. Baird & Co.
Lisa Monaco - Morgan Stanley
Jeetil Patel - Deutsche Bank
Heath Terry - Credit Suisse
I would like to welcome everyone to the Monster Worldwide second quarter 2007 earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Bob Jones, Vice President of Investor Relations.
Good morning and thank you for joining us on Monster Worldwide's second quarter 2007 conference call. Our format calls for us to have formal remarks from Sal Iannuzzi, Chairman and Chief Executive Officer; and Tim Yates, Executive Vice President and Chief Financial Officer. Joining us for the question-and-answer part of the call are members of our executive management team: Steve Pogorzelski, Global Sales; Mark Stoever, Internet Advertising and Fees; Brad Baker, Marketing, Products, and Customer Service; and Darko Dejanovic, Technology.
Before we begin, I would like to remind you that except for historical information, the statements made during this conference call constitute forward-looking statements under applicable Securities laws. Such forward-looking statements involve certain risks and uncertainties, including statements regarding the company's strategic direction, prospects, and future results, and do not include the effects of the defense or outcome of the ongoing investigations or litigations relating to past stock option grants or costs associated with the restructuring.
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, seasonality, and the other risks discussed in our Form 10-K and our other filings made with the Securities and Exchange Commission.
With that, I would like to turn the call over to Sal for his comments.
Thanks, Bob. Thanks to all of you for joining us for the 2007 second quarter conference call. First of all, before I begin I would like to apologize for having to delay this call several days, but it was events outside of our control.
Since my arrival as CEO of Monster a little over three months ago, the management team and I have led a comprehensive assessment of the company's business operations. In this process, I spoke to many associates across the organization, and appreciate their candid insights and passion for the company. This morning's announcement to implement the restructuring plan is a new chapter in our history that will position Monster to meet both customer demands, maintain market leadership, and deliver strong future growth.
To put our plans in context, we are extremely confident in the future of the online career search. Monster created this industry a dozen years ago, and we remain the leader in terms of brand awareness, revenue, and both employers and job seekers served. We also have expanded into the international markets, which now generate over a third of our revenue, while making inroads in the large Internet advertising market.
But we also recognize that following a long period of dramatic growth, even an industry pioneer can lose its focus, becoming less efficient, and make insufficient investments into innovation. Make no mistake, this management team will not tolerate a short-term philosophy that fails to make the investments needed for long-term growth. That short-term mentality does not work for any company, and certainly not in a growth company such as Monster. Our customers expect and will receive more from us. While our revenue continues to grow above the help wanted industry average, we are not satisfied and believe we can and will do better.
Today, I want to discuss the actions we are taking to deliver strong results in the future, results that reflect the power of our global brands, the growth potential of our business, and most of all, our commitment to our shareholder value. As you know last month we took the first important steps to realign our organization. We adopted a more streamlined and efficient horizontal management structure, arranged by global function to eliminate silos, share the expertise of our teams around the globe, and take advantage of our size and scale. We centralized our operations in many key areas, such as sales, technology, marketing, and customer service.
Following the alignment, I asked our team leaders to take a hard look at their respective operations. We conducted a thorough and comprehensive analysis of our organization, business plan, competitive environment and the outlook for online recruiting. As we assess the business, our goal is not just to reduce costs, but also to drive revenue by enhancing the job seeker and employer experience. We also will seek opportunity to extend the Monster brand, a Top 25 website into other areas of global growth.
So today, we are introducing initiatives that we believe will foster expansive growth, resulting in higher revenue, and expanded operating margins over time. We are going back to the commitment of innovation and customer service that made us the leader in our market. Our goal is to refocus, reinvest in, and reenergize Monster. Let me describe the key elements of our plan.
First, we are further simplifying our organizational structure. We have an extremely talented team of associates, and we want to empower them to succeed by eliminating redundancies and layers of management, while clarifying responsibility and accountability for performance. We have taken strong steps to rationalize our cost base. We are also centralizing non-revenue generating functions, such as human resources and finance, allowing these functions to fully support the local business unit.
Second, we are attacking our expense structure to ensure that we have the most cost efficient platform possible. Tim will provide more specifics on the timing and expense implications in a few minutes but the main initiative is a global headcount reduction of 800 positions, or 15% of our current staffing level. The majority of the positions being eliminated are in non-revenue-generating areas. It was difficult to make this decision affecting so many of our fellow associates, but we believe the results will create opportunities going forward.
We are also driving efficiencies in a number of areas of our organization. For example, we are centralizing all brand-building functions such as advertising and promotion, which formerly were handled by individual business units. This will result in a more consistent and powerful global brand message through tailored local needs, as well as economies of media buying and related services.
We expect our cost control efforts to produce savings of between $150 million and $170 million through 2008. In 2007 alone, excluding the severance and related charges, we expect to realize savings of $50 million to $55 million in the second half of this year.
Third and most important, we are relocating dollars towards investments that are essential to our long-term growth. Approximately half of the savings generated from the restructuring will be reinvested in the business. Specifically, we will be focusing our investment away from business as usual and towards improvement in product development, technology and brand support.
In the product area, we will invest in innovations that improve the experience for our customers and differentiate our services. We will pursue innovation with a sense of urgency, accelerating our decision-making and reducing the time to market for new products and services. An important focus of this effort will be on customer-facing initiatives that improve the employer interface. At the same time, we will actively pursue enhancements that deliver greater personalization, richer content, and greater ease of use for job seekers.
In technology, this means ensuring that the infrastructure is up to next generation standards. Our systems must be able to support a range of features to ensure our position as a market leader and continue to drive the shift from print to online channels. We also want to make certain that our platform has the ability to acquire future job seekers and make their experience more relevant at lower incremental costs and we must provide the technology support that our sales people need to close business.
In terms of brand support, we will direct our dollars towards more effectively and forcibly communicating the Monster brand message. Monster enjoys wide recognition and trust among job seekers and employers. We believe that a better coordinated global marketing effort that is also sensitive to local markets will enable us to build on those qualities to drive market penetration and growth.
I would like to comment on how our approach will play out with respect to each of our businesses. In North America careers, we believe that investing in an improved job seeker experience is an essential step to reenergizing growth. We need to make sure that we present employers with the highest quality, most engaged candidates. In this regard, we recently eliminated work-at-home job postings and reduced pop-up ads for Monster. These two decisions will have a short-term impact on top line, but will improve the quality of the seeker experience. We are also making changes in the sales force reporting structure, along with other actions to improve productivity.
In the international business, will continue to invest in initiatives that increase revenue, grow market share, and expand the margin at a steady pace. This has been especially successful in Europe and is being extended to Asia. We are in the earliest stages of brand building in Asia, and we expect this market to be very meaningful in the future.
In IAF, we are evaluating how we can make our offerings more attractive for advertisers. We will focus on quality advertising revenue, in order to take advantage of the huge opportunity in this segment. However, we will make sure that our Internet advertising efforts do not detract from the job seeker experience.
We will also taking a fresh approach to the way we allocate our capital to drive future growth. At the end of the second quarter, our net cash position was $719 million. We will continue using our financial resources for highly selective strategic acquisitions, but only if they complement our core business and offer extremely compelling growth dynamics and economics. As an indication of our confidence in the company's long-term prospects, we also intend to make active use of the existing share repurchase program.
Now, let me talk about our business outlook for the remainder of 2007, which you can see in detail in the release. We are expecting revenues of $1.340 billion to $1.370 billion. Our assumptions are based on a slight decline in year-over-year revenue growth rates in Q3, followed by a rebound in revenue growth in the fourth quarter. This will bring us to top line growth of approximately 21% for this year at the midpoint.
As we have told you, we are taking $150 million to $170 million of cost out of baseline expenses over the next six quarters, with the majority occurring in the short term. Going forward, we are more closely aligning expense increases with revenue growth. Some $80 million of the savings will be reinvested in innovative products and technology. This plan will also provide the financial flexibility to make further investments in response to potential opportunities.
Looking ahead, by reenergizing growth and managing expense, we aim to achieve an operating margin at the 25% level by fourth quarter of 2008.
Now, I would like to ask Tim Yates to provide more detail on our financial performance and restructuring initiatives. But before I do that, I would like to welcome Tim to the Monster management team. Tim and I have known each other for a number of years. Tim brings a wealth of experience and is a wonderful addition both to the management team and to the board of Monster.
Thank you, Sal and good morning, everyone. It is my pleasure to be here as Monster's Chief Financial Officer. I look forward to speaking and meeting with many of you in the upcoming weeks and months.
I will review our second quarter financial performance and the financial impact of the restructuring initiatives we announced in our news release this morning. I will then turn the call back to Sal to wrap up. Total revenue increased 20%, and was led by continued strong growth of 57% in our Careers International division, which now accounts for 35% of our consolidated revenue. Offsetting this growth was continued deceleration in our Careers North America and Internet advertising and fees business, which grew 7% and 5% respectively. Excluding currency benefits, our consolidated revenue growth rate was 18% for the second quarter.
Included in our second quarter results are previously disclosed severance-related charges of approximately $15.8 million related to three former executive officers. Approximately $12.8 million of these severance costs are non-cash and relate to the accelerated vesting of stock awards. These severance costs were recorded as a component of our salaries and related line items in our income statement.
Also included in our second quarter results are $5.3 million of legal fees stemming from the ongoing external investigation into the company's historical stock options grants. The legal fees are primarily recorded as a component of our office and general expenses, and were down from $9.8 million in the first quarter of 2007. As the investigation cycles through the one-year point, please note that our second quarter 2006 results include approximately $600,000 of professional fees associated with the stock option investigation. These professional fees were not previously disclosed because of materiality.
Total operating expenses including the severance and legal fees were $289 million in the 2007 period, versus $216 million in the prior year. Our total expenses grew at a faster pace than revenue, even when excluding the severance and legal costs. As Sal has noted, this is one of the contributing factors behind today's announcement to initiate a restructuring plan.
On a non-GAAP basis, when excluding the severance and legal fees, our total expenses were $268 million, resulting in an operating margin of 19.2%, versus 21.8% in the 2006 period. Including the severance costs and legal fees from the option investigation, we generated an operating margin of 12.8% in the second quarter of 2007, a decline from the 21.5% reported in the prior-year period. Our interest and other line item came in at $7 million, up approximately 75% over the 2006 period, primarily reflecting a larger portfolio.
Reported income from continuing operations was $29 million in the second quarter, or $0.22 per diluted share, compared to $0.29 per share in the prior year period. Included in income from continuing operations is $0.10 per diluted share for the severance costs related to the former executives, and legal fees relating to the stock option investigation. After adjusting for these items, earnings per share from continuing operations were in-line with our previous outlook.
Our effective tax rate was 35.3%, in the 2007 period, versus 34.9% in the comparable prior year period. The loss in equity interests, which is primarily China HR was $3 million as China HR continued to invest in this important market.
I would now like to spend some time discussing some of the segment results. Looking at the company's international business, we are pleased with the execution across Europe and in Asia. We are clearly benefiting from the marketing and sales investments we have put in place over the years, as evidenced by the division's 57% revenue growth, and improved operating margin of 10.3%, compared with 2.7% in the 2006 period. The European and Asian recruitment markets represent a significant growth opportunity for Monster, and we will continue to make strategic investments to grow in these areas.
Careers North America generated revenue of $174 million in the second quarter and grew 7%, compared with 15% growth in the first quarter of '07. There were a wide variety of factors contributing to this deceleration. Growth in the second quarter was impacted by a change in our telesales model that did not produce the anticipated results. We have made some modifications in the model and are conducting a rigorous analysis to determine the optimal mix of sales coverage for both new and existing customers.
Our ecommerce channel underperformed our expectations during the quarter. We intend to invest heavily in the ecom platform as part of the restructuring plan, to change the experience for the employer, and simplify the process. In addition, there was a shift in our marketing spend from our core products to our newspaper initiative.
Turning to IAF, revenue growth was 5% versus 20% in the first quarter. The combination of decreased traffic on certain properties and management decisions to curtail some non-core advertising has contributed to this revenue deceleration. For example, as Sal mentioned during the quarter, we started the process of evaluating interstitial advertisements displayed on Monster.com, and recently made the decision to reduce the placement of these ads in certain areas of the site. While the decision has some short-term revenue impact both in terms of direct revenue and foregone opportunities, we believe it was the appropriate action to make our product offering more relevant across the Monster business. IAF posted an operating margin of 13.1%, an increase of 200 basis points compared to the first quarter of '07, while managing to keep costs in-line with revenue. The IAF division is an emerging business in our portfolio of products and offerings, and we continue to believe the business represents a solid growth opportunity.
Turning to the balance sheet, we generated cash from operating activities of $53 million in the second quarter. Deferred revenue grew 30% over the second quarter of last year, and was essentially flat over first quarter levels. Our cash and marketable securities balance increased to $721 million, providing strong liquidity and flexibility to support our growth initiatives. As Sal mentioned, with respect to our capital allocation strategy, we have approximately $55 million available under our previously authorized plan and we plan to make aggressive use of this existing share repurchase program.
I would now like to spend some time discussing the financial impact of the restructuring plan that we announced earlier this morning. We will reduce the current run rate of operating expenses through the following initiatives:
- reducing current global headcount by approximately 800 associates;
- the adoption of more efficient methods to operate the business, and
- writing off fixed assets and accelerating depreciation for items that do not fit into our long-term strategy.
Our headcount reduction will reduce our current workforce by approximately 15%. The majority of the positions impact will be in non-revenue-generating areas and a majority of the headcount reduction will be completed by year end.
We are also adopting new methodologies to run the business on a day-to-day basis. For example, we are centralizing our global advertising and promotion efforts. This effort will allow for more efficiency to be created, and it also gives us better leverage with online media buys.
Finally, we will be writing off certain assets and accelerating depreciation expense for assets that no longer fit into our long-term growth strategy.
We anticipate that these initiatives will reduce our current run rate of operating expenses by approximately $150 million to $170 million on an annualized basis. The objective of this restructuring plan is twofold. First, to reallocate funds to growth areas, and secondly to improve our operating margins over time as we increase revenue and reduce costs. While we are reducing our operating expense run rate, we will be simultaneously reinvesting in the business.
We currently estimate that the earnings impact of this investment will be approximately $80 million on an annualized basis. This investment will be in the following general areas:
First, new products and innovation. We will be focusing our efforts on improving the experience for our customers. For example, a main priority is to develop the next generation ecom capability that will offer an entirely new experience to the employer. Additionally, we will invest in products that differentiate Monster from its competitors, and offer the highest quality experience.
Second, technology and infrastructure. We will invest in the core business to ensure that we can operate in the most efficient and effective way. Through the integration of critical platforms that support both our employees and customers, to be able to provide the type of infrastructure that will give our company a competitive edge.
Third, global marketing campaigns. In the short term, we will aggressively market in the back half of 2007 and continue into 2008.
Lastly, sales force expansion. Our investment plans include the addition of talented sales individuals in certain locations throughout the globe.
Additionally, we intend to incrementally invest approximately $50 million of capital expenditures to upgrade and enhance and purchase new technology. The associated depreciation expense with this capital investment is factored in the estimated annualized $80 million of reinvestment.
Therefore, we expect to have a net $80 million reduction of operating expenses from the current run rate as a result of these initiatives. We will lower our expense growth rate, and redirect expenses to support customer facing initiatives. Additionally, we believe that our sales force will be supported by more targeted marketing initiatives. We expect to record cumulative charges within the range of $55 million to $70 million beginning in the third quarter of 2007 and into 2008, primarily relating to severance.
The other major component of the restructuring charge will be non-cash charges of approximately $15 million fixed asset write-offs and acceleration of depreciation. This restructuring plan will lower our existing cost base, but also allow for investments that will foster long-term revenue growth. We are confident that this plan and our investment strategy will lead to operating margin expansion, and higher levels of earnings growth. Putting this together, we believe our overall expense trajectory will allow us to achieve a 25% non-GAAP operating margin by the end of 2008, based on current market conditions.
Now I would like to turn the call back over to Sal to wrap it up.
Thanks Tim. In summary, Monster is first and foremost a growth company and a powerful brand. Our strategy is sharply focused on maximizing the potential of the brand and accelerating our growth. We will get there by investing in products and services that deliver a superior experience to our customers while also operating more effectively and efficiently. We will fiercely protect and expand our global leadership position by focusing on innovation, service to job seekers and employers, and driving value for our shareholders.
We also want to take this opportunity to thank our associates for their hard work and dedication, and emphasize that we are committed to empowering them to succeed.
Now we will be pleased to take your questions.
Your first question comes from Peter Appert - Goldman Sachs.
Peter Appert - Goldman Sachs
It feels like at least some of the revenue slowdown in North America may be a function of just the more intense competitive environment. Based on your reviews so far, how do you access to the cyclical phenomenon playing on revenues currently, versus some of these competitive pressures?
I think that certainly there is no question we have competition in North America. But having said that, as I have tried to make clear in our comments, we are unhappy with our own performance and our own execution here in North America. It is certainly one of the reasons for the changes that we made a few months ago. Now with Steve in the position that he is in to drive revenues into the future, there are a number of changes that he has already made, and I'm sure there are more coming.
I think that our emphasis in marketing, our additional investment in marketing -- I think that we made the mistake of short-changing our investment there for the past several quarters -- will help. Our longer-term plans to investment in production innovation and technology, will have a very strong effect in our abilities to achieve the kind of success I think we certainly can achieve here in North America, and for that matter, around the world.
Peter Appert - Goldman Sachs
Do you think, Sal, you need to do the traffic deals Monster has done in the past with the likes of AOL and MSN, for example? Is that part of what was missing in terms of the recent marketing strategy?
No, I don't at all. Look, I think that and I have been studying it and spending some time on the whole issue of traffic, and sure, traffic that brings us business, traffic that brings us revenue, that brings us job seekers, we are very interested in; but you know, we are not going to play the game, we are not going to get in the fray, if you will, of just trying to get traffic and traffic statistics on the map just for the sake of saying that we have them where they don't bring anything to the bottom line, and to really the growth of the business.
What we are interested in is quality, and where we can find avenues to create that and increase the seekers that come to the site, et cetera, then we will pursue it and we will pursue it strongly; otherwise we have no interest.
Peter Appert - Goldman Sachs
Let me ask you just one other unrelated item. On the share repurchase front, are you committed to spending the $50 million. It seems light relative to the recent share price performance, in particular given your cash balances. Why not more aggressive on the stock buyback?
I think we have a buyback program in place now, which we have not fully exhausted. As a matter of fact, we have utilized less than half of what the board has approved. So our plan is, particularly at these prices, to aggressively fulfill the remainder of what has been approved, and let's just say we won't be shy of going back to our board and asking for an ability to repurchase more when we exhaust what we already have approved.
Your next question come Imran Khan - JP Morgan.
Imran Khan - JP Morgan
You talked about the 25% non-GAAP operating profit margin based on current conditions. I was wondering if you can give some color on what kind of revenue assumptions are you baking in? Some acceleration of U.S. business, or a similar kind of growth rate?
Secondly, if I look at your margin structure, it seems like the biggest opportunities are in the international market, my understanding is the sales force is a very similar size in the international market, but the margins are 20% plus lower. How quickly do you think you can, I think Steve and I talked in the past, that you can narrow the margins, the difference; how quickly do you think you can do it? Thank you.
Well, we are certainly hopeful of being able to improve our revenue growth, but in terms of making an assessment like that and taking the expense actions that we have taken, we are not counting on that. So implicit in my using of that kind of a number is a status quo growth which we hope we will be able to surpass as we go forward and have even more money to invest or profitability.
You are right. I think the big swing factor is in the international market, where a substantial amount of the sales investment has been made in the markets that we are already in. We intend to incrementally invest, but the balance of that will continue to improve margins over the rest of this year and next year. We said we think we can get to that level by the back end of next year.
I will throw some additional comments on that, if I may. I think in North America, as we said in my comments and Tim's comments a few moments ago, clearly we are not happy with the growth in North America and we can do better and we are going to do better. There is a tremendous amount of emphasis, both on the innovation side, the investment on the marketing side, and selective investment where we need to on the sales side. I think that Steve is doing a lot of work in stabilizing our sales force, in reinvigorating our sales force, and I think we are going to see some good results out of that.
Internationally, I think that Europe, we have made a sizable investment, we will continue to invest, but I think we are at the stage now where we are starting to see the benefits, if you will, of that investment; not only in revenue growth, but also in margin improvement.
The exciting story, in addition to that, is Asia where I think that the amount of growth is just staggering. The opportunities -- whether it be in India or China or in Korea or ten other countries around the Pacific Rim region -- I think we have tremendous opportunity for growth in the future there. So I think that what we are doing this morning, I want to emphasize this and take the opportunity of your question to do it again, is that we are taking costs away from areas where we don't think we need to spend the money, where it is not giving us the returns on investment that we would like to have, and taking a good portion of those dollars and reinvesting them in where we need to reinvest, for the future growth of the company. Precisely that's in the areas of innovation, and technology, and selectively in sales in North America, and more broadly around the world, in marketing, and making sure that we focus our marketing and advertising spend accordingly, that we get the maximum return from it.
It is a story of really transitioning the company and empowering people to do the job that they know how to do. There is an awful lot of talent here and making the proper investment where we need to make it.
Your next question comes from John Janedis – Banc of America Securities.
John Janedis - Banc of America Securities
You touched on this, but overall can you give us an update on the ecom channel, meaning what kind of growth are you seeing at Monster, and then how do you think that compares to the industry and what you are seeing on pricing? Thanks.
I am going to ask Steve to give some commentary on this in a moment, but maybe I will go first and give you a little bit of knowledge that I have at this point. Here in North America, the ecommerce growth that we have, we are not satisfied at all with. We need to explore and once again, Steve and Brad and others around this table here with me, are spending time to study and engineer how more of our business is growth through the ecommerce channel. Steve has been running Europe, has been very successful there. A significant portion of our business there is in the ecommerce market and we need to do the same thing here in North America.
With regard to pricing, we have the margin, we have the power, the brand is so strong that we can compete on pricing where we need to on a selective basis. We do see pricing pressure and we have been seeing it for some time over the last couple of years, that is not a new phenomenon at all today. So I think whatever the pricing pressure has done to us, or whatever effect it is having on the company, it is out there, it is blended into the numbers as is. The numbers that you have been seeing over the past several quarters, if not more.
The real strength of Monster is that we have the margin and the strength, if we choose to, where we choose to, to compete and to compete very aggressively on pricing, which I find, you know, as CEO of the company, as a strong weapon if, you will, in our arsenal to compete and compete effectively.
Back to the ecommerce, I mean ecommerce is obviously very important to us. The total utilization of the Internet to most efficiently do our business is critical. Having said that, we also realize that what built this company is the strength of our sales force and the commitment to that sales force and the strong role that that sales force plays, has played, plays today, and will continue to play, is very key to our success, whether it be here in North America, or overseas.
After that long-winded answer, I will turn it over to Steve. Hopefully he agrees with what I just said.
Absolutely, Sal. Ecom around the world is a tale of two cities. In North America, ecom revenue underperformed and actually had a small single digit decline in the quarter. For the most part we believe that the underperformance is a direct result of execution in investment. We are taking strong corrective actions around marketing, products and technology to restore growth in the e-com channel in North America. We also will tightly align ecom to the rest of our channels like we do in Europe. In Europe, ecom continues to be very successful. The product is performing and we are seeing growth rates, year-over-year, of above 100% ecom channel in Europe.
We are globalizing the ecom business. We are going to put in somebody who has been running ecom in Europe to run it on a global basis, and we will be moving those best practices in Europe into the United States and Asia Pacific.
Your next question comes from Christa Quarles - Thomas Weisel Partners.
Christa Quarles - Thomas Weisel Partners
I was wondering first if you could reconcile the 30% deferred revenue growth with the U.S. and international? Obviously, the mix of ecom has an impact there, relative to the numbers that we are actually seeing overall. But I was wondering if you could just give more color there.
And then second, on China, I think 2008 is decision time as to what you are going to do in terms of getting into a majority position there. I was just wondering if you could update us relative to your expectations there? Thanks.
I will take China first. I think that you absolutely are right, 2008 is decision time. I am not going to say what we are going to do, because that will put me in a competitive disadvantage with my partners in China HR; but suffice it to say that China represents a huge opportunity for many companies, it certainly presents a huge opportunity for us.
In terms of our business, an opportunity for growth with a population of almost 2 billion people, it is hard to fathom how we could succeed or be truly a global franchise without having a significant presence and a significant investment in China. We fully intend in some way, in some form, to do exactly that. It is without question, one of our key top three, top four areas of investment and growth for the future.
Christa, can you repeat your first question with regard to the deferred revenue?
Christa Quarles - Thomas Weisel Partners
The overall strength of the deferred is surprising given the slowdown in the U.S. and I was just wondering if you could highlight either the deferred revenue growth by either U.S. and international, broken out, or just given the impact of ecommerce, we know that number is not going to look exactly like overall revenue growth, but just trying to get more color there.
I think that really the answer to the question is that international growth has been such, and international is getting to be such a more significant portion of our overall business, that is what is driving the growth that you see. I think that will continue as we continue to grow, and you continue to see the numbers move, particularly in Europe, and then later on in Asia.
Christa Quarles - Thomas Weisel Partners
But is there something in there that is sort of causing you to think about that rebound in Q4 that were you talking about in the U.S.?
No, not really. I think the rebound in the U.S., the reason we say there is going to be a rebound in the U.S. -- and I want to caution on this. I think the rebound will happen in Q4. I think hopefully it continues into Q1 and beyond. What that is going to come from, and we have made a number of mistakes in the managing of our North American business, and we are in the process right now of making some significant adjustments to that business. It is where the considerable amount of time of our time and effort, all the people around the table over the past number of months have been focused. I think that as those measures take shape, that that will drive that rebound.
Again, it cuts across multiple disciplines or multiple facets of the business. It includes refocusing and further investment in our marketing, it involves heavily on the technology and the product side; although the product side, as you might expect, will take, you know, somewhat longer just by its very nature. The focus on the sales force, the management of the sales force, with empowering seasoned people who have long experience with our sales force to move the business forward. I think all of those factors in combination or in unison with each other is what will drive that growth in North America.
Your next question comes from Mark Mahaney - Citigroup.
Mark Mahaney - Citigroup
I wanted to get back to the North American results from the second quarter. Sal you mentioned a shift in marketing spend from core products to newspaper to some of the newspaper initiatives you had. I couldn't tell whether you meant by that, was that a mistake or was that a direction that you wanted the company to go in?
As part of that, could you also just talk about pricing trends that you're seeing both in North America and in Europe for your Careers product? Thank you.
I'm going to have Steve comment on the pricing extent in a moment, if that's is okay. With regard to the newspapers and what has happened is under a number of the agreements that we signed, we needed to make considerable marketing investment as part of those transactions. We believe that those investments will pay off over time, and as in all transactions, there is an investment period and then hopefully there is a period where you see the return on the investment. We are in that investment phase right now.
What I think we should have done and this is with hindsight, of course, and as I always like to say, I always win the football pool on Monday morning after the Sunday game. That investment was at the expense, if you will, of our normal business; in other words, we didn't invest equal dollars. Our marketing spend stayed relatively constant, and we invested in the newspaper transaction which really had the effect of diminishing our investment in our core business.
Added to that, that we didn't adjust or increase our expense for inflationary pressures and some of the investment in the marketing was somewhat inefficient, by just the way we did it. So if you take all of those things into account, the reduction in marketing spend in our core Careers business in North America was fairly severe. Going forward, we intend to continue to invest, and invest more heavily and with hopefully greater precision in marketing here in North America.
With regard to your pricing question, Steve?
Pricing held out throughout the quarter. Overall pricing for job postings and resume products was stable in both North America and internationally. We're going to continue to do tiered pricing and price testing as appropriate. We had recently had a launch in July that we're very excited about, that gives different pricing options and different duration benefits to our employers which is something they demanded over the years, and initially we believe that that is the right thing to do and we're seeing good results from that effort.
Your next question comes from Mark Marcon – Robert W. Baird.
Mark Marcon - Robert W. Baird
Good morning. Welcome, Tim. With regards to North America, can you talk a little bit about the trends that you saw across the quarters, as the quarter progressed? Can you just give us a little bit more color in terms of your expectations for the third quarter? Lastly, in terms of your forecast, how are you taking into account the potential changes in pricing that you've recently announced into your forecast?
I think that there's a bunch of questions there all wrapped up in one. I will try and answer them, but if I don't, please re-ask, if I missed anything. First of all, with regard to Q3, obviously, it was a conscious decision not to give a forecast for the next quarter. And I'm going to try to stick to that in this conversation. I think that the business is fluid enough in the number of changes, and the number of moving parts, that we have in place now,
I think it is fair for us to emphasize this is a company currently undergoing significant change. I wasn't exaggerating before when I said we are turning a new chapter. So to really give precise estimate as to what is going to happen next quarter versus the quarter after would be unfair to you all, and obviously to our investors and our shareholders.
What we can see going forward is that the trend will be up. I think we will start to see, as I said earlier, better returns and better performance here in North America as a result of the changes that we're making, and maybe some of those will kick in by the end of Q3, maybe not, but certainly we feel that we will see some of those benefits going forward into Q4 and beyond.
With regard to pricing, as I said earlier, the pricing pressures are not new to Monster. You know, at Career Builders if you will, and others, they have been out there for some time. We have been competing. We have held our own. I think that in spite of what I have said and the need for investment in new product technology and innovation, Monster still commands its pricing, because it delivers a superior product. It delivers a superior seeker experience and employer experience. We fill the job needs of employers. Companies are willing to pay for that service. Paying a cheaper price and not getting a product doesn't really save you any money.
I think that on the pricing side, we're able to compete, we have been competing, and we have been competing in very a aggressive marketplace and we will continue. The margin again speaks for itself and I think some of the measures that we took today will enable us to even compete more in the future, where we choose to, where we feel it is strategic and necessary for what we need to accomplish.
Mark Marcon - Robert W. Baird
Great. Well, thank you very much for the explanation, and obviously a lot of the steps that you're taking are long overdue, and to be commended. It sounds like some of the issues were evident previously, and now you're in the process of correcting them.
What I was referring to with regards to the pricing is specifically you announced a new pricing formula and new flexibility for employers in terms of postings, and so I was wondering how you were taking that into account?
I think what you're referring to is new products that we introduced in July, which is really to meet the demands of our customers for some time, variable duration products, which allow us everything from a few day trial product to a 365-day posting. We have factored in pricing to sell points earlier, and we're delivering a competitive product, we will leverage that position, at the same time, we will give our customers what they're asking for. This should allow us to better capture the value of our product by giving customers what they demand.
Mark Marcon - Robert W. Baird
Great. Sounds like a great long-term move. Thank you.
Your next question comes from Lisa Monaco - Morgan Stanley.
Lisa Monaco - Morgan Stanley
Just drilling down again on Monster North America revenues in 2Q, can you just elaborate? I think some of the posting numbers out there from external sources have postings up mid to high teens. Can you walk us back to how you get to revenue growth of 7%? Is that weakness on the resume database side?
Secondly, can you just give us a sense for what kind of changes you've seen in terms of the state of the labor market, both in the U.S. and overseas, and whether that has changed materially from 1Q and what you expect from the second half? Thanks.
Why don't we go to the labor materials and what we see in the future, I will turn that over to Steve, but with regard to the job postings versus our revenue growth, or the percentage of growth in revenue, I think what you're seeing is there has been a shift in the type of revenue, our newspaper deals have started to go in, they are less revenue than our normal business. I think you're seeing the beginning of that mix into the fray if you will, or into the mixture. I think that is what is probably driving, as best as we have determined, that is driving the bulk of it.
Other than that, we just have not seen a major shift beyond that in terms of pricing or in terms of competition that would cause that drop-off. I will tell you that from time to time, going back on my earlier comments, you may see that phenomenon. If and where we decide that we want or we need or feel that it is important to the overall strategy of the company, to compete; in other words, you may see revenue be somewhat more inconsistent, than what you're seeing as the trend, just because we decide to go after a piece of business, because we feel it is the right thing for us to do at a point in time.
In terms of the resumes, they remain very strong. The seeker community, if you will, is coming to Monster more often, as far as all statistics show us, than anyone else. We're seeing no negative experience there whatsoever. We fill more jobs than any of our competitors.
From a labor market perspective, as you know, we are continuing to see moderation in terms of growth in the domestic market. So while the BLS numbers remain relatively healthy, they are at a much more moderated level than they've been in the previous two years.
However, when we look into Europe and Asia Pacific, we're continuing to see some improvements in the labor markets, and some of the bigger countries in Europe, and there continues to be strong employer confidence in hiring in Asia Pacific.
Lisa Monaco - Morgan Stanley
Sal, you made a comment about global growth expansion opportunities for Monster. Are you talking outside of the online recruitment market? And if so, what areas? Thanks.
I think that we're holding our options open across the board. Obviously, our first emphasis without question is in our core business, in our Careers business, but in terms of part of the innovation team, part of the innovation in investment that we're making is to also look, how can we expand the brand? Are there opportunities out there that we can seize upon, which allow us to leverage the Monster brand and the core business? Things that are tangential and can actually help grow the core business and attract more seekers and users of the core business, if you will. So that slate is completely clean and we're looking at everything at this point.
The great thing about Monster and where Monster is, is that we have the capacity, we have the money, we have the capacity, the business is strong, we are making the changes we're making today, the restructuring we're making today from a position of strength, so that leaves us a lot of opportunities to be able to execute where we see opportunity around the world. We are in a very strong position to be able to do that and after today's actions, even stronger.
Your next question comes from Jeetil Patel - Deutsche Bank.
Jeetil Patel - Deutsche Bank
You had this buy one, get one free program on the job postings side in the quarter. Can you talk about whether that materially helped or was it neutral in terms of the impact and how do you motivate the small business community to adopt postings on the ecom channel more aggressively in more detail?
Second, you've got generally margins expanding into 2008, based on the Q4 '08 commentary, about 25% operating margins. Do you think that you're investing enough into the business, or it just seems like you're focused on marketing and adding more sales force and it seems like the key growth driver seems like it is more of a product development or product initiative that seems to be taking on. Can you elaborate on how much you're investing in new products as opposed to enhancing areas like the infrastructure and the ecom channel?
Let me answer the second question first, and then your first question, I will turn over to Steve to comment on. The investment that is being made here, first and foremost, we feel that the 25% operating margin level by the end of '08 is certainly within reach and obtainable.
Having said that, included in coming up with that number is very significant investment across the board. It is investment in marketing. It is investment, to be sure, in strategic areas in sales. It is investment in product. It is an investment in teams of people to create and envision new generations of product. This is an ongoing investment. This is not something that is going to cease after the next say four quarters, or six quarters; this is ongoing. We will create a group of people to lead our innovation and product development capability significantly beyond what we have today.
In terms of technology, we're an Internet company. At the core of what we do, what allows us to do what we do is technology. We are going to invest very heavily in technology. Everything from looking at new search or improvement to our search engine, new product to improve the experience for our seeker, and for our employers. New product, as I've said in my comments earlier, to help our sales force sell, and not encumber them or bog them down with paperwork, instead of being out there facing off with the customer, and understanding the customer needs and selling and just greater efficiency throughout the company.
But at the core of all of this, and the most important element in what we're doing is to investment where it will have the most benefit to our customers. That is at the core of everything that we're doing. The investment in the technology alone, as an example, we will be well over $100 million over the next 18 months. So that just gives you a little bit of a taste, if you will, of the depth of what we're doing. The only thing that is precluding us at this point from spending even more is our ability to consume it. In other words, there is just so much that we can do at one time and do it effectively and efficiently. There are some things that need to be done before others. It is sort of a little bit like building a house. You have to start from the bottom. Otherwise, we would even invest more quickly.
Rest assured of one thing. If I am incorrect, that we can achieve the numbers of 25% margin by the end of '08, if that becomes unobtainable, we will not sacrifice investment in order to make that happen. I will come to you and I will tell you that we will slow down on the timeframe in order to achieve that result and not sacrifice investment or the future of the company to achieve that objective. But I think in the plans that we've laid out and the work that we've done, we're very comfortable that we will be able to make the ongoing investment that a true growth company needs to make, and at the same time as bring those results to the shareholder.
Jeetil Patel - Deutsche Bank
Now, does that investment also compensate for social networking services that are maybe trying to encroach upon parts of your category or folks like Linked In that are focused on a different approach to the marketplace?
If we decide to pursue some of those areas, if we decide to go into that, I think that we have ample resources in the equation we've laid out to make the kind of investments or do the amount of development that we need to do to deal with it effectively. Steve?
The BOGO free promotion is something we've been doing here on an historical basis for at least since I've been here since 1999. It is a cornerstone of our CRM program. It is a proof of concept approach. When we get new customers acquired they tend to have very favorable experiences that becomes a lead for our telesales or field sales operation and they get upsold, renewed and come out with higher lifetime values. We have always seen positive ROI on BOGO free and we will continue to use it in selected markets and occupational areas.
Jeetil Patel - Deutsche Bank
Are you seeing, on the ecom channel, the weakness among existing customers, or just new customers adopting the ecom channel in the U.S.?
I think what we saw in Q2 was the problem relative to the investment was not enough new customers coming in that we've seen on an historical basis. In terms of what we're seeing from existing customers, the trajectory is where we need it to be, and can always be improved but this was really an acquisition issue.
Ladies and gentlemen, we have time for one more question. The question will come from the line of Heath Terry - Credit Suisse.
Heath Terry - Credit Suisse
Sal, I was wondering if you could talk just a little bit about what you're expecting to do on the sales force side of things from an automation standpoint? To what extent, as you get into the company and start working through this with your sales people, is Monster really taking advantage of all of the automation opportunities that they have in order to lower that sales and marketing cost relative to your revenues? Is that something that when you talk about this investment, that you feel like you can get some meaningful leverage out of?
I'm going to turn it over to Steve, since this is his area of expertise. I will make some comments at the end.
The way that we look at this is from a sales force productivity standpoint. If you measure direct and indirect selling time on a regular basis and other forms of sales optimization, the investments are designed to be able to provide our sales people with more opportunities on direct selling time. That makes them more productive, it generates higher sales and greater margin across our sales force. So when we start to look at new technologies, the bottom line is it can make our existing sales force more productive. A more productive sales force tends to have lower turnover rates, which then again increases our margins and our productivity.
Thanks, Steve. I think that Steve obviously just answered the question, but let me just elaborate a little bit more. Not only in sales, but throughout the company, this is a company that has grown, as you all know, very, very quickly. In most situations where that happens, inefficiencies build in, and when there is an opportunity to seize revenue, the first thing that comes to mind is not providing the best, or most state of the art sales system, but just grabbing the opportunities to seize that revenue.
I think we are at a juncture now in regard to whether you talk about a sales system that will make the sales force more efficient, more productive and also allow you to hold on to that sales force. A strong sales force does not want to be encumbered by bureaucracy and inability to record business. They want to sell. If you cut them off from their ability to sell and from their ability to generate commission, to be quite frank, chances are they are going to be unhappy, and it is going to be difficult to retain them.
We have that problem, I think, throughout the company, because of just where we are in our evolution, and now is the time where we needed to readjust and part of this restructuring is to do exactly that. This to not start out as an exercise to cut costs. This started off as an exercise to really allow the company to operate more effectively, more efficiently, and get the job done for the customer in a more precise way. It was really driven by what hundreds of associates here at the company had to say about the way we did business and what was causing them a great deal of frustration. As it evolved and as we probed deeper, certainly the management team sitting at this table and many others throughout the company, we came up with the plan that we unveiled today.
I really think that the secret behind it is not the efficiency that you gather net of the investment on an annualized basis, I think we're talking about saving somewhere around $70 million, $80 million a year, something in that vicinity that will be returned to the shareholder, but that really masks the real benefit of this.
What this does is make us much more focused on the opportunities for growth. It allows people to really use their ingenuity to move the business forward and not encumber them by let's just say bureaucracy and lack of clarity of organizational structure, et cetera, that we were experiencing, that as I said built into any company that has grown very quickly. This is not by any way a condemnation of what was done in the past; it is just that this is what happens in a company that has moved very, very quickly. So we now are seizing the opportunity to recalibrate ourselves, put ourselves in a position where we can really take this to the next level.
Once again, thank you for joining us this morning. To listen to the replay of this call please dial 800-642-1687. Or you can access the replay through our website under investor relations. Or please feel free to call me any time at 212-351-7032 with any further questions. Thanks again.
On behalf of myself and the entire management team, thank you very much for listening this morning, and take care.
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