Monster Worldwide (NASDAQ:MNST)
Q4 2007 Earnings Call
January 31, 2008 5:00 pm ET
Robert Jones - Vice President, Investor Relations
Sal Iannuzzi - Chairman and Chief Executive Officer
Tim Yates - Executive Vice President and Chief Financial Officer
Mark Stoever - Internet Advertising and Fees
Darko Dejanovic - Global CIO and Head of Product
Art O’Donnell - Customer Service
Mark Mahaney - Citi
Imran Khan - J.P. Morgan
Peter Appert - Goldman Sachs
John Jacobs –Wachovia
T.C. Robillard - Banc of America
Jeetil Patel - Deutsche Bank
I would like to welcome everyone to the Monster Worldwide fourth quarter 2007 earnings results conference call. (Operator Instructions) I would now like to turn the call over to Bob Jones, Vice President of Investor Relations. Please go ahead, sir.
Good afternoon, and thank you for joining us on Monster Worldwide’s fourth quarter and year end 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 the following members of our executive management team: Mark Stoever, Internet Advertising and Fees; Darko Dejanovic, Global CIO and Head of Product; and Art O’Donnell, Customer Service.
Before we begin I’d like to remind you that except for historical information, the statements made during this conference call constitute forward-looking statements under applicable securities laws. Such forward looking statements involve certain risks and uncertainties including statements regarding the company’s strategic direction, prospects and future results and does not include the effect of the defense or outcome of the ongoing investigations or litigations relating to past stock option grants or costs associated with the restructuring and the security breach.
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 any other risk discussed in our Form 10-K and our other filings made with the Securities & Exchange Commission.
With that I’d like to turn the call over to Sal for his comments.
Thank you, Bob. Good afternoon, everyone and thank you for joining us for the 2007 fourth quarter year end conference call. As we reported to you on our results for the past year, this is an appropriate time to look at actions we have taken during 2007 and more importantly, at the plans we are implementing for 2008.
Starting mid-year 2007, Monster senior management team took a hard look at the company’s mission, brand, competitive position and organizational structure. We reviewed virtually every aspect of the company’s operations with an eye towards world-class customer service, significant operational improvement and product innovation that will leapfrog the competition.
We found many strengths, including a recognized brand and a leading position in a global market with enormous growth potential. We came to realize that the growth opportunities in both our core business and adjacent markets are actually much larger than we originally thought. However, it was clear that to reach this potential, pervasive change was necessary to take advantage of this large opportunity.
We also saw a chronic lack of investment in our core product, technology systems and quality marketing at a time when new competitive challenges were emerging. As a result the company was not fully capitalizing on the marketing opportunity despite its role as the industry pioneer.
We took immediate action to address these challenges and opportunities. We have reinvigorated the Monster brand and significantly increased the energy level of our global associates. Quite frankly, more has been done in the last three months than in the prior three years in terms of execution of strategic goals.
The first action we took was to implement a restructuring plan to make the organization more nimble and accountable, while at the same time curtailing expense growth. These initiatives also included a commitment to significantly invest in product innovation, marketing and infrastructure.
These initiatives have started in a big way and are ongoing. We took significant action to improve the experience when a seeker visits our website. Specifically, we removed distracting ads, made the site easier to navigate and also enhanced our products. As a result, job searches and applies on the site are up globally.
We’ve taken on tough challenges to refocus and revitalize Monster, and we believe these changes are crucial to build a company with a strong foundation. While it is still early in the rebuilding phase we are pleased with our progress.
Let me briefly update you more specifically on the plans we initiated last year and the plans we are vigorously pursuing in 2008, which we believe will transform the company. We reorganized the marketing function and changed our go-to-market approach. We’ve partnered with BBDO, a top global ad agency to create a global and integrated marketing program. In addition, we’ve gained greater efficiencies in both purchasing and placing media through a more centralized media buying program.
Our changes in reenergizing our plan are particularly dramatic and visible. On January 1st, we launched a powerful, integrated global marketing program to build on Monster’s position as the industry leader. This new marketing approach is designed to evolve the brand from a job transaction machine to a life improvement engine, enhancing our seeker’s experience and making Monster a trusted partner in their career life decisions.
This is a multifaceted program including a new home page design, online, offline, print and video advertising and a targeted marketing outreach program to current and potential customers. While still early, the returns have been positive and the campaign has been well received by seekers and customers worldwide.
In the fourth quarter, we made the strategic decision to significantly increase our marketing activities to support the brand. We carried this momentum into this year and have experienced positive trends in job response, a key indicator that demonstrates our strategy is working.
We recently made several meaningful improvements in product innovation and usability to support our goal of improving the customer experience. For seekers, we’ve simplified the account registration process and introduced Express Apply, which enables a job seeker to search and apply for job postings quickly and more efficiently. In addition, we have added richer content and a job location tracker through Google Maps. Employers now have the added benefit of streamlined job categories and greater exposure to their job postings through Monster’s career advertising network. We believe these enhancements will allow seekers to be more productive and proactive in their job search.
I’d like to share with you the actions we’ve taken to enhance our technology platform. This is an area where we believe we’ve made the most progress over the last six months. Our goal is to create secure, scalable and redundant technology systems. We’ve strategically invested to add capacity and flexibility while increasing the speed of delivery. In particular, we are reducing the number of platforms and have made progress towards operating North America and Europe on one common platform.
We have also significantly increased our data center capacity and upgraded our security protocols following the security breach that occurred in late August. I’m pleased to tell you that the number of intrusions to our website since early September have dropped off dramatically because of the improvements we’ve been making to secure the site. We’re especially proud of these efforts which are designed to protect our operations and customer data, improve the speed at which we implement goals and changes, and support the future scalability of the business. These are just the first of many enhancements that we anticipate in 2008.
In terms of moving into adjacent markets, our recent acquisition of Affinity Labs is an excellent example of how we are increasing our value proposition to customers. Affinity operates a portfolio of professional and vocational communities for people entering, advancing or networking in certain occupations. They operate from a proprietary technology system which allows them to produce additional sites quickly and cost effectively. The acquisition allows us to provide highly relevant content to our seekers while giving employers access to a large, hard-to-reach pool of job candidates which will allow Monster to expand its core product more aggressively.
Users in these communities tend to visit frequently and have made Affinity a key part of their everyday life which in turn will lower our cost to attract users. Affinity Labs to Monster also contributes to our transformation into a life improvement company as members of these communities are attracted to these sites to network, interact and exchange ideas about locations and interests they have in common.
While small progress has been made in repositioning the company, we have much more to do moving forward. To better respond to the changing needs of our customers, we’ve redefined our mission and values that represent the Monster brands. Our mission is to inspire people to improve their lives. This mission statement recognizes the workplace has evolved. Job seekers expect a fuller, more rewarding experience in searching for a job while employers are seeking the highest quality candidate more efficiently and effectively.
Monster must evolve as a company to meet our customers’ changing demands. We have broadened our lenses to be more than just a job board and reflect our approach to serve employers and seekers. We are determined to make our user experience more relevant, engaging and personal. The actions we have taken support our commitment to successfully reposition Monster as a life improvement company.
Just last week we were pleased to announce the company took a major step forward in its ongoing efforts to resolve its outstanding litigation related to prior management practices with respect to stock option grants with its former Chairman and CEO. The relinquishment of his super voting rights with respect to the Class B shares is effective immediately and will become permanent upon court approval. This conversion of super voting rights into one vote for one share equalizes the playing field for all Monster investors.
This settlement begins the process of eliminating the lingering distraction of our outstanding litigation to customers, associates, investors, and Monster’s commitment to achieving world-class corporate governance.
We have said a great deal previously about our efforts to streamline the organization. Monster is leaner today. Employee productivity has increased and we are balancing investments against revenue opportunities. We are now better positioned to respond more quickly to changing customer and market demands, while improving our operating margin over time. As a result of the restructuring efforts, which are ongoing, we have been able to increase our investment in customer-facing initiatives. However, because of the historic lack of investment, we move fast and believed these actions will enhance the value of the franchise. These investments are critical to build revenues and the cost will be spread unequally throughout the year.
In looking at our fourth quarter performance, I’m pleased to say that Monster delivered strong financial results. At the same time, we continue to invest in the company for future growth. Tim will provide more details of the financial results and factors that drove the performance, but I do want to comment on our achievements.
Our 19% revenue increase was strong particularly given the more challenging domestic macroeconomic conditions which impacted overall demands. We believe these softer conditions muted the progress we experienced and contributed to the lower than expected revenue growth in North America.
The international business remained a solid performer in the quarter and throughout the year and was the main driver to our overall corporate margin expansion. Our plan is to continue to aggressively build on our leading market share in Europe, India and South Korea by investing in product, technology and marketing in these growth markets.
I’d like to briefly review the steps we have taken to achieve the goals and objectives we have set as we enter 2008. Our number one goal is to reach world-class customer success. Everything we do from top to bottom is focused on this customer success goal. Last quarter, we introduced Art O’Donnell who has joined the company to lead our global customer service effort. Art is moving rapidly to in-source, centralize and standardize our global call center operations. We believe this will substantially improve all customer service metrics while reducing operating costs over the long term.
We are driven by the desire to deliver the best experience for our users by becoming a value-added partner. We will offer greater value to all seekers, even those who are not actively looking for a job at the current time and we will reinforce their brand loyalty. More active seeker engagement will translate directly into higher quality candidates for our employers.
Our second goal is to offer an undeniable, compelling value proposition that differentiates Monster from the competition. Success here means beating the competition by offering a better product that generates the results that attract and retain the customers. The actions we have taken to improve our product and services are designed to drive quality traffic to the site and increase visitor job response.
We are drawing on our full global network for best-in-class products and service ideas, taking concepts that have been well received in one market and adopting them for the entire organization as appropriate. This is one of the key benefits of breaking down the silo mentality as a result of our change to a global, functional organization. We are dedicated to winning in every market in which we compete by capitalizing on and enhancing our extensive global reach, creating and sharing best practices across Monster will enable us to reach this goal.
In North America, we believe that our sharpened focus on engaging customers, a new marketing program and continued efforts to improve sales through productivity will allow us to be substantially more competitive. We are also targeting key verticals including those served by Affinity Labs which we believe represent a growth opportunity for Monster.
In Europe, we will capitalize on the strong market position we have developed in larger markets. This strong revenue growth and margin expansion in this region in the fourth quarter was driven by the investments we have made in infrastructure, brand building, and operating efficiency gained through our ongoing restructuring activity.
The Asia Pacific region represents a substantial growth opportunity for Monster. We believe China offers a terrific opportunity for future growth and anticipate acquiring the remaining 55% of ChinaHR in the middle of 2008.
We have recently added to our bench strength with the addition of Ed Lowe to the Monster team. Ed has significant experience in successfully operating businesses throughout the Southeast Asia region. He will be responsible for integrating and overseeing Monster’s activities in greater China.
Both India and South Korea delivered strong operating results and financial performance in the fourth quarter, and throughout the year and we anticipate that those trends will continue throughout ‘08.
As we develop for the greater China market as well as Southeast Asia we are equally excited about the opportunity that exists in neighboring markets, particularly Australia. We believe these are opportunities to expand beyond our current major geographic markets. During the past year, we increased our global footprint by expanding Monster’s presence in 12 new countries through low cost launches. We’ve seen terrific growth in traffic, seekers, job postings and resumes throughout the year on a quarterly basis in countries like Turkey and Mexico. In 2008, we will continue to further develop smaller markets in Eastern Europe, Poland and the Czech Republic in particular while we consider additional geographic expansion.
Combined with these goals is a commitment to excellence in everything we do and a determination to invest in our people and community. We have made strategic decisions and taken swift action throughout our organization to innovate and serve our customers. We have diligently restructured the business, reallocated and ramped up investment in critical areas, reenergized the brand and renewed Monster’s growth potential with our dedicated associates. We are in the process of building a foundation that will support sustainable growth and long-term value to our shareholders. But clearly, there is still a lot of work that needs to be done and more changes are needed to achieve our goals.
We are currently operating in a weaker economic environment which will impact the employment market in 2008. Obviously there is much turmoil and significant uncertainty surrounding the level and pace of hiring in the U.S. over the short term. Customers have taken a more cautious approach to workforce expansion and overall job creation.
Our decision to invest significantly in product innovation, infrastructure and brand allows Monster to compete aggressively in the near term. The investments position the company to produce even greater future growth when the economy turns to a more normal state. As I have stated since assuming the leadership role in Monster in early April, we will not make decisions that will compromise the achievements of our long-term goals for the benefit of short-term gain. I don’t believe that works in any business, particularly in an Internet-based business like Monster that is rapidly evolving.
Because we are managing for the long term, in an increasingly uncertain economic environment we do not believe it is prudent for our company and our shareholders to provide financial guidance at this time. Probably many of you believe this represents a lack of optimism about our future. Let me assure you, it does not. As a matter of fact, we are more encouraged than ever before about the many growth opportunities before us.
The board of directors’ decision to authorize an additional $100 million share buyback bringing the total authorization to $450 million supports the management team’s confidence and belief about the company’s long term growth prospects. I am convinced it is the right approach at this time given the overall economic uncertainty, there are far too many variables to predict Monster’s growth rates over the next four quarters. More importantly, I strongly believe that managing the company to meet short-term hurdles will offset the focus on the urgent need to support investments that will support the longer term growth.
Doing the right thing for our customers is a core value at Monster. We have consistently delivered this message internally to our business leaders and global associates. Managing for the short term will lead to bad decisions, limiting the company’s ability to compete and grow in the future.
We will continue to balance our investments with revenue growth, and believe we are on track to deliver a 25% non-GAAP operating margin by the end of the current year. It is our objective to grow our core business faster than the industry average while generating strong cash flow to our ongoing operations. We also believe there is significant opportunity to leverage the company’s deep employee relationship as part of our life improvement strategy.
Now I’d like to turn the call over to Tim for his remarks.
Thank you, Sal and good evening, everyone. First I will review our income statement, highlighting or non-GAAP results while pointing out the GAAP reconciliations and then I will comment on the performance of our segments, provide an update on the structuring plan and finish with a brief discussion of our equity investment in China and the balance sheet.
Consolidated revenue increased a solid 19% in the fourth quarter, consistent with our expectations reaching $354 million. Revenue increased 14% excluding a $13 million benefit from foreign exchange rates.
Within our operating segments, our international business performed exceptionally well, delivering 59% revenue growth while Careers North America grew revenue by 3%. When combining North America and International, Monster Careers revenue increased 23% and generated a strong non-GAAP operating margin of 27%.
On a non-GAAP basis our operating expenses were $280 million. Despite significant incremental investments during the quarter, the non-GAAP operating margin held steady at 21% compared to the third quarter.
Operating expenses grew 23% over the prior year period and were up 4% sequentially. The currency impact on our operating expense was approximately $10 million for the quarter, partially offsetting the currency benefit on revenue.
Interest income increased 7% to $6.8 million in the fourth quarter over the prior year period. Our effective tax rate ticked down slightly to 35%, while our loss in equity interest came in lower than we expected at $800,000 as a result of improvements at ChinaHR.
The diluted share count was 126.7 million, down 3% sequentially and year over year. Putting the pieces together, excluding the items we have called out, income from continuing operations increased to $52 million or $0.41 per diluted share compared with $49 million or $0.37 per diluted share in last year’s fourth quarter.
Before we review the segment results, I want to highlight the impact of certain adjustments recorded in the fourth quarter that reconcile our GAAP and non-GAAP results. They are:
$5.4 million of restructuring and other special charges primarily related to severance and accelerated depreciation as part of the plan.
$3.4 million of costs associated with measures taken by the company in response to the security breach, most of which occurred in the month of October.
$1.4 million of professional fees from the ongoing investigation of the company’s historic stock option grant process.
Including these costs, our GAAP operating margin was 18% and income from continuing operations was $45 million or $0.36 per diluted share. GAAP operating margin increased significantly since we initiated the restructuring plan in July, an improvement of 530 basis points as a result of strong revenue growth and our cost containment initiatives.
Moving over to our segment results, the Careers International business which now accounts for 40% of consolidated revenue continued to experience dramatic growth. Revenue grew 59% or 45% excluding a $12 million currency benefit. We continued to see strong revenue gains in the U.K, France, Germany and the Netherlands, which were in line with the overall international business. Outside these four countries, our smaller markets also posted very healthy top line growth.
In Asia, we saw strong revenue increases year over year in all countries and we believe our strategy to capture market share while aggressively investing in the business will position Monster firmly in the region for significant future revenue growth.
The strong revenue growth was fueled by higher sales productivity and our ability to leverage our investments in sales, marketing and infrastructure. We are continuing to balance the growth of operating expenses with strategic investments. As a result, our Careers International non-GAAP operating margin expanded significantly to 20% compared to 11.2% in the 2007 third quarter.
North American Careers revenue came in at $174 million, a modest increase over the prior year. The revenue growth rate was below our expectations and represents a decline from the 5% increase in the third quarter. It is a respectable performance considering the deteriorating macroeconomic conditions in North America and our historic lack of investments.
The segment was impacted by weakness in the financial services sector, primarily resulting from the sub-prime mortgage issue. We also experienced lower demand from smaller to medium-sized customers who tend to curtail their hiring needs in a challenging economy. However, our global enterprise accounts are holding up reasonably well in a more cautious environment, reflecting the breadth of our product and its global nature.
The non-GAAP operating margin declined to 32.5% in Q4 compared with 33.9% reported in the third quarter, resulting from our decision to continue marketing in the fourth quarter in advance of our brand launch which we believe will position us well into 2008.
Our IAF business generated revenue of $37 million in the fourth quarter, an 8% decline over the prior year. 2007 was a transition year for IAF as we adjusted our strategic focus, took a more selective approach to advertising and placed a greater emphasis on relevant content and quality traffic.
In addition, during the fourth quarter we reevaluated our relationships with certain clients engaged in the student loan advertising space. These operational decisions contributed to the decline in IAF revenue and the non-GAAP margin. We do believe that the fourth quarter results represent a reasonable base from which to expand the business subject to market conditions. In addition, we continue to believe that the business model in IAF represents a significant opportunity with attractive operating leverage features. Our recent acquisition of Affinity Labs demonstrates our commitment to expanding our presence in key vertical markets and the lead generation space.
I’d now like to mention a housekeeping item relative to our existing segment reporting. As you know, earlier in the year we realigned our business into a global functional organization in order to allow us to make more efficient use of our resources on our global basis. Our internal structure is evolving beyond our current segment disclosure. At the moment, we have made the decision to continue to provide segment reporting on a consistent basis. Currently, we believe there is information content in that disclosure that is consistent with the accounting standards. However, as the company continues to evolve, we believe that the individual segment reporting as currently constructed may become less relevant and therefore we will continue to reassess it.
Now I would like to provide an update on our restructuring and reinvestment plan. As we communicated last quarter, the plan has a number of business objectives. To briefly recap:
Drive revenue by enhancing the customer experience fueled by new product innovation.
Streamline the organization so that we can move quicker in a rapidly-changing market environment;
Invest in our infrastructure.
The program from a financial standpoint is designed to allow us to slow the growth rate of our operating expenses over time, redirect a greater percentage of our dollars to market-facing initiatives and innovation and achieve a 25% non-GAAP operating margin by the end of 2008. We remain committed to these objectives based on our current portfolio of businesses in a reasonable economic environment.
We have made substantial progress in a short period of time. We are proud to note that in the fourth quarter, Monster recorded its highest level of profitability in the past four years on both a GAAP and non-GAAP basis.
On the headcount front, the company was on a trajectory to end the year with approximately 6,450 associates. We have made significant headcount reductions, consistent with our restructuring plan. We have curtailed the amount of new hiring while at the same time, selectively adding and shifting talent in key product, sales and technology areas. Consequently, the total headcount was essentially flat when compared to the third quarter. As a result, we were able to increase our annualized revenue per employee to $275,000 per person, a 12% increase since we implemented the plan. We have increased productivity with a leaner organization.
Our original restructuring plan was to reduce global headcount by 800 associates, which included approximately 100 associates from the customer service function who are now going to stay with the company. When excluding customer service from the equation, approximately two-thirds of the 700 associates who were part of the reduction have been notified, terminate or voluntarily resigned through the end of the year.
Customer satisfaction is the top objective. Our original plan for customer service included outsourcing more of the function. We believe that it’s important to control the key interfaces with our clients, and that this ultimately will lead to a lower cost operating environment. As Sal mentioned, Art O’Donnell joined the team during the end of September and has reevaluated our original plans. Rather than outsource the function we will implement an in sourced model. Despite this change in our original plan we remain committed to achieving the original headcount target.
From an investment perspective, our restraint on headcount growth has freed up money to invest in the business. During the fourth quarter, we stepped up our investments and directed more dollars into infrastructure, innovation, site improvement and marketing which Sal has elaborated on. The majority of the Q4 spend went into marketing where we increased our mass media presence in anticipation of our new brand campaign. We also directed incremental investments into the build out of a North American data center to support our operations as well as consolidation of our employer platforms to integrate an increased functionality.
A combination of new investments offset by savings from the restructuring allowed us to maintain our 21% non-GAAP operating margin during the quarter as we took action that we believe will contribute to future growth.
Turning to our investment in ChinaHR, we expect to acquire the remaining 55% and believe the transaction will close sometime towards the middle of the year. We will pay 100% cash for the remaining interest which we currently estimate to be in the range of $200 million to $225 million. This is based upon a multiple of ChinaHR’s 2007 revenue audited in accordance with U.S. GAAP. This multiple was determined when Monster made its initial investment in ChinaHR in early 2005, and is reflected in the put and call provisions.
We are approaching the final stages of the financial and legal due diligence process and have had an active and positive dialogue with ChinaHR’s management over the last few months. With rapid revenue growth, ChinaHR believes they are closing the gap in the online recruitment space and are quickly gaining ground with their top competitor. We are optimistic that we will become the leader in this important market in the near future.
Moving on to the balance sheet, our deferred revenue balance increased 18% over the prior year period reaching $524 million. We ended the quarter with cash and marketable securities of $578 million. Cash generated from operating activities was $64 million and capital expenditures were $16 million.
During the quarter, we repurchased 2.8 million shares for an aggregate cost of $97 million. On a full year basis, we repurchased almost 7.3 million shares totaling $252 million. We now have approximately $253 million remaining under our buyback provision program.
In addition, we also added to our financial flexibility by entering into an unsecured $250 million credit facility on improved terms. Following the anticipated investment in China and the cash needed to fund our buyback program, we believe our cash flow generation provides us ample flexibility to explore other capital allocation strategies and appropriate acquisition opportunities for growth.
As Sal mentioned, we are not providing guidance for 2008. Because we are managing for the long term in an increasingly uncertain environment, we do not believe it’s prudent to provide specific financial guidance at this time. As the year and the economy evolve we will continue to evaluate the balance between investments necessary to enhance the long-term value of the company and short-term earnings. We believe that this market scenario may provide opportunities to gain market share and enhance our product offerings given Monster’s strength and strong financial condition. The investments in our business will continue to be managed in line with the long range opportunities we see, and our objective of obtaining our margin goal.
Now I would like to comment on some considerations for the first quarter. On the last conference call we noted that as we phase in the investments and take advantage of business and market prospects, our expense growth rate will vary from quarter to quarter, and the results in our margin will not be linear. The decision to relaunch our global brand earlier this month is a perfect example of this variability. The purpose of the launch was to reinvigorate the brand through an aggressive, globally integrated media program. We are positioning the company beyond the Monster job board business to be a life improvement engine, a differentiator in today’s evolving market.
We believe the campaign and our product enhancements will drive our job response levels, increase engagement and result in higher conversion metrics. As a result of this initiative, a disproportionate amount of marketing will be incurred in the first quarter of this year. We expect the marketing and promotion expense in the first quarter of 2008 to approximate one-third of our anticipated spend for the year. In total, we currently expect the marketing and promotion line to be a comparable percentage of revenue as it was in 2007.
There are two main ingredients resulting in this higher first quarter marketing spend: media and production. First, in order to maximize the market impact of our launch which we believe will benefit our operations for the full year, we launched a massive media campaign across 16 countries. The campaign includes marketing on high profile and targeted television programming, as well as print and online advertising. The media plan was launched quickly and effectively and was executed over a relatively short three-month period. Most importantly, it was a fully integrated global launch led by the strength of our marketing team and BBDO, our marketing partner.
Secondly, there were considerable costs to produce the advertising, particularly the commercials. In accordance with GAAP, production costs of the commercial are recognized when these commercials are first aired. However, we will continue to benefit from the value of these commercials throughout the year, so long as they continue to air.
I will now hand the call back over to Sal for his closing remarks.
Thank you Tim. Before we take your questions I want to reemphasize our confidence in Monster’s long-term potential. We are well positioned to capture the opportunity in the online career market and the even broader life improvement market. We have an established brand, enjoy a global presence and present strong financial resources. Our single most important priority entering the new year is our unwavering commitment to provide the kind of customer experience and innovative products that it takes to separate Monster from the pack.
We have already made many of the tough choices and organizational choices needed to transform the company. We are doing what needs to be done, and to move our company forward. I particularly would like to thank the talented and dedicated team of Monster associates around the globe as well as our customers and shareholders for their support.
They have responded to the many changes that have taken place at the company in a very positive and constructive way. They are our best asset and represent the brand leadership that Monster stands for.
On behalf of the executive team and the board of directors, I thank them and emphasize that the best is yet to come. I look forward to reporting on our progress throughout 2008, and now I’d be happy to respond to your questions.
(Operator Instructions) Your first question comes from the line of Mark Mahaney - Citi.
Mark Mahaney - Citi
You’re not giving guidance, but yet you want to stick with this goal that you had mentioned before of exiting ‘08 with 25% operating margins. I guess the simple and broad question is, why the commitment to that and not to other metrics? Is that the key underlying driver for how you’ll think about the business not only in ‘08 but going forward? Thank you very much.
I think that first of all, we have a goal in how we manage the business and where we think the business, certainly one of this type, should be at. I think the 25% margin gives us not an easy goal, perhaps an aggressive one but I think one that we can achieve.
I think with regard to overall guidance, well metrics as you refer to them, this company is for a long time had really been managed on a hit the target basis and as we all know these days, companies that miss the target are punished and punished tremendously. Those that beat get rewarded really disproportionately sometimes to the actual economic benefit of whatever a quarter produces.
I think what we need to do and what the mindset of the associates in this company has become is that we’re in this game for the long term. It’s not about the next quarter. It’s not about the next several quarters. We have to make the investments, make the investments when we think the opportunity is right, and in the long run, that will benefit the shareholders the best.
It is not a decision -- and I know it’s easy to go there, believe me, Tim and I pondered it as well as members of the board and other executives here at Monster -- whether or not this was the right time given the macroeconomic picture, if you will. But we thought that you know, this is a decision to be made where many can argue there is no perfect time to do it. So we moved ahead with it because we really, truly believe it is the right strategy for this company and the right mindset for the employees as we move forward.
Mark Mahaney - Citi
Makes a ton of sense, Sal, thank you.
Your next question comes from the line of Imran Khan - J.P. Morgan.
Imran Khan - J.P. Morgan
First of all, I was trying to understand if you can give us some sense like your deferred revenue was up 18% on a year-over-year basis. What percentage of your revenue is coming from the resume database or guaranteed contractual revenue that you have with your large enterprises versus more of market sells like job postings growth? A better sense on that would be helpful.
Secondly on the U.S, your margins were down 400 basis points year over year, on the margins. I am trying to get a better sense of what is happening there and how should we think about the U.S. margins? Thank you.
I think margins in North America suffered from simply the fact that revenue obviously has slowed down. Investments have been very heavy. Those investments also leverage us around the world. So they are decisions we’ve made in order to improve and prepare ourselves for the future overall.
I think that many of those investments -- and I don’t know exactly when, particularly given the economy -- but many of those investments will position us to increase our market share here in North America. I think most importantly really position us to come out of the box strongly when a slowdown or recession or whatever it is that we’re going through when we come out the other end, Monster will be in an extremely strong position to cede that opportunity and grow quickly.
With regard to your first question, could you please repeat it, I didn’t quite grasp it?
Imran Khan - J.P. Morgan
What I’m trying to understand is if you could give us some sense, what percentage of your revenue comes from job posting vs. resume database?
There hasn’t been any significant change in that during this quarter from what it’s been in the past. I would amplify what I said in my comments to the point that Sal said, the company made an affirmative decision in Q4 to maintain a level. Two things were going on within the marketing and promotional spend, we were getting more efficient in how we did it which had the effect of bringing the spend down. But then we went out with a more aggressive campaign in the fourth quarter. Had that second step not happened, the impact on the margin would not have been as significant.
Just if I may add to that because Tim, as usual, made a very good point. I want to emphasize that many of the investments that we’re making are even greater than they appear by looking strictly at the numbers, if you will because there’s a tremendous amount of reorganization, redeployment of energy and resource throughout the company and marketing being just one of those.
There’s enormous efficiencies that are being captured and where the spend is increasing so the amount of benefit, if you will, the amount of benefit to the company is much more than even the numbers would indicate. That’s a very, very key point about what’s going on here.
Your next question comes from Peter Appert - Goldman Sachs.
Peter Appert - Goldman Sachs
Sal, what do you think beyond getting to the 25% goal, do you have thoughts longer term in terms of what is a reasonable and sustainable level of profitability of the business in terms of what you’ve described with regard to the need to balance investment with ongoing profitability? Is 25%, in other words, probably a sustainable rate you’d want to stick to?
I think that certainly again, if looked at over time we certainly think that based on what we’re doing, what we’ve analyzed, that is a sustainable number. It may waiver from quarter to quarter because as Tim indicated and I’ve indicated, call it the lumpiness if you will of investments, but when we reach the 25% and when we’ve sustained it for a while, maybe we’ll look at it again, and maybe we’ll set a new bar. I’m sure we will. But right now, I’d be awfully happy just achieving that goal and then looking beyond to what we can offer going forward.
Peter Appert - Goldman Sachs
So the implication is then that the international business really probably can’t be as profitable as the U.S. business?
No, I think that the international business offers a lot of opportunity. I think that the international business, the issue is that there’s competition around the world. It’s not like when Monster first began where competition was limited. There is competition around the world and that’s going to impact margin, naturally, because as we all know there’s a cost of competition. But that’s also going to be offset, our model is to really go into a number of new areas, new offerings, both to the employer and to the seeker.
This life improvement concept or business that we talk about, is not just words. It’s not buzz words for advertisement. It is really, we think, a number of new activities that we can get into and benefit our seekers on a broader front, even when they’re not looking for jobs and that will bring more revenue to us; more revenue to us in terms of advertising in just a wide spectrum of areas.
So I think the opportunity is broad, and I think the profitability may surprise us in the future. I think that what we’ve done as far as we can see, as far as we’re comfortable in saying right now, is we believe that 25% is a fair target given where we are. Nine months ago or so the company was operating at an operating margin of approximately 12%. Today we’re at 18%. In that nine-month period we’ve increased quite a bit.
I think we’ve pegged it there and hopefully in the future we’ll see opportunities that will bring us even further.
We have time for one more question. Your final question comes from the line of John Jacobs -Wachovia.
John Jacobs -Wachovia
Thank you for taking my questions. Guys I totally understand your views on the guidance but with the North American revenues, I guess they’ve been about 2% below the MEI over the past couple of quarters, how do we interpret the decline in January’s MEI? Is it that they trend out as the year progresses?
I’m sorry, could you repeat that? I missed the last part.
John Jacobs –Wachovia
In terms of the expense comment, is the read that the growth of expenses trends down as the year progresses?
Specifically I was talking about advertising, one-third of the advertising expense based on what we see today, would incur in the first quarter as opposed to a quarter so the rest of the year will bear a lower pro rata amount. Absolutely. That was the point of the comment.
John Jacobs –Wachovia
So in terms of North American revenues as it relates to the MEI and the correlation there, it’s been about 2% below the MEI over the past couple of quarters. Can you give us a sense of how to interpret January’s number as it relates to the quarter? Because the decline there was pretty noteworthy going into the year.
I think in the numbers and what we’re seeing, obviously an added dimension and again, I want to emphasize strongly that this is by no means the only reason that we’re making a lot of investments. There is nebulousness as to when we make some of those investments but that’s the reason for the pull back on the guidance. The issue of the economy as a whole, in terms of jobs going down, the number of postings, et cetera, obviously there is some of that. We also experienced some of that in Q4.
I think it’s important to note that we actually thought Q4 again in North America was going to be a bit stronger than what we saw. I think that’s largely related to the slowdown, particularly as we’ve started to see it really manifest itself in financial services.
So I think that’s trailing into January a little bit; I think even in the comments that went out this morning with the Monster Index, I think with the actions taken by the Fed, the actions that the White House and Congress are taking, we’re hopeful that this will start to swing around.
The most important thing though, and this is what’s difficult to predict, will it start to swing around in February, will it happen in March or April? I don’t think any of us have that crystal ball that we know when that’s going to happen.
But I think with the investments that we’re making, we have a great opportunity to seize market share, market share that we’ve lost over the past several years, opportunities we’ve given competitors to creep in into areas where Monster’s been traditionally strong, and I think that that will help buffer us against whatever downturn, however deep the downturn ends up being.
The investments -- and most importantly -- the investments are critical. We are very focused on continuing the investments, making the improvements that the company needs to make because as we all know, at some point, and we don’t know exactly when, the economy will turn around. We need to be in a position to seize that opportunity and really capitalize it.
Operator, we’d like to take two more questions. We did run a little long on our formal remarks if you could do that we’d appreciate it.
Your next question comes from the line of T.C. Robillard - Banc of America.
T.C. Robillard - Banc of America
Sal could you give us an update? On the last earnings call you talked about a major initiative in terms of stabilizing the U.S. salesforce and taking care of churn and things like that. Can you give us an update of how that’s going and what we can expect as we go out throughout the year?
As you know, we announced a week or two ago that Steve Pogue has left the company. I think that what we are focused on is really looking across the board to the sales organization; it is certainly where I’ll be sharing the lion’s share of my time going forward.
Let me step back a moment. Ever since I’ve gotten here at Monster, as you’ve seen, we’ve made a number of changes in the senior and executive team. And as those changes have been made, what’s happened is in a number of cases, I’ve subsumed those roles and then having spent some time, done a little bit of learning, and then put them in some cases redeployed them to other executives here at the company, in other cases redeployed to new executives, that we’ve been fortunate enough to attract to the company.
Sales is an area where obviously it’s extremely critical to us. It’s an area that I think continues to have a number of issues. It is doing well. The results prove that. But I think there’s a number of opportunities there of how we go to market, how we deal with our customers, how we penetrate market here in the United States.
There are a number of geographic areas where we have simply not penetrated anywhere near as much as we’d like, as our salesforce would like. So what we’re going to be looking at very, very carefully is the mix of how we deal with our enterprise or field sales force. We need to focus heavily on our telemarketing organization and make sure it’s armed with the proper edification with regard to product, et cetera.
We need to invest in those folks a great deal. Also, we only do a few percentage points of our activity in utilizing the Internet, in e-commerce. We need to do a much better job at that. It’s sort of an irony that an Internet company such as us really utilizes the Internet very little in terms of its revenue. I think this presents enormous opportunity not only for an increase in revenue but in terms of efficiency and freeing up our resources, so that they can focus on relationship building and the customer.
The other part of this equation -- and I’ll be also work very closely with Art -- is the customer service component. I think that customer service has been looked at here at the company as really a cost of doing business, if you will. We simply don’t view it that way and in our previous life, we kind of proved the theory. We think it’s another engine to generate and it’s a selling point for us for revenue as well as obviously satisfying the needs of our customers. So we have a lot of work to do there.
I am not anticipating a tremendous disturbance regarding our customer base. Whatever we do in that area, we’ve learned from some of the lessons of the past. We’ll deal with it very deliberately and very cautiously and make sure that if any handoff is necessary that it’s done in the correct fashion. But I think that the amount of opportunity that lies ahead of us is significant.
Your next question comes from Jeetil Patel - Deutsche Bank.
Jeetil Patel - Deutsche Bank
Can you talk about what your overall take of the industry growth rate is for the U.S. and the European markets for online recruitment? What are your assumptions so we can work with those as we try to figure out where we’re going?
I have a quick follow up.
In terms of, as we said, in terms of giving guidance we’re really not going to go there. In terms of growth right now I think that the ability to expand internationally, is very significant. I think here in North America, obviously, the economy is a question mark. It is possible that some of that does filter into overseas, we’ve seen it show itself a little bit in the U.K, for example.
But as I said earlier, what’s very interesting and maybe it’s fortunate for where Monster is at this point in its evolution, is that we have a lot of work to do and a lot of room to grow in recapturing market share in areas where we haven’t done as good a job as we could have in the past and areas where we just didn’t focus enough in the past.
Jeetil Patel - Deutsche Bank
Have you and Tim looked at overall when there are these types of downturns, no one knows how severe they are but can you give us a framework of how long they typically last in your view as you look at them historically, so we can better assess this situation.
How do you manage the notion that if there is a U.S. downturn, UK obviously follows and is there a fear that the European market beyond the UK follows suit and it happens in successive order every three to six months one after another? How do you manage the expense load at that point if that were to happen?
Look, I think that obviously we continue -- some of your question and please don’t misinterpret this, I’m not trying to be glib -- but if I had the answers to the first part of your question, I’d probably be the
Chairman of the Fed.
Actually I probably wouldn’t go to the Fed, I’d go to Wall Street and become the biggest player on The Street. It’s very hard for us to predict and as you know very well, I’m sure, everybody is having a hard time predicting it. In fact, there’s even controversy as to whether or not we’re in a recession or slowdown or if everything’s okay.
Having said that, look we’re watching every nickel. As we mature as a management team, we are literally watching every expenditure that we make, to make sure that every penny counts. The investments that we need to make, I think, are as much as you can say this about anything, are there to be made. They’re necessary. We’re going to do everything we possibly can to make those investments.
Where there is opportunity to cut, if things get worse obviously we need to constantly reevaluate and make sure that we’re doing just the absolute most that we can do with every dollar.
What I don’t want to do again and I hate to be redundant, is that we need to make sure that we don’t curtail to maintain short-term profitability for a couple of quarters and shortchange our future. Tim spoke about earlier the need for the investment in marketing as an example in Q1. That increase is sizable and it is being done over time when we see a slowdown we’re not doing it with lack of visibility to that slowdown.
But we firmly believe that in the renewal period that’s heavy in the fourth quarter of this year that we will benefit from that investment that we will make in the first quarter. Our confidence in this is what I can emphasize is that the board and the executive team obviously advising them has decided to buy back $450 million worth of stock this year and just added $100 million to cap it off at $450 million. So we’re fairly certain about the future in the sense that we believe that what we’re doing is right, we believe it will position us correctly for the future, and it will allow us to take advantage of the opportunities that are out there. Yes, we may have some short-term slumps because of the economy. But unfortunately that’s part of doing business. Tim.
There are obviously a lot of variables in your question. In terms of the length of a recession you can read different things about that. It seems to me that the last few recessions have been relatively shorter. But there’s a fair amount of dialogue out there that perhaps this one might be a little longer. We need to be prepared in the event that happens, but expressing a personal view, and I’m not in a position to project it, the way the market’s evolved now things seem to be shorter in general.
I think you posed the question of if the U.S. catches a cold, what happens to the rest of the world? Also there you can see it, two sides of the coin. There’s a lot of increased talk now about decoupling which doesn’t seem to have been seen yet. I would observe that a lot of our growth internationally comes from an accelerating increase from offline to online, which perhaps would be accelerated in a weaker economy.
People go for more efficiencies so the European market and the Asian markets are behind where the U.S. was in terms of the conversion from offline to online so there could be a bit of an insulation in that. To the extent that we’re participating in India and China, they may be less related to us than the Western European countries.
So that’s a big equation in there which has led us to be conservative.
The amount of diversification that the company has both geographically and when we go to product offerings both to the seeker side as well as to the employer side will, without question, help us. But obviously as in all companies, as Tim said, if the United States catches the flu, Europe catches a cold. If that were to continue to really spiral and we go into something that is much deeper than anything that’s being contemplated right now, obviously we’ll have to look at what we have, what we’re doing, and readjust.
But the big benefit that this company has is that it is a growth company, it is in a position to expand its market on a global scale and I think that’s going to help it buttress a good part of the storm.
With that, I’d like to formally thank everyone for joining us on the call this afternoon. A replay is available, the number is 800-642-1687 or you can access the replay through our website under the Investor Relations section. In addition to that, please feel free to call me at anytime at 212-351-7032 with any further questions. Thank you, everyone and good afternoon
Thank you very much.
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