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Monster Worldwide (MNST)

Q4 2005 Earnings Conference Call

February 1st 2006, 10:00 AM.

Executives:

Bob Jones, Vice President, Investor Relations

Andy McKelvey, Chairman and Chief Executive Officer

Lanny Baker, Senior Vice President and Chief Financial Officer

Steve Pogorzelski, President - International Group

Doug Klinger, President - Monster North America

Analysts:

Jeetil Patel, Deutsche Banc

Imran Khan, JPMorgan

Christa Quarles, Thomas Weisel Partners

Douglas Arthur, Morgan Stanley

Peter Appert, Goldman Sachs

Mark Mahaney, Citigroup

Bill Morrison, JMP Securities

Steven Barlow, Prudential Equity Group

Operator

Welcome to the Monster Worldwide fourth quarter and full year 2005 operating results conference call. Operator Instructions As a reminder, this conference is being recorded. I would now like the turn the conference over to Bob Jones, Vice President of Investor Relations. Please go ahead, sir.

Bob Jones, Vice President, Investor Relations

Good morning, and thank you for joining us on Monster Worldwide's fourth quarter and full year 2005 conference call. We will have formal remarks from Andy McKelvey, Chairman and Chief Executive Officer, and Lanny Baker, Chief Financial Officer. Bill Pastore, Chief Operating Officer, Steve Pogorzelski, International Group President, and Doug Klinger, President of Monster North America, will join them in answering your questions following the formal remarks.

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. 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, risk associated with acquisitions, competition, seasonality, and other risks discussed in our Form 10-K and our filings made with the Securities and Exchange Commission. With that, I would like to turn the call over to Andy for his remarks.

Andy McKelvey, Chairman and Chief Executive Officer

Thanks, Bob. And certainly, welcome to Monster's fourth quarter and year end conference call. Outstanding fourth quarter financial results cap off another terrific year in the short history of Monster Worldwide. Our solid organic revenue growth, significant earnings increase, and a strong cash flow generation, demonstrates the power of our business model. These achievements spotlight the consistent execution delivered by our operating management team, and Monster's dedicated associates. Before getting the into the details of the quarter results, I think it is important to take a step back and briefly reflect on the year, from the big picture perspective. Internally we set strategic priorities, focus on Monster. Repeat, focus on Monster. Be a local leader, expand internationally, and leverage our multiple sales channel. And we executed on these priorities. We delivered on our financial goals and in some cases, even exceeded our expectations. We diligently invested internally in key areas that we believe will propel future growth.

Externally we grew our customer base dramatically in 2005, and converted a new class of small and medium sized businesses to the power of online recruiting, and Monster's capabilities. We introduced new marketing messages to job seekers, created a new look to our website, and engaged seekers with enhanced tools. We strengthened our leadership role within an increasingly dynamic business by expanding globally, elevating the Monster brand, and creatively providing solutions to our customer needs.

As we delivered these consistent financial results across the year, we also had an eye towards the future. We invested in enhancing our product, advancing our technology, and upgrading our talent, here in North America and overseas, to take advantage of the large 13 billion global market opportunity that online recruiting represents. In North America we successfully broadened our coverage and expanded the market for our services by effectively managing our telesales, field and e-commerce channels, and promoting the Monster brand on a local level. Internationally, we exported our experience and knowledge to take advantage of the huge opportunities we see in both Asia and Europe. We believe that we are in the early stages of executing on our goal as the industry leader, which is to not only grow our Company, but to develop the industry. This will produce results that consistently drive shareholder value.

So we're off to a good start. Monster's fourth quarter results were achieved overall in a human capital environment that has become more favorable with tighter market conditions, U.S. unemployment now under 5%, and skill shortages appearing in critical industries. Moreover, the shift online and away from print continues to pick up strong momentum, as more employers around the world are realizing the benefits and results they achieve when advertising online. Monster showed great balance in the quarter as the Company benefited from solid performance across the board, in looking at the contributions geographically, as well as by vertical markets, such as healthcare, staffing, and the results are encouraging. Although the Monster Employment Index dipped a bit in December, due to a seasonal slow down, overall online job demand was up 32 points or 28% for the year. The Monster Employment Index Europe finished the year on an uptick, and increased 29 points, or 35% year-over-year.

Despite the softer overall market conditions that existed in Europe, we demonstrated remarkable performance. Our international operations grew revenue by 15% in the fourth quarter, and contributed a profit which we intend to improve upon in 2006. Let me provide some operational highlights and accomplishments for the quarter, before I turn the call over to Lanny for details on our financial results and outlook. In speaking with you over the past year, I have stated that international expansion was one of our strategic priorities. Monster products and services are now available to roughly half of the world's population. The markets in China, India, South Korea, Germany, France, and the U.K. are enormous and have a lot in common. Namely, large labor pools, growing Internet usage and human capital markets that are undergoing structural changes. Monster is the only online recruiter plan across all of these markets.

We started in Europe 6 years ago, and we have strategically and steadily expanded our footprint by bringing our human capital in Internet knowledge and expertise across the U.S. border. We have invested in building sales forces and increasing our brand awareness, and as the fourth quarter results demonstrate, with a good return on our investment. Moving forward, we will effectively leverage our technology, product knowledge, service programs, and financial strength across the globe by utilizing our platform here in the U.S. and our technology center in Europe. But more importantly, it is our ability to train and manage our growing sales force that serves as the foundation of the platform to grow these markets. The successful track record of increasing sales productivity is what sets us apart from the competition here in the U.S., and is an unparalleled competitive advantage in the international markets.

Let me give you an example of what I mean. A few months ago, we signed a deal with a major energy company for over $4 million. It covers 24 countries, including China. It is one of the largest enterprise deals ever signed in our industry, and it covers virtually all of the Monster products, including job postings, resume access, career site hosting, banner advertising, as well as MonsterTRAK, which is one of our campus products. This is a great example of leveraging the power of Monster globally. I think it is fair to say that we are the only Company in our industry that can deliver service on this scale and breadth. In Europe, we invested in increasing our brand awareness with a very good result. A study done by Neilsen//NetRatings in November of last year, ranked Monster the number 1 most visited job site in Europe, with over 5 million unique visitors in the third quarter of 2005. We also saw the initial benefit of our goal to increase sales force productivity.

On the operations side, we're in the process of going from 18 small call centers in various European countries, to far, 4 large call centers which will be strategically and more effectively located in Frankfurt, Glasgow, Amsterdam, and Marseille. We have also made great strides in Asia. In India, we built on our leadership position and have dramatically grown the resume database business, which is the prime revenue source. In China, we have narrowed the gap, and are quickly closing in on the number 1 player in that growing market. Online career-related transactions are growing in record numbers. We are in the process of substantially increasing the capacity of our China call center, and we are launching new, exciting brand campaign to support our sales effort in China.

JobKorea has been part of the Monster family for just 4 short months, and we've been very pleased with its performance. JobKorea contributed to Monster's bottom line in the quarter, as revenue came in at 4 million, which was more than we anticipated when we acquired them in October. Even more important is the opportunity to implement a Monster-style telesales model alongside JobKorea's profitable e-commerce model. And in India we demonstrated strong year-over-year revenue and profit growth, as we continued to build on our market leading share.

Let me turn closer to home and provide an update on another strategic priority, which is leveraging our multiple sales channels. We reached a milestone in 2005 as our e-commerce, or self-service business, crossed the $100 million mark in revenue for the year. This was an increase of over 45% from last year. This represents Monster's fastest growing channel and carries higher operating margins than our other sales channels. We continue to generate very strong returns on our marketing investment to promote and advertise the efficiencies of ease of posting a job, or accessing our resume database electronically.

Our e-commerce product also led the way in generating new customers, as small and medium sized businesses continued to shift their help wanted advertising dollars online at a faster rate. As a result of our success here, and the increased productivity of our telesales force, Monster added nearly 20,000 new customers in the quarter, bringing the total new customers for the year to over 80,000. As part of our ongoing effort to reduce our distribution costs, we opened a new sales center in Tempe, Arizona. Cost of operating that center is roughly two-thirds of the total cost that we are currently incurring in our other 2 call centers domestically. The new location is ideal and enables us to better service existing enterprise accounts, while also hunting for new business among the small and medium sized target companies.

On the marketing front, we continued to invest in building the Monster brand in Europe, where we more than doubled our advertising activities in the fourth quarter, and in North America where our focus is on providing support for our local sales. We strategically shifted the marketing mix throughout the year, and have allocated more resources to highly targeted online marketing that better matches the job seeker with our customer needs. The significant sales increase in our e-commerce channel, as well as our larger deferred revenue balance, are directly tied to the success of our marketing efforts this past quarter.

As we look to 2006 and beyond, we are optimistic and confident about Monster's growth perspective. Our number 1 goal is to continue to provide results for our clients, and quality job opportunities for job seekers. We will continue to work hard to increase the productivity in our sales channels. We will focus our efforts in resources on carefully building out our European and Asian operations. In addition, we are excited about some of the new products we are working on in Monster Labs, which will enable us to continue leading the online recruiting industry in innovation and expansion in the years ahead. And with that, I would now like to turn the call over to our CFO, Lanny Baker. Lanny, they're all yours.

Lanny Baker, Senior Vice President and Chief Financial Officer

Thanks, Andy. And thanks to all of you for being on the call today. Monster Worldwide's fourth quarter financial performance demonstrated once again, strong organic revenue growth, expanding profit margins and consistent healthy cash generation. The fourth quarter results were a fitting finish to a year in which we streamlined the Company's operating profile, expanded the Monster's reach overseas, drove profitability in the U.S. and made important internal investments for the future, all while delivering strong and consistent bottom line results in the near term. With those accomplishments behind us, we're focused on what lies ahead, and we see tremendous long-term opportunity for Monster. We expect Monster to surpass 1 billion in revenue in 2006, and we're excited about new products, sales strategies, and markets, that will contribute to operating margin progress in the future. The global recruitment marketplace is becoming more dynamic and global, while simultaneously moving online at an accelerating pace. And Monster is positioned to benefit. Importantly, we believe that the operating, strategic and investment decisions we are making today, are the right ones to enable the Company to lead locally and capitalize globally, while serving the primary objective of building significant shareholder value over the long-term.

Let me turn to the highlights of the fourth quarter which include a 24% year-to-year increase in total revenue, powered by 29% organic revenue growth at the Monster division, and acceleration in Monster's organic revenue growth rates outside the U.S., reaching 46% year-to-year in the quarter; operating margins and EBITDA margins improved by 450 basis points from a year ago; earnings per share from continuing operations rose 56% year-to-year to $0.28 per share; and free cash flow of 45 million in the quarter, equated to 70% of the Company's EBITDA for the quarter, and lifted full year free cash flow to $1.45 per share.

I think the last point about Monster Worldwide's healthy free cash flow warrants a bit more attention. As you know, we define free cash flow as cash flow from operations, less capital expenditures, and we focus on this measure because we believe it encompasses all of the operating, investing and financing activities of the Company, and most accurately quantifies the value created for shareholders. Compared with 2004, our free cash flow grew by over $100 million, on a $230 million revenue increase, which highlights the operating leverage and the capital efficiency within our business model. Similarly, our 2005 free cash flow was more than 50% greater than our net income, which also speaks to the high quality of Monster's earnings.

Before going into the details of the quarter's results, let me mention a couple housekeeping items. First, in November we sold warrants we held in the Nasdaq Stock Market, Inc., a publicly traded company, and recorded a $2.1 million pretax gain on the interest and other line. The after tax amount was equal to $0.01 per share in earnings contribution for the quarter. Second, we incurred severance and real estate restructuring expenses in the fourth quarter, totaling about $4 million pretax, or $0.02 per share after tax. 3 quarters of this was within the Monster division, and 90% of that was related to Monster Europe, where we're centralizing key functions and regionalizing sales offices to operate more efficiently in 2006 and beyond. Combined, these 2 actions reduced reported fourth quarter earnings per share by $0.01, while shaving about 1.5 points off of overall profit margins in the quarter.

Now let's turn to the P&L. Total revenue grew 24% year-to-year, reaching 267 million in the fourth quarter. The Monster division's revenue grew 30% to 224 million in the fourth quarter, slightly above our outlook for the quarter. Total operating expenses grew 17% year-to-year. As expected, we opportunistically increased our investment in advertising in the fourth quarter, and this accounted for more than half of the year-to-year increase in expenses for the quarter. Fourth quarter operating income rose 61% to 53 million, and operating income before depreciation and amortization rose 53% to 64 million for the quarter. Our overall EBITDA margin was 24%, and both Monster and AdComms achieved their highest profitability levels for the year during the fourth quarter.

Focusing on the Monster division, total revenue was slightly higher than anticipated, with JobKorea coming in a bit better than expected, thanks to a healthy economy and smooth execution through the acquisition. On an organic basis, Monster's revenue growth rate was 29% year-to-year in the fourth quarter, excluding a 5 million year-to-year benefit from acquisitions, partially offset by a 2.6 million impact from currency exchange rates. The Monster's margins were just over 30% on the EBITDA line, and 26.5% on the operate income line in the fourth quarter. As expected, these margin levels were roughly even with third quarter margins, as we made planned investments in marketing and product during the quarter. On top of that, the restructuring costs we incurred were also reflected in Monster's margins for the quarter. The incremental EBITDA margin in Monster North America was 42% in the fourth quarter, in the middle of the targeted long-term range of 30 to 50%. For the full year Monster's EBITDA margin was 29%.

Strong secular revenue growth and increasing operating scale are the key factors driving Monster's margins and cash flows. And Monster's year end deferred revenue balance provides an encouraging outlook here. The fourth quarter deferred revenue balance at the Monster business was over 325 million, representing a 40% plus increase from a year ago. We renewed many large existing relationships in the fourth quarter at higher dollar value commitment levels, which takes Monster deeper into corporate recruitment wallets. We also won significant new pieces of global business in the fourth quarter, as a result of Monster's enhanced international reach, which demonstrates 1 of the advantages of our global strategy. These growing customer relationships and the associated deferred revenues not only underpin our confidence in the near term business trends, but they also point to the abundance of opportunity that still lies ahead.

Geographically, revenue grew 25% year-to-year in North America in the fourth quarter, well ahead of the growth rate shown by the leading U.S. newspapers and their online initiatives in the category. For the year, we believe that Monster's 30% revenue growth rate in North America is close to twice that of the recruitment market overall, as we continue to gain market share within the broader domestic help wanted market. New customers are a critical force behind Monster's revenue growth and market share progress. And our North American customer base was 20% larger in the fourth quarter of 2005 than it was a year earlier. Given our existing and extensive coverage of the Fortune 1,000 segment of the market, smaller and mid-sized businesses are primary sources of new customer growth in North America today. And while these smaller customers do tend to spend less on average than the enterprise accounts, our scale, sales efficiency and the growing eComm channel, enable us to service this large segment of the market very profitably.

E-Commerce revenue was up 45% year-to-year, and the revenue contribution to our careers business from eComm was up 3 percentage points from last year's fourth quarter, to a high teens portion of the careers mix. The majority of the growth in e-commerce revenue in the fourth quarter was volume driven, as we've now cycled our earlier price increases, and have shifted toward more localized pricing in this channel. The emerging strength of our consumer advertising business was another important factor within Monster North America's results. Monster's consumer segment, which is made up of online advertising revenue that runs on Monster, Military.com, FastWeb, MonsterTRAK, and Tickle, is currently a $100 million business within North America. Given the size of our global audience and the fact that users come to us at the key junctures in their lives, when advertisers seek the most, we see significant opportunity to expand our non-careers revenue over time, without impeding the core of what we do.

In the fourth quarter our consumer revenue grew better than 30% year-to-year, bringing in more of these high margined online advertising dollars to the business. Propelled by the strong revenue growth just described, Monster North America's operating income before depreciation and amortization, climbed 28% year-to-year to 63 million in the fourth quarter. And a North American EBITDA margin of 38% was roughly 1 point higher than in the year ago period. Revenue per employee was once again one of the key levers in Monster's improved profitability. With revenue growth in the mid-20's and average head count up about 7% in North America, revenue per employee rose 15% year-to-year in the fourth quarter, providing a sustainable boost to profitability.

On the marketing side, we stepped up our investment in the fourth quarter, spending a slightly larger amount relative to North American sales this year than last year, and growing the total spend by almost 30%. Over time, we've shifted our marketing toward more targeted, tactical and consistent messaging, in favor of less frequent splurge-type events. And you're now seeing a bit less seasonality in our spend. These marketing efforts, coupled with the changes we made to our seeker site during 2005, are promoting greater user and usage levels, which in turn supports Monster's ability to provide reliable, high quality results for employers. In the fourth quarter Monster North America's unique visitors were up about 10% year-to-year, according to our logs. And the number of job agents, which is a useful indicator of seeker engagement, grew nearly twice as fast. Even more importantly, we ended the fourth quarter with in excess of 30% more searchable resumes in the Monster database in the U.S., which roughly matches the growth rate in resume views by employers, pointing to well balanced and strong seeker and employer activity levels. These usage metrics are the raw material from which Monster's results are generated, and we are encouraged by the progress we are seeing here.

Shifting to Monster's operations outside North America, organic revenue growth in international was 46% in the fourth quarter, accelerating from 40% in the third quarter, and 39% in the second quarter, on year-over-year basis. On a reported basis, international revenue increased by 50% year-to-year to 55 million in the fourth quarter of 2005, and the unit generated a high single-digit EBITDA margin in the fourth quarter, even after restructuring costs. With an annualized run rate now north of 200 million, Monster International is not only the largest player in online recruitment outside the U.S., and home to 25% of Monster's overall revenue, but it is also at a break through revenue level where we've seen other global internet companies begin to produce meaningful levels of profitability. In Europe, Monster's year-to-year revenue growth rates accelerated in 10 of our 18 markets, including the U.K., France, Belgium, Italy and Spain.

There are 3 primary factors contributing to our strong momentum in Europe. First, the migration of recruitment ad spending toward the Internet is entering an attractive phase of widening adoption, and we can see this by the kind of companies and job functions now moving online. Second, we have expanded our sales force by more than a third in the past year, and recently implemented centralized call centers in the key regions. These are improving account coverage and productivity. And third, we've stepped up our marketing investment in Europe, spending twice as much on advertising in the fourth quarter of '05 as in the year earlier period, as we're capitalizing on progress against other cost areas to fund greater marketing spend. Our brand visibility has begun to build, and we're seeing growth in key metrics across Europe including 50% increases in new resume submissions in our 2 largest markets, the U.K. and Germany, during the quarter.

In Asia, the addition of JobKorea and the growth of Monster India, means that nearly 15% of our international revenue is now coming from this fast growing region, where we saw organic growth in the mid-50's in the fourth quarter. As mentioned, JobKorea did a little better than the 3 million in revenue we anticipated for the quarter, and they are off to a strong start in 2006, as well.

Shifting gears to our AdComms division, despite essentially flat overall revenue in the fourth quarter, management's focus on cost reductions and dedication to building higher margin interactive services, paid off in operating profit of 7.5 million in this year's fourth quarter, as compared to a loss in the same quarter of last year. In North America, AdComms' revenue grew 17% year-to-year, while in Europe we faced a high teens decline in AdComm's revenue in the fourth quarter, largely due to hesitant hiring in the public sector in the U.K. That U.K. climate and long-term structural issues on the print side, continue to present challenges for AdComms, but we're very pleased with the margin performance of the business recently.

Turning to the balancing sheet, net cash and marketable securities of 273 million at the end of the year, was modestly higher than at the end of the third quarter. We had several large cash movements during the quarter including 45 million in free cash flow generation, complemented by 57 million in proceeds from stock option exercises, and about 4 million in other cash gains. Offsetting these, we had 97 million in cash payments for acquisitions, notably JobKorea, and we spent 8 million to repurchase 200 shares, 200,000 shares of Monster stock during the quarter. Capital spending in 2005 was 40 million, as we built out new call centers in Marseille, Glasgow, and Tempe, we invested in software and server upgrades for Monster, and supported the global growth of the business.

Finally, the fully diluted share counted was 127.4 million in the fourth quarter, a 4% increase year-to-year. Roughly half of that 5 million share increase came from the effect of higher average stock price used in the treasury method calculation, while the other half came from stock option exercises in the past year. We expect to use restricted stock units in the future equity compensation programs, and with our share repurchase authorization, target more modest share count dilution going forward.

Now, let's turn to the business outlook for 2006. We're introducing ranges for both the first quarter and the year, and will continue our practice of providing revenue ranges for the Monster division and for the Company overall, together with earnings per share. Before we go into the numbers, let me explain an important consideration reflected in the outlook. We expect to implement a long-term equity compensation plan in 2006, that will provide restricted stock units as compensation and incentive for key employees. The plan will be entirely performance-based, with any earned grants vesting over a 4 year period. We anticipate that this new program will result in a non-cash expense of about 9 million pretax during 2006, which equates to just over a penny per quarter, and roughly a nickel for the full year 2006.

Now, for the first quarter of 2006, we anticipate total Company revenue of 278 to 285 million, up 21% year-to-year at the mid-point of the range. For the Monster division, we expect first quarter revenue of 239 to 244 million, a 27% increase at the mid-point of the range. At the AdComms division, weakness in the U.K. market is expected to offset growth in the U.S., leading to mid single-digit decline in first quarter revenue for that segment. At the anticipated revenue levels, we expect to achieve solid margin improvement in the first quarter compared with the first quarter of 2005. Within the Monster business, both operating margins and EBITDA margins are likely to improve by a couple percentage points year-to-year in the first quarter, and the growing size of Monster within our business mix, should mean that overall EBITDA margins improve similarly. We will make larger investments in marketing in Europe and in India in the first quarter, while focusing on targeted spending in the U.S. And marketing, as a percentage of Monster's revenue, should be down slightly year-to-year in the first quarter.

Below the operating line, we should generate about 2 million in interest income in the first quarter, and the tax rate ought to remain steady at 35%. We are expecting a $2 million loss on the equity income line from our share of ChinaHR's first quarter losses. ChinaHR grew at the top line approximately 50% at the end of 2005, and we are encouraging them to invest in brand building and sales force expansion today, in order to cement their position for the long-term. Putting the pieces together, we expect Monster Worldwide to earn between $0.26 and $0.27 per share from continuing operations in the first quarter of 2006, including the effect of slightly more than a penny in non-cash costs related to the treatment of our equity compensation program.

Turning to the full year, we expect total revenue to range from 1,165,000,000 to 1,215,000,000, which represents again, a 21% year-to-year increase at the mid-point. For the Monster division, we expect revenue of 1,005,000,000 to 1,045,000,000 in '06, up 25% from a year ago at the mid-point. AdComms' revenue is expected to be flat to down 5%. From a profitability standpoint, we expect Monster North America to make further EBITDA margin progress, while remaining in the upper 30% range for the year, as we invest in our local efforts and our products. On the international front, we target mid to high single-digit margins in 2006, and expect strong top line growth, coupled with increasing operating efficiency that will move Monster International solidly into profitability in '06. Monster's incremental EBITDA margin for the year 2006 is expected to be consistent with our 30 to 50% long-term target range, with North America generating stronger incremental margins than international as you might expect, given the more advanced stage of development.

Back at the consolidated income statement level, we expect salary and related expenses to increase year-over-year, but to decline as a percentage of revenue as we drive productivity. At the same time, we expect total marketing expenses to be roughly 25% of Monster division revenue, 1 percentage point higher than in 2005, with spending in Europe coming up to levels consistent with driving sustainable long-term growth for Monster. We expect interest income of about 10 million in 2006, with an overall tax rate of 35%. The equity loss from ChinaHR is expected to be 7 to 8 million in 2006. Adding it all up, we anticipate earnings from continuing operations of $1.21 to $1.26 per share in 2006, a 34% growth rate over the prior year at the mid-point. Excluding the impact of equity compensation charges, the full year EPS ranges just provided, would be about $0.05 higher, with earnings per share growth rate of 40% at the mid-point.

In summary, 2005 was a pivotal year for Monster. We focused on the core business, drove revenue and margins in North America, and projected our model and expertise overseas. We invested in our people, our brand, and increasingly in our product and service. And as a result, we enter 2006 as a stronger and more efficient Company, with a vibrant business in North America and accelerating momentum overseas. We have increasing capacity to invest in our brand, attract new customers and innovate with our product, all of which contributes to sustained long-term growth. At the same time, we will balance these investment opportunities with our commitment to deliver strong financial results in the near term. And with that, we're happy to take your questions.

Question-and-Answer Session

Operator

Operator Instructions Our first question comes from the line of` Jeetil Patel with Deutsche Banc.

Q - Jeetil Patel

Hey, guys. A couple of questions. You talked about a big account, in terms of $4 million account, globally. There is an interesting piece in that, that you talked about, which was the advertising component of that deal. Can you talk about, I guess on that relationship, kind of broadly what you're doing to actually go after just overall online ad dollars in the business? Is it geared towards recruitment? Or is it geared towards general brand awareness? And how are you able to capture those dollars in the business, which I think was 100 million for 2005? And second, I have a follow-up. But can you address that first?

A - Lanny Baker

Why don't we separate it into, there are really 2 issues that you have got there, Jeetil. 1 is about the breadth of the large transaction we had at the end of the year. And Steve can talk about that.

A - Steve Pogorzelski

The global deal was initiated in Europe, and the majority of the dollars associated with that deal are recruitment-related throughout all of our global properties. From a consumer standpoint, the customer has strong graduate hiring needs and invested in our MonsterTRAK product as well, which is part of our consumer division.

A - Lanny Baker

And on other part of the question, it is a little bit separate, Jeetil, in this instance, about our consumer advertising business. As we said, it is about $100 million business. It is really that other line that we've talked about in the past, within the mix of revenue at Monster. We've made some important investments in that area over the years. We brought in Mark Stoever, who many of you have met, and given him the charge of taking advantage of a website that's one of the top 10 to 15 websites in the world, in terms of traffic. With users who are coming to us at really pretty critical junctures in their lives, whether they're going into the military, or leaving the military, at Military.com, or they're looking for jobs on Monster, and capitalizing on that through all the different forms of online advertising that are really gathering momentum right now. So we saw very good growth in that business, as you've seen broadly in online advertising throughout the year and in the fourth quarter, as well, and we're very excited about it for the future.

Q - Jeetil Patel

But it is actually geared towards non-recruitment, or kind of broadly, consumer dollars if anything. And secondly, if you look at the 42% growth in deferred revenues, can you give us a sense of maybe how much of that 42% increase came from existing accounts, versus new wins that you've landed in the fourth quarter, or kind of have been working on throughout the year?

A - Doug Klinger

This is Doug Klinger. In terms of the 42% growth, it is significant relative to some prior periods. We essentially had renewal of a lot of large deals. Importantly, we renewed significant deals in the staffing and enterprise arena on a multi-year basis, which is a good sign of robust growth that we're expecting going forward from existing customers, as well as others. So I think overall, we're seeing good renewal rates. But as Andy and Lanny talked about earlier, we added 20,000 new customers in the quarter, and 80,000 new customers in the year, which is pretty robust growth relative to the overall recruitment advertising market growth. So I think we're happy with the balance between new and existing and have had some nice growth in existing relationships.

Q - Jeetil Patel

Thanks.

Operator

Our next question comes from the line of Imran Khan with JPMorgan.

Q - Imran Khan

Yes. Hi, guys. Congratulations. Good quarter. First question is, Lanny, in terms of improving sales productivity in the European market, I was wondering if you can give us color. You increased the sales force pretty significantly in the European market. So can you give us some sense where we stand in terms of the productivity there? And secondly, in terms of housekeeping question, can you give us what percentage of revenue came from job posting versus resume database? Thanks.

A - Lanny Baker

Sure. On the second question, Jeetil, for the…….

Q - Imran Khan

It's Imran.

A - Lanny Baker

I'm sorry. Imran. On the second quarter, on the second question about the mix of the business. It hasn't changed by more than 250 or 300 basis points over the last 13 quarters, so the revenue from postings was 53%. The portion from resumes was high 20, and the rest was from the other line, which is largely that consumer business. On the sales force productivity, yes, we have expanded sales force by a third over the past year. Most of that was earlier in 2005, and I will let Steve talk about where we are on productivity today and where we're headed.

A - Steve Pogorzelski

In terms of the European sales force, we look at productivity in 2 levels. First, number 1, is the basic standards of performance, which is basically the number of calls, it's the amount of talk time and appointments and the conversion rates they have, that has escalated throughout the year, as we've had more rigorous management and attention to detail in that area. And they're becoming on par with the United States. The biggest opportunity though, however, is within sales force productivity, which we measure by sales per rep. Our sales force in Europe is about the size of the United States, but you can see that our sales are significantly lower on a per rep basis. So we're continuing to focus on the productivity levels that have been increasing through the year, by on training, average order size continuing to increase, renewal rates continuing to increase, and we're having some very good success with telesales new business increasing the number of transactions, as the sales force continues to mature in 2005. And will mature even further and their productivity will increase throughout 2006.

Q - Imran Khan

So in terms of future hiring, do you plan to increase the sales force number in the European market, or just only focus on the productivity improvement?

A - Steve Pogorzelski

We're going to do both. We're going to be opportunistic in our investments. And as the opportunities presented themselves in Europe, we'll invest accordingly in those sales forces, knowing we can generate ROI and margin through the sales force.

Q - Imran Khan

Great. Thanks, guys.

Operator

Our next question comes from the line of Christa Quarles with Thomas Weisel Partners.

Q - Christa Quarles

Hi. First question is easy. Just keeping the line of the free cash flow, what is your CapEx expectations for next year? And then 2, the e-commerce side, I was just wondering if you could highlight any penetration that you have made outside the U.S.. Obviously, Korea contributes. But do have definitive plans in '06 to use e-commerce as an entree into the new markets? And then third, just kind of following on Jeetil's question on the deferred revenues. It sounds like, I guess I am just trying to understand sort of the Fortune 1,000 versus sort of that medium sized customer lift, as to if one was contributing a little bit more than others. Thanks.

A - Steve Pogorzelski

It is Steve again. From a European perspective, eComm contributed roughly about 5% of our sales in 2005. The opportunity for us is to double that percentage in 2006. And you will see that number escalate throughout the year, and eventually contribute to the margins we expect to deliver in Europe. One of the things we're doing is certainly, is to leverage best practices, and all the learning and competency in the United States. We've just moved the key senior product person, Mike Hanington, from the United States into Europe, so we can leverage those best practices in learning in Europe, in a much rapid, a more rapid fashion than perhaps in 2005.

A - Lanny Baker

On the capital expenditure front, we, the total for 2005 was about $40 million. Looking at 2006, Christa, I think it will be in a similar range, and it could perhaps be a little less. At the end of the year, we did some incremental spending on some of the new call centers that we've opened up. But it will be in that neighborhood.

Q - Christa Quarles

Got you.

A - Lanny Baker

And you had a question about deferred revenue and the composition of deferred. I think we have, there is no big change going on within the deferred. I think you should typically think of deferred as being representative of, to a large extent, our relationship with the big, big accounts, and the staffing and the like. And we're showing an ability there to reach deeper into those wallets with that kind of growth at the end of the year, and the commitments that they're making to our service for the coming year. So I don't think there has been any big shift. It is really just continuing to gain share within the wallet.

Q - Christa Quarles

And is it more reflective of your expectations also in Europe, then, as well?

A - Lanny Baker

Europe is certainly contributing to the growth of the deferred revenue, and we are building those enterprise relationships over there. But it is pretty balanced between growth in U.S. and growth in Europe.

Q - Christa Quarles

Great. Perfect. Thanks so much, guys.

Operator

Our next question comes from the line of Douglas Arthur with Morgan Stanley.

Q - Douglas Arthur

I'm wondering if you can just gauge the 2 year opportunity in your 3 emerging markets, China, India and Korea? Obviously, you have different stakes in all of those. But what's got the most near-term potential? And I guess what's got the most long-term potential? Thanks.

A - Lanny Baker

I'll let, I think Andy should talk about India, China, and Korea, and about the opportunity over the next 2 or 3 years in those markets.

A - Andy McKelvey

Yes, Doug. Obviously, in the next 2 or 3 years, it is going to be good, but not the kind of potential we see, say 5 years out. And 10 years out, it is going to be phenomenal. We said it more than once. Ultimately, the revenue in China, in our belief, will be higher than the revenue in the United States. The issue is how long? We don't know. But we're in this business forever. So all 3 markets show tremendous growth opportunity. I don't know whether you're looking for a percentage over the next 3 to 5 years. I assume not. But we're very pleased with where we are. The JobKorea acquisition was terrific. I mean, it got 50, 60% of the market, with a very unique model. In fact, it is worthwhile that probably Steve should speak to it for a moment. Because it is very different than any of the other countries, and I think we can learn from it. And I think there is some opportunity for additional revenue. So we really think that where we are in Asia is terrific. The only country we're not in is Japan. We've talked about it before. It is fragmented. It is very expensive. And I don't know whether we will ever go there. I don't think it is that big a deal. But Steve, why don't you just mention, .

A - Steve Pogorzelski

So Doug, in short term in 2006, what you'll see in Korea is taking the eComm model and our telesales competency, and marrying them together to continue to produce high growth rates. Well, also high margins in that business because, which is the beauty of an eComm model. We'll continue to leverage that. We're also looking at exploring, applying that eComm model to new market expansion from an organic basis throughout 2006. India is a year of growth in investment. It has been a profitable business for us. We think that we can invest more heavily in marketing and sales force investments to take advantage of low wages. And continue to drive that from a high growth standpoint. And China is really about influencing and directing best practices, as we're in a dog fight for the number 1 position with Job 51 and we intend in 2006 in a much better strategic position vis-a-vis the competition, than we entered the year.

Q - Douglas Arthur

Great. Thanks.

Operator

Our next question comes from the line of Peter Appert with Goldman Sachs.

Q - Peter Appert

Hey, Lanny. Can you tell us what percentage of the revenue forecast, the revenue guidance increase for '06 is price driven?

A - Lanny Baker

I think the growth of the business has really been primarily volume driven, as we've really over the last couple years, certainly the e-commerce channel has benefited from the pricing power that we've seen there. But the bulk of the revenue growth, Peter, is going to be from volume. It is going to be primarily new customers, getting a deeper share of that customer's wallet. And then finally, a pricing opportunity. So you're probably should think of something in the neighborhood of a quarter or less of the revenue growth coming from price in the coming year.

Q - Peter Appert

Okay. And it sort of raises the issue that the price differential - you guys have highlighted this in the past - the price differential between the online posting versus a traditional recruitment vehicle is very large and getting larger. And I am just wondering, at some point over the next several years, if you see an opportunity for a more substantial adjustment in your own pricing structure to close that gap?

A - Lanny Baker

They're talking about pricing. The challenge with pricing, Peter, is that our customer base is so broad, from the big companies to whom we sell tens of thousands of jobs, to the small companies for whom we might sell only 1. And the pricing across that spectrum is very different. Layer on U.S. versus Europe versus Asia. It really becomes challenging to kind of distill it to a single piece of analysis. But I think we have some opportunity in some markets to generate higher prices on our core listing product, certainly in competition with the leading entrenched print vehicles, there is still a big opportunity. And when you start to think beyond that, towards some of the recruiting services companies, even a bigger value opportunity for us on our price points. On the other end of the spectrum, in some of the smaller markets where we perceive a tremendous amount of opportunity, it is really coming online pretty quickly right now. You might go, the unit prices in those markets, as you open them up, where in the past maybe online recruitment hasn't penetrated as deeply, the unit prices in those may be lower under the preestablished print market umbrella. So in some places there will be opportunities to drive price. In other places, we will use price very tactically to gain market share.

Q - Peter Appert

Okay. Fair enough. And just 1 unrelated item. On the AdComms business, you did the 9% operating margin this year. Is that a good number to think about for the next couple years?

A - Lanny Baker

Yes, I think it is a good number. We hope to be able to improve that. We're continually looking at ways to operate more efficiently and push the higher margin interactive products. But there are some challenges, as I described in that business, and that's probably a good range to think about, respectively.

Operator

Our next question comes from the line of Mark Mahaney with Citigroup.

Q - Mark Mahaney

Great. Thank you. 3 quick questions. In terms of the stock comp going forth, just to be clear about it, are there options in, will there be options as part of your plan? And is that already in that sort of $0.05 dilution you're talking about? Secondly, any update on the Korea revenue guidance for 2006, since is may have come in a little stronger than expected? And then third, can I get you to argue why the margins, which ramp really nicely internationally at 7.5%, why they wouldn't be higher than mid to high single-digits in 2006? I know there is seasonality in that December quarter trend, but that looked like very positive results, in line with what you talked about at your analyst, and maybe even a little stronger sooner than expected? Thank you.

A - Lanny Baker

Sure, Mark. On the equity compensation, we're really excited about the new long-term plan that we've got. This is only 1 piece of the broader compensation plans that we use in our broader strategy at Monster. It works with our salaries and commissions and everything else. We have moved away from options, as many companies have, and we are going to focus on our restricted share program going forward. As we said, it will be entirely performance-based, which I think is an important element of this program. It will have minimum growth rate thresholds that have to be met in order for any shares to be granted. And we hope with this program to balance evenly, between rewarding the employees for the hard work and accomplishments that they generate, and delivering a large amount of value down to the bottom line for shareholders. Going forward, that $0.05 number reflects the cost of the new, long-term equity compensation plan. We don't anticipate that there will be option-related expenses going forward. We have accelerated the divesting of some of our prior option issuances during 2005, so we have kind of moved beyond that today.

Looking at Korea, I think as we said, good start there after a short period of ownership. We have got some exciting plans to add to their business model, and we think that will continue to be a very strong growth market for the Company. And then turning to the international margins, I think, remember that the Monster business typically generates more than 50% of its revenue in the second half of the year, and of all the quarters, seasonally. Unlike our brethren in the print business, the fourth quarter tends to be one of the best in revenue quarters from a seasonal perspective. So you do get some extra level of profitability at the tail end of the year. But as we look at the margins in international for 2006, we expect to generate year-to-year progress consistently throughout the year in those margins, and there will be some seasonality in that business.

Operator

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

Q - Bill Morrison

Hi. Thanks. If I could follow up just a little bit more on Mark's question. It looks to me like if you exclude the 90% of the 4 million in restructuring costs in the international business, that the EBITDA margin was more like in the low to mid-teens. I was wondering if you could tell me whether my math is right or wrong there. And then if so, how does that, kind of going back to, how does that foot to the high single-digit margin guidance, or is margin guidance high single digits on operating level, and not EBITDA level? And then secondly, it looks like you added 180 plus employees in the quarter. You said that there weren't many hires on the sales side. I was wondering if you could just kind of break down where those employees were, where they are going inside the Company? Thanks.

A - Lanny Baker

Sure, Bill. On the employee count, remember the acquisition of JobKorea brought in about 140 people in the quarter. So that was the bulk of the growth in employees. We also added some people in Tempe, Arizona, at the new call center. We grew a little bit in other parts of the Company. But those are probably the couple biggest pieces of the head count change, quarter-to-quarter. On your question about the, I think you've done accurate analysis on the restructuring charges and the margin picture in the fourth quarter. Though I would come back to what I said a moment ago. And that is, we are going to invest in the international business, because the long-term opportunity overseas is tremendous. It is not, 2006 isn't necessarily the year to switch into the full harvest moment, model. We're committed to driving strong profitability. There will be some seasonality in that. But we are going to continue to invest in marketing. We think the marketing spending we've done in Europe of late has helped the brand awareness of the product. It's certainly driven seeker levels. It is starting to help sales force productivity. In fact, marketing is one of the most important components of driving sales force productivity, is providing that air cover and awareness for the marketing, for the sales force that's out beating the bushes and bringing in the new customers. So for the moment we feel like a mid to high single-digit level of profitability in Europe is the right balance between investing in that business and delivering results out of it in the near term.

Q - Bill Morrison

Great. Thanks a lot.

Operator

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Our final question will come from Steven Barlow with Prudential Equity Group.

Q - Steven Barlow

Thanks. Made the list here. Lanny, can you talk a little bit more about the pricing initiative in the U.S.? You've mentioned in past calls that maybe you would charge, let's say $500 for a spot ad in New York, and 250 in Nashville or something. How has that sort of progress passed the test stage? And secondly, how do you guys look at job churn in the U.S. economy, and how does that sort of fit into your plans when you work with your customers?

A - Doug Klinger

All right. This is Doug Klinger. I'm going to take that. Steven, just in terms of pricing as we look at fourth quarter, we saw some favorable improvement in our discounting, meaning we've been getting more price out of existing customers, and doing well with new customers. In terms of the look forward, I think the papers, it is pretty clear where they're headed in terms of pricing. CareerBuilder has been raising prices for some time. Although it looks like they are slowing a bit. So we're looking for mid single-digit-type increases, and as we go through the month of January, we're seeing that pricing stick, both in our larger account business, so-called enterprise business, as well as in the small to mid-sized arena. I think the combination of the value that we deliver, and value that online delivers relative to other options, tightening labor market, increasing demand in a lot of categories and geographies, is giving us as well as some of our competitors, pretty reasonable pricing power. In terms of your specific question about tiered pricing or localized pricing, we have been testing particularly with our e-commerce capability, using variable, discriminative pricing on a geographic basis. We haven't really gotten into doing it by job category yet. But I think the net message we would give, is that we see significant potential as we move into '06 to use a more discriminative pricing approach. We have a good understanding of the different geographies. We've got local on the ground distribution in a lot of these places, as well as telesales calling in to them.

So we have insight into what we're seeing competitively from papers and other onlines, and we've got the ability to vary pricing from an infrastructure standpoint. So I think we're going to do that. We'll see some markets where we take it up, as Lanny said earlier, some places where we take it down. And we'll see the use of trial pricing as well, as we try to drive new customer adoption of Monster. From a job churn standpoint, what we've seen in the U.S. is that it helps us deplete our inventories of job postings faster. We did a survey of 600 HR managers in the U.S. in January. Fully 70% said that one of their biggest challenges in 2006 will be the retention of employees. As you have seen, wages continue to rise faster than productivity. We have acute skilled shortages in the U.S. And for us, that adds up to a favorable environment in terms of our ability to grow our businesses, not only in the U.S., but we're seeing in some of the countries in Europe and especially in India, where turnover is rampant, that we have the opportunity to benefit from the churn in the labor market.

Q - Steven Barlow

Thanks very much.

Bob Jones, Vice President, Investor Relations

Once again, this is Bob Jones. Thank you for joining us this morning. Please feel free to call me any time at 212-351-7032, or Lanny Baker at 212-351-7005, with any further questions. To listen to a replay of this call, please dial 800-642-1687, and the ID number is 4395460. Thank you very much.

Operator

Ladies and gentlemen, this concludes today's conference. You may now disconnect.

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Source: Monster Worldwide Q4 2005 Earnings Conference Call Transcript (MNST)
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