Sell-Side Reaction to Monster's Q4 Earnings (MNST)

Citigroup analyst Mark Mahaney on Monster's Q4 earnings results:

SUMMARY
• MNST reported a Beat & Raise December quarter -- $267MM rev and $0.28 vs. Street at $264MM and $0.28, with 1x restructuring charges totaling $0.01. '06 guidance was cleanly above Street.

• Fundamentals strengthened -- organic rev growth at Monster Division was 29% Y/Y vs. 30% in Sept., while EBITDA margin expanded 450 bps Y/Y to a record high 24%. Also key, Y/Y deferred rev. growth accelerated to 42% Y/Y, while Monster Division International margins hit 7.5% (12% excluding charges). The catalyst of profitability ramp in the European segment has arrived.

• We are more positive on MNST. Our estimates increase ('06 EPS goes from $1.22 to $1.24 or $1.29 excluding $0.05 new stock comp charge) and our PT rises accordingly to $51 (30X our 2007 proforma EPS of $1.69).

• We reiterate our Hold. We like the fundamentals here, but we don't see material valuation upside from these levels (~$50 intra-day).

Did Monster’s fundamentals improve? Yes, largely. Organic Monster division revenuegrowth of 29% was modestly lower than the 30% Y/Y growth in the September quarter. Butthe EBITDA margin expanded 450 bps Y/Y to 24.0%, the highest level ever. After adjustingfor the $4MM in restructuring charges, EBITDA margins were 25.2%. Incremental marginwas also a strong 42.9%, the highest since June 2004 (47% after adjustments).

Were fundamentals better than the Street expected? Yes. Revenue of $267MM washigher than the Street’s $264MM and, although GAAP EPS from Continuing Ops. of $0.28was in-line with Street expectations, EPS would’ve been $0.01 higher without therestructuring charges.

Did the company raise guidance relative to the Street? Yes. Midpoint revenue guidancefor March is $282MM, which is above the Street’s $279MM. MNST’s EPS guidance rangeis $0.26-$0.27 vs. the Street at $0.27, but after adjusting for the $0.01 impact of stockcompensation we’ll call that a modest raise. For the full year, midpoint revenue guidance is$1,190MM and the EPS range is $1.21-$1.26 ($1.26-$1.31 ex stock compensation) vs. Streetrevenue of $1,178MM and EPS of $1.23. That’s a material EPS raise.

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