Monster Worldwide, Inc. (NASDAQ:MNST)
Q1 2008 Earnings Call
May 1, 2008 5:00 pm ET
Robert Jones - Vice President, Investor Relations
Salvatore Iannuzzi - Chairman of the Board, President, Chief Executive Officer
Timothy T. Yates - Chief Financial Officer, Executive Vice President, Director
Darko Dejanovic - Global Chief Information Officer and Head of Product
T.C. Robillard - Bank of America
Mark S. Mahaney - Citigroup
Jeetil Patel - Deutsche Bank
Peter P. Appert - Goldman Sachs
Good afternoon. My name is Jamaria and I will be your conference operator today. At this time, I would like to welcome everyone to the Monster Worldwide first quarter 2008 earnings results conference call. (Operator Instructions) I would now like to turn the call over to Mr. Bob Jones, Vice President of Investor Relations. Please go ahead, sir.
Good afternoon and thank you for joining us on Monster Worldwide’s first quarter 2008 conference call. Our format calls for us to have formal remarks from Sal Iannuzzi, Chairman, President, 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 & 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 do 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 the other risks discussed in our Form 10-K and our other filings made with the Securities and Exchange Commission.
With that, I would like to turn the call over to Sal for his comments.
Thank you, Bob. Good afternoon, everyone and welcome to our first quarter conference call. I would like to kick off our call today with some general reflections on the business and the industry overall. I will share some updates on our progress this quarter, the ways we have offset some of the challenges of the current economy by extending our geographic reach, launching new products, optimizing operations, and refueling our product pipeline. I will also sketch out plans for the future, the opportunities we see ahead.
Tim Yates, our CFO, will discuss the first quarter operating and financial results in greater detail.
As many of you know, it has been just over one year since I assumed the role of Chairman, President, and CEO of Monster. It is in that brief period of time the Monster executive team has been largely revamped, injecting new leadership from the outside and promoting key talents from within. Together with our nearly 5,200 global associates, we have made strong and steady progress in leading a fundamental transformation of the company.
The momentum is building and the impact of that momentum is becoming exponential. Exciting changes have been made and are being felt around the organization around the world. Much more, however, needs to be done.
Over the past 12 months, we have taken deliberate, decisive steps to grow our business. We have taken very specific tactical steps to streamline our processes and operations in a disciplined way. These are symbiotic activities. Our efforts to streamline operations make our work more efficient, our people more productive, and frees up the economic energy necessary to invest, build, and innovate our business.
In effect, we are doing more with less.
We have truly become one Monster -- one of our new corporate values, which not only speaks to a united global team but also to efficiency of process and programs and approach on a global basis.
I want to highlight some of the key accomplishments over the past few months. When I arrived in 2007, we immediately focused on building a quality, robust business and we also started the work of realigning in-house operations. We restructured and realigned the entire organization to be more customer focused, more innovative, more efficient, more nimble, and more cost effective.
Specifically, we initiated a horizontal management structure aligned by global function to eliminate silos. This new alignment has centralized and unified every aspect of our company, enabling us to have one global sales function, one global product and technology function, one global marketing function, one global finance function, one global human resources function, and one global customer service function.
This restructuring has allowed us to leverage ideas around the world while maintaining a strong local sensitivity and most importantly, begin to service our multi-national customers on a truly global basis.
The restructuring has also allowed us to eliminate redundancies and inefficiencies. This action has resulted in an annualized savings of more than $120 million. In addition, more than $50 million of annualized expense has been avoided. These actions have enabled us and will continue to enable us to reinvest back in our company in strategic ways, including sales force expansion, geographic expansion, product innovation and enhancement, technology architecture refinements, brand and marketing campaign launch, compensation and recognition of our people.
In these ways, we have not just achieved the singular goal of managing run-rate but have optimized the run-rate for the long-term growth of the business and maximum shareholder value.
This is truly how we do more with less.
Product innovation is the key to our long-term success, particularly in today’s rapidly evolving global online recruitment market space. In order to stay relevant, it is critical to anticipate, build, and market innovative products that meet the changing needs of our customers, both employers and seekers alike.
To this end, we have spent the past 12 months taking a hard look at our existing product portfolio and building it out. We have made more significant product enhancements over the past year than in the last few years.
For jobseekers, these new products have included an improved search engine and richer content to help candidates more quickly refine and focus their job search, and match more quickly.
An Express Apply product, making it easier and quicker for seekers to register and apply for open positions.
A newly designed home page that better reflects our new Monster brand and essence.
We have also made some significant search engine optimization changes on our site over the past few months. Those changes are resulting in a much higher number of organic search visits to our site. In March alone, the number of organic site visits increased 26%.
Our product refinements have also made it easier for our employers to do business with us. We have created features that much better match quality candidates with existing job openings. For example, we are aggressively promotion our career ad network product, which provides great exposure to job postings for our employers. We introduced a job posting suite which provides employers with greater flexibility and options when posting a job. We introduced a new video posting tool for our North American customers and will cascade this globally throughout 2008. We redesigned our e-commerce capability by moving to a more consultative selling engine online.
These products and customer service improvements have already had measurable impact on our business. We have seen significant increase in job response, a key measurement of our ability to provide a quality candidate pool to our employer customers.
Technology is the engine that powers and protects our product and as such, it is critical we invest in it and support it. We have made significant strides in a relatively short amount of time in this area, including a complete overhaul of our site security, which has transformed Monster from a laggard to an industry leader.
Specifically, we have made major progress in mitigating our North American and European -- migrating, I’m sorry, our North American and European operations into one common technology platform, to make our platforms more efficient and truly global. This will not only make us more efficient but it will also allow us to significantly increase our development speed.
We have focused on protecting our operations. Just last month, we opened a new state-of-the-art IT facility which allows us to significantly increase our capacity and provide for back-up capability in the event of an emergency. This also allows us to respond quickly to changing business requirements. We are no longer subject to a single point of failure.
We have upgraded our security protocols and adopted vigorous new processes, including 220 application level enhancements. Our goal is to make our customer data as secure as possible.
I want to make a comment here on the topic of protecting and ensuring the security of our operations. I hope you have seen over the past year that Monster will not hide from unexpected problems, that we have moved quickly and have taken decisive action whenever necessary.
This focus on enhanced data security systems is one example of that quick action philosophy. When we experienced the security breach last summer, we moved fast to inform our customers. We addressed the problem and we were transparent about the situation. And incidentally, in the process of handling this breach, we took a leadership position in the industry on the issue.
This is the new Monster culture -- transparent, [inaudible], and honest.
You’ve also heard me say that we are not going to be short-sighted about investing in the business. As you know, beginning last fall, we substantially stepped up our marketing efforts and brand investment.
In the fourth quarter, we began to revitalize the Monster brand, to make it globally consistent and relevant for a new generation of customers. We supported this effort with greater promotional and advertising activity. This effort was designed to unify our public voice, our visual identity, and our market position worldwide.
Together with our global advertising agency partners, BBDO, we created a comprehensive global marketing plan that launched in early January. The marketing plan was fully integrated, high profile, and included new television ads, as well as print and online advertising.
Our overall marketing initiatives and ad campaign have been well-received. We are pleased with the significant increase we have seen in job response rates, which demonstrate that we are delivering results to our customers.
We expect to realize the added benefit of our overall marketing program as the year progresses. Going forward, our seeker acquisition market program will be more targeted to our current and future customer needs and therefore will allow us to be more effective.
We have also worked to recognize and reward our people, Monster's most critical asset. I am proud to report that internally, we have made great progress in attracting and retaining Monster's talent overall. Based on Q1, our analyzed rate of voluntary attrition has decreased 25% from 2007.
During the past quarter, we rewarded associates for their hard work, particularly during some challenging times. Specifically, during 2007 we made every Monster employee eligible for a bonus. Additionally, nearly 40% of the employees received equity in the company.
The intent of both our bonus plan and our equity plan is to make us all owners and active participants in the success of Monster. The metrics for determining bonus incentive for every Monster employee, from the most junior to the most senior, is now completely aligned with the interest of the shareholder. This is another example of what we mean by our corporate value of one Monster.
Having the strongest array of products and technology supported by world-class customer service is not only critical to maintaining our leading position but most critical to our growth. To be sure, we are operating in a challenging economic environment. There are certainly signs of recessionary pressure and concern about [the global fall-down].
Like all companies, Monster is feeling the impact of these economic pressures and we’ll continue to feel those impacts. Notwithstanding these economic conditions, I have never been more optimistic about a company and its future than I am about Monster today.
We have opportunities right now because of under-exploited market share and under-leveraged products that will help fuel us through the soft economy and position us well for the economic rebound ahead.
For some time, the perception has been that we have saturated the U.S. market. I disagree. We believe very significant growth potential exists in all customer segments. Let me tell you why.
Because over the past 12 months in the U.S., of the 13 million companies that employ between one and nine people, we have only done business with about 1%. Of the 1.7 million companies that employ between 10 and 500 employees, we have done business in the past 12 months with only about 4%. And of the 31,000 companies with over 500 employees, we have only served 25%.
This is why I am optimistic. This is a business opportunity we will aggressively and relentlessly pursue over the next year.
This is not a time for us to retrench but to build and seize the opportunity. Do I believe we can capture the opportunity I describe 100%? No, but the [breadth] of the opportunity is such that even a modest success will have dramatic benefits to our shareholders. And I promise you we are not going after modest success.
Our goal is to maximize sales productivity by putting the appropriate resources against the opportunity that offers the highest return on our investment. As I mentioned just a minute ago, we believe there is still a large, untapped opportunity to add customers in the large, medium, and small company segments and we are building our sales function to seize that opportunity.
We also believe there is a significant opportunity for Monster to seize a different go-to-market approach, a fundamental redirection of our sales force. As a result, for the first time, we are integrating and aligning Monster's e-commerce, telesales, and [inaudible] sales force teams as one integrated sales effort.
The realigned function will have clear compensation and commission structures that encourage maximum customer engagement and service and align sales performance with shareholder value.
The sales force augmentation, which calls for more than tripling the number of field sales reps, allows for a more enhanced, high touch experience for our customers in one fluid, go-to-market strategy and will create global customer sales teams.
We will have many more sales people on the ground, building greater, more substantive relationships for our customers, enabling us to seize the remaining market share we do not currently own. We believe this initiative will lead to a significantly broader sales penetration and coverage, includes customer service, customer account growth, and greater sales productivity in North America at lower expense levels.
Over the next nine months, we will be introducing new Monster products, enhancements, and developments. Combined with recent releases, the sum total of products that we will introduce will be the most intensive set of releases in our entire history.
We will unveil new analytics and services that will help facilitate strategic hiring decisions, whether helping to identify the supply and demand of mission critical positions, analyzing mobility patterns of top performers, or evaluating assessment results to predict success on the job.
These new offerings will provide insights based on the behavior of millions of career related transactions from seekers and recruiters across the globe. Additionally, customer intimacy, user engagement and match depend on our capacity to obtain and exploit data that creates relevant and customized user experiences.
This means that we will better leverage the data we have on employees and seekers and develop new modeling techniques and algorithms to serve up relevant solutions and concepts.
We will also extend reach beyond the Monster platform. Online, we will offer broad distribution capability to reach seekers wherever they are. Offline, we will maximize our relationship with hundreds of newspapers and media alliance partners to develop more holistic solutions for employers.
We are also creating exciting new platforms and business models which appeal to those seekers and employers who are most sensitive to recession and economic trends. These new alternative models will be vital, simple, and affordable.
In summary, we are excited about the trends in technology that continue to influence our industry and the opportunity they present. We aim to leverage data, broaden our audience, and continuously develop exciting new applications and strategies to engage seekers and employers. The results will yield an increased competitive advantage and will once again redefine our leadership position in recruiting solutions.
As the leader and industry creator for online recruiting space, we are keenly set on delivering breakthrough ideas and solutions that will once again raise the bar as the standard for our industry.
With our brand relaunch in January, we put a stake in the ground regarding the essence of the new Monster. We have long understood that a better job can make a better life. It is this promise of life improvement that powers our brand and motivates us to be the authority in job search leadership.
The Monster of today and tomorrow is more than a transactional or an episodic marketplace for jobs. Rather, we are focused on delivering services, experiences, and relationships to assist our users in achieving the most out of life to the work they choose to do. Our goal is to deepen the relationship with our job seekers and serve their need across a continuum of life-changing events, not just for one-time job transactions.
We are doing this by building out our suite of businesses in the vertical online space, because we believe this is where the most significant growth will occur in the months and years ahead. Our network of sites provide leading solutions in the areas of career, education, and community, with leading brands such as Monster Learning, Fast Web, Military.com, and Police Link. All are major areas of growth in terms of the online community usage and interest.
These Monster network properties are full of rich content and serve millions of users who come to these sites to learn, network, and interact with others who share a common interest. This is just in the U.S. Where appropriate, we will bring them overseas and leverage this suite of business relevant to overseas markets.
As you will hear from Tim in a moment, in the first quarter we experienced a slowdown in demand in North America, as customers became more cautious due to softening economic conditions. We can’t forecast how deep or prolonged the slowdown will be. I assure you we will not passively sit by and simply wait for the economy to improve. As I’ve laid out in these remarks, we will be relentless and aggressive in seeking out new customers and identifying alternative areas for growth and expansion of our business.
The goal, of course, is to spend this time making our business better, smarter, more attractive to our customers so when the market rebounds, we are poised to immediately seize the opportunities.
As I have said, our short-term approach will be to compete aggressively with the goal of capturing market share, where we continue to show financial discipline and be conservative and selective on our investment.
We also believe there are still areas within Monster that can operate more efficiently and we will continue to identify and act on these opportunities on a daily basis.
As we entered the end of the quarter, we saw more cautious signs in our European business, particularly with respect to U.S. companies operating in Europe. Our business with respect to our local European based employers remains stable and continues to provide Monster with strong competitive advantage in the global marketplace.
Overall, we certainly realize our financial results need to be stronger but given our rebuilding efforts, our investments, and the economic slowdown, I am encouraged by our performance. The actions that the team have taken have not only improved our results but have positioned the company for future growth.
Our strong liquid balance sheet and proven ability to generate cash provides financial flexibility to grow both organically and via acquisition, if the right opportunity presents itself. We continue to look for opportunities outside while we execute our stock repurchase plan.
Tim will now provide a more detailed look at our operating and financial performance in the quarter. Tim.
Timothy T. Yates
Thank you, Sal and good evening, everyone. First I will review our income statement, highlighting our non-GAAP results while pointing out the GAAP reconciliations. I will then review the results within our operating segments, providing information on our operating expenses and restructuring plan, review our investment in China, and finish with a discussion of the balance sheet and our liquidity.
Consolidated revenue reached $370 million in the first quarter, a 13% -- an increase of 13% over the prior year. Excluding a $13 million currency benefit, revenue grew 8%. Last year the currency benefit impacted revenue by approximately 2% in the first quarter.
On a non-GAAP basis, operating expenses were $329 million, in line with our internal expectations and near the lower end of the range that we provided in mid-March. On a year-over-year basis, the currency impact on our operating expenses was approximately $10 million in the quarter.
Interest and other income was $7.4 million, and our effective tax rate was 37%, primarily reflecting lower tax exempt income as a result of the substantial decline in our tax exempt securities balance. Moving forward, we expect our effective tax rate to trend slightly lower throughout the remainder of 2008.
Our loss in equity interest was $1.8 million. The diluted share count was $123.3 million, a decrease of 3% sequentially and 7% year over year, reflecting the repurchase of our common stock and a lower average quarterly stock price. Excluding the items we are calling out, income from continuing operations was $29 million, or $0.24 per diluted share compared with $46 million, or $0.35 per diluted share in last year’s first quarter.
Before we review the segment results, I want to highlight the impact of certain adjustments recorded in the quarter that reconcile our GAAP and non-GAAP results. They are $7 million of restructuring and other special charges, primarily related to severance costs; $3 million of professional fees from the ongoing investigation of the company’s historic stock option grant process; and $450,000 of costs related to the August 2007 security breach.
Including these costs, our GAAP operating margin was 9% and income from continuing operations was $23 million, or $0.18 per diluted share.
Revenue from the combined career segments was up 16% over the prior year. The non-GAAP operating margin for the first quarter was 16% and includes approximately $30.6 million of incremental expenses associated with the media placement and production costs related to our marketing campaign.
Turning to the segments, our careers international business, which now accounts for 41% of consolidated revenue, continued to experience strong growth. Revenue grew 44%, or 33% excluding a $12 million currency benefit. Our leading position in large geographic markets across Europe and the ongoing secular shift from print to online continued to drive top line growth. As Sal mentioned, toward the end of the quarter we did experience a slowdown in customer activity, particularly from U.S. based multi-national customers, reflecting the economic environment.
We continue to experience strong performance and healthy demand in the Asia-Pacific region.
Our ability to serve our customers globally is a true competitive advantage for Monster, utilizing our global reach to connect employers and jobseekers in over 40 countries worldwide.
The non-GAAP international operating margin was 8% in the first quarter of 2008. Included in the operating profit was approximately $12.8 million incremental impact from the marketing campaign.
North American careers revenue was $184 million, essentially flat over the prior year period. The weaker U.S. economy is impacting overall hiring demand as customers are being more deliberate with their recruitment decision. Customer demand in the credit, financial services, and housing markets slowed during the quarter, reflecting the weakness in these industries. We did experience growth, however, in our government and staffing verticals, as well as in our newspaper partnerships and Canadian business.
The non-GAAP North American operating margin was 23% in the first quarter of 2008. Included in the operating profit is a $17.8 million incremental impact from the brand launch.
Our IAF business generated revenue of $34 million in the first quarter, a 14% decline over the prior year. Our strategic decisions to remove interstitials and student loan advertising at the end of the second and fourth quarters of 2007 respectively continued to negatively impact comparable results. We also experienced lower demand from our customers in the financial services sector.
Included in IAF’s operating results was approximately $700,000 of incremental marketing costs related to the campaign.
As part of our ongoing analysis of our present business, we have decided to wind down Tickle, an online property within our IAF segment. Embedded within Tickle are services related to photo and video sharing and online dating, which are not related to Monster's core offering. Tickle has negatively impacted operating income and margins and no longer fits in our strategic growth plans. Accordingly, we will reclassify its results as discontinued operations effective in the second quarter of 2008. We expect to incur expenses in discontinued operations related to severance, fixed and intangible asset write-offs, and other costs associated with the wind-down, which we believe will be approximately $16 million in total.
In the first quarter of 2008, Tickle recorded an operating loss of $2 million on $3.9 million of revenue. Excluding Tickle’s financial results, IAF’s non-GAAP operating margin would have improved by 570 basis points, resulting in essentially a break-even performance.
As Sal has discussed, Monster is committed to being more than just a transactional marketplace for jobs. We believe there are significant opportunities to expand our presence in online vertical communities. Affinity Labs is an example of this strategy and we were pleased with their contribution in the first quarter. The online destination sites within IAF include category leaders in education, military, and law enforcement, all of which will play an integral role as Monster continues to evolve and will provide a future source of growth for the company.
I would now like to review our operating expense profile to provide more visibility into the trends and components of our cost structure. Total non-GAAP operating expenses increased 26%, or 22% excluding currency compared to last year’s first quarter, and 18% sequentially, or 17% when excluding currency. As Sal has commented, the company made a strategic decision to reinvigorate and relaunch the brand, initiatives which we believe will benefit future quarters and years. This significant investment was the primary factor in first quarter operating expense growth. The ongoing profitability of the company and our success in controlling costs and workforce expansion has allowed us to make this significant investment.
Excluding the incremental $31.3 million of marketing costs related to the brand launch, non-GAAP operating expenses increased at a significantly slower rate than the company’s historical pattern.
Year over year growth rate excluding the incremental marketing costs was 14%, which compares to an historical rate of approximately 26% when taking an average of the trailing eight quarters.
Our decision to restructure and control headcount growth was designed in part to allow us to have the flexibility to make significant investments, such as the brand launch during the quarter.
One of the goals of the restructuring plan is to slow the rate of growth of operating expenses over time by reducing and controlling headcount growth and by operating our businesses more efficiently. The restructuring plan called for lower our run-rate by reducing our workforce by 800 employees.
As we have discussed, the original 800 included 100 customer service associates who are now going to stay with the company. After adjusting for customer service, which I will discuss in a minute, we have identified substantially all of the 700 employees through the end of the quarter.
In addition to removing headcount from our run-rate, we have also tightly controlled new headcount additions. Prior to announcing the restructuring plan in mid-2007, the company was on a trajectory to end the year with approximately 6,450 associates. We ended the March quarter with 5,193 associates, roughly 1,250 less than the original plan and approximately 600 associates lower than June 30th of last year. The result is a 17% increase in annualized revenue per employee, so we are getting a substantial increase in productivity from our worldwide associates.
In addition to controlling headcount, we have also achieved other expense reductions by operating the business more efficiently. This is a whole host of bigger and smaller actions across the company and it is ongoing. Let me give you a couple of examples.
The company until recently was not operating with a global procurement approach. This was a direct product of the siloed organization structure which we have been discussing. Our single largest third-party expense is marketing and as we have commented before, we have rapidly moved to a global approach to buying media. We believe this has represented significant productivity in our marketing spend.
By following the same approach, we have been able to generate significant savings by purchasing our technology hardware and equipment, particularly computers and telecom, across a global standardized platform. We believe that there will be further efficiencies as a result of global sourcing and procurement.
Another example -- by developing and prioritizing a global product roadmap, we are beginning to have success properly balancing the usage of our own internal staffing. Therefore, we are able to reduce the amount of external resources which have historically been brought in to fill the gaps.
We believe we have made solid progress in improving the company’s operating platform to facilitate future growth and there are more opportunities to gain greater efficiency. A couple of examples -- we can reduce operating cost in our customer service department over time by in-sourcing and standardizing all global call center operations. In addition to lower operating costs, we will provide our customers with an improved value-added experience. We believe the potential savings are a significant percentage of our current customer service costs and will begin to be evident in 2009. This transition, however, will require some interim investment expense.
We will continue to invest in globalizing our internal functions, which will result in higher productivity. Sal has mentioned the progress we have made migrating our North American and European business platforms. Another example is the consolidation of our financial systems throughout Europe and then globally. This will provide a more scalable finance platform at a lower cost.
Finally, Monster has grown rapidly and currently operates in many different geographic locations around the world. We believe there are meaningful opportunities to rationalize the existing global real estate portfolio, resulting in future run-rate savings.
Now I would like to look closer at first quarter operating expenses. Marketing costs were up 42% sequentially, reflecting both the brand relaunch and normal beginning of the year promotional activity. This incremental marketing cost, which I earlier discussed, accounted for approximately $31.3 million of the sequential increase. Overall marketing expenses are expected to return to a more level -- to a more normal level beginning in the second quarter.
Salary and related expenses were up 7% sequentially despite our workforce remaining essentially flat. The two major components are an increase in payroll benefits reflecting the seasonal nature of FICA in the United States and higher non-cash compensation costs.
As Sal has noted, we are providing broader equity and incentive compensation opportunities. Our associates are becoming more productive and that is being recognized.
Office and general costs grew 9% quarter to quarter, primarily due to our annual regional sales conferences that launched our new brand strategy in the beginning of the year. Moving forward, we will actively manage operating expenses while we continue to invest in critical areas that will drive future growth.
Excluding the first quarter’s incremental marketing costs and Tickle’s operating expenses, we currently anticipate total non-GAAP operating expenses in the second quarter to be roughly in line with the first quarter.
We remain committed to achieving the financial and business objectives which we discussed at the time we announced our restructuring plan. The early benefits that we have realized through these initiatives reinforce our belief that we can attain our non-GAAP operating margin goal of 25% by the fourth quarter of 2008 in a reasonable revenue growth scenario.
Based on our current internal forecasts, and before any significant acquisitions, we believe we are on track to achieve this target. However, as you all know, the global macro environment is extremely uncertain and certainly weaker than when we articulated the 25% objective. If material weakness in the economy results in greater sales and revenue deceleration than we currently foresee, then the company would confront a trade-off between continuing our longer term investment plan and reducing operating expenses in the short-run to attain the operating margin target.
As we have stressed, we are not managing the company on a quarter to quarter basis but rather to make the investments necessary to take advantage of the market opportunity which Sal has articulated. We do believe that over time, the business certainly has the potential to achieve 25% operating margin and there are more areas where we can gain productivity. We are aggressively pursuing them.
In the trade-off between meeting our operating margin target in any particular quarter versus making the investments which we believe will allow the company to achieve its potential, we currently believe that it would be in the best interest of our shareholders to continue with our thoughtful investment program.
With respect to our investment in China HR, we are continuing an active and productive discussion with our colleagues in China. We have held several due diligence meetings, both in China and the United States, and our team has been fully engaged in moving the acquisition process along.
As we have previously disclosed, the mechanics of a potential acquisition of the remaining interest in China HR by Monster were established upon the company’s initial investment in early 2005.
Given the current global economic and business environment, Monster is carefully considering its obligations under the existing agreement. Additionally, there are a number of issues that have arisen through the diligence process that will take time to resolve. Nevertheless, we remain committed to pursuing the transaction with China HR. Based on these facts, we currently anticipate closing on the transaction some time during the third quarter of 2008.
Turning to the balance sheet, deferred revenue increased 16% over the prior year, a faster pace than overall revenue growth. Monster has strong cash flow generation and a liquid balance sheet. At this stage in the market cycle, liquidity is highly value and provides Monster with multiple options.
Cash from operating activities in the first quarter was $79 million and capital expenditures were $21 million. In the quarter, we spent $79 million on stock repurchase to reacquire 3 million shares at an average price of $26.26.
As of the end of the quarter, we had approximately $174 million remaining under the stock repurchase program. Since we reopened our buy-back program in August 2007, we have repurchased 10.3 million shares for an aggregate cost of approximately $330 million, representing an 8% reduction in our total shares outstanding since that time.
At the end of the quarter, our net cash and securities balance was $498 million, which includes auction rate securities with a fair value of $103 million. I would like to comment briefly on those auction rate securities. As of year-end the company held $357 million of auction rate securities within its portfolio. After year-end, we became concerned with the liquidity in this market. As our auction rate securities were rolling over at par, we moved approximately $253 million into U.S. Treasury money-market funds. The current $103 million of auction rate securities in our portfolio as of quarter end are all triple-A rated and approximately 90% are backed by the U.S. government’s guarantee, with the remaining 10% backed by private insurance.
We do not believe there is meaningful credit risk in these securities; however, due to the failure of recent auctions, there is liquidity risk and as a result, we have reclassified these instruments as long-term available for sale.
Based on independent third-party valuation of our auction rate holdings, the company has recorded $1.7 million of temporary impairment related to those securities as of quarter end, as a component of our other comprehensive income.
Excluding the fair value of our auction rate securities at quarter end, the remaining $395 million is invested primarily in U.S. Treasury money market funds, high quality bank deposits, and Triple A rate short-term marketable securities.
In addition to the $498 million of capital on hand and our proven ability to generate cash, we have an existing 250 unused revolving credit. We believe we have strong liquidity, enabling us to pursue a number of strategic or financial alternatives.
I will now hand the call back over to Sal for his closing remarks.
Thank you, Tim. I would like to sum up by saying first of all, we are very confident in the company’s long-term potential. Literally every day we see and we identify more opportunities that we feel will propel the company forward in the months and years to come. We are moving aggressively on numerous fronts to grow the top line and manage costs.
We will make investment decisions based on the long-term, not short-term gain. The transformation continues and positive changes are and will occur. Make no mistake -- we have a lot of work to do but we have a strong and talented workforce. Our associates can get the job done. The future of Monster is very promising. The opportunity is enormous.
I would like to thank all global associates. The management team is committed to providing the support and resources that they need to continue to perform at the highest level. We also want to thank our shareholders for their ongoing support and interest in Monster.
Thanks very much and now we’ll -- Bob, can we open up for questions?
Operator, we’d like to take questions.
(Operator Instructions) Your first question comes from the line of T.C. Robillard from Bank of America.
T.C. Robillard - Bank of America
Thank you. Good afternoon, guys. Sal, I was just wondering if you could give us a sense in the U.S. careers business, how intra-quarter, how the monthly trends were. I mean, flat year-on-year was actually better than we were expecting, I think what a lot of people were expecting, so can you just give us a sense -- you gave us some, obviously, in the international piece. Just trying to get a sense that -- were things pretty stable throughout the quarter? Did they decline, did they improve? Just trying to get a sense.
Sure. I think what we’ve seen, particularly -- well, I’ll start here in North America, is first of all there has been a consistent pattern, for example in financial services where it’s been sluggish. I mean, I don’t think that’s a surprise to anyone. But that’s been offset by quite a bit of robustness in healthcare, in the government sector, in a number of other areas. There is no question I think that across the board, we’ve seen a little bit of some holdback, some concern, some consternation regarding the economy.
We had not seen that in Europe for the most part, except in the sector where -- subsidiaries of U.S. companies operating in Europe, particularly Western Europe, where I think the -- probably the best way to say it is I think the message got sent from the U.S. to hold back a little bit until the situation clarified itself, and we saw some sluggishness on the part of some of those subsidiaries.
But all in all, the good news has been that I think some of that sluggishness or slowdown or caution is being offset by I think we have an array of new products that have been introduced. I think that that’s had an amount of benefit. I think the marketing campaign or the rebranding that we talked about has had a degree of benefit. I think we are doing a better job, still a lot of work to do in the area of customer service. I think that’s had some benefit.
So I think there’s a bunch of factors that caused us to be able to offset some of the affect but without question we are watching it pretty carefully and we’re -- not only here but overseas.
T.C. Robillard - Bank of America
Great. Thank you.
Your next question comes from the line of Mark Mahaney with Citigroup.
Mark S. Mahaney - Citigroup
Thank you. If I could throw out a couple of question -- Sal, what’s the evidence to date that the branding campaign has been successful? Do you think you’ve got evidence now or are you believing that you will see it in the back half of the year?
Secondly, the guidance about OpEx, in Q2 non-GAAP OpEx being similar to Q1 levels -- does that imply margins are likely to be down sequentially?
And then finally, can you just give us a little color on the European operating margin in Q1 was flattish or downish a little bit from last year, depending on how you look at it. Was that just due to the branding -- was that just due to the -- despite the major revenue growth, was that just due to the branding initiatives or was there something else going on there in terms of pricing? Thank you.
I’m going to let Tim answer the first part and then I’ll chime in after he’s done, if that’s okay.
Timothy T. Yates
What I was trying to say was if you back out the incremental level of marketing, we would be flat to the -- you know, flattish to the operating expense excluding that level of incremental marketing, so that would imply an increase in operating margin.
I think that -- and I’ll try and remember all of the segments to your question. If I don’t cover them, do me a favor and please ask again. I think that in Europe, first of all, let me start there -- our operating margin in Europe is somewhere around 8%, roughly 8%. I think that that operating margin, we have to keep in mind gets impacted because Europe is a big place. There’s a lot going on. We have more mature markets -- for example, the U.K., Germany, Netherlands, Germany, and then we have less mature markets for us in the form of Eastern Europe, Italy, Spain, Portugal, which require investment for us to seize those opportunities going forward.
So when you look at the margin there, it’s not really margin of an overall mature marketplace. It’s very much of a mixed bag, if you will. But there is nothing -- other than those investments, there is nothing unusual in what is going on there. If you take the allocation of the rebranding, if you will, that’s been done to Europe -- and I want to really caution with this. We’ve tried to do it as accurately as we possibly can but let’s face it -- there’s some judgment there and it is just that, it’s an allocation at the end of the day.
The rebranding cost us approximately $31 million. That is an anomaly. That is not a cost we intend to continue to have. I think what you will see in Q2, 3, 4 and beyond is a more normalized, if you will, marketing spend. That’s a -- as clearly as I can say it, that is a one-off. The piece of that that pertains to Europe or to the international segment is roughly about $13 million. So in other words, if you break down the 31, $13 million or so is international, $18 million is North America. And if you take out of Europe the effect of, if you will, of the rebranding exercise, then you’d see margins in Europe somewhere around 15%, 17%, approximately. And I think those trends without that, once again, that anomaly, those trends will probably be more normal in Europe as they will in North America.
What the rebranding has done for us, I think it has clearly defined what Monster is all about. I think it’s clarified for the first time on a global basis one real brand and I think it sent a global message that we are not just a job board but really looking to work with seekers and employers to find the best candidates possible by going after the best candidates the market has to offer.
So I think in that sense, it’s been very successful. I think that the metric, one metric certainly that I look at fairly carefully, which is responses, has shown that we’ve made significant progress. Job responses are significantly up and I think that we will see that trend continue.
It’s had an impact that is -- wasn’t by design and I certainly wouldn’t have spent $31 million or $32 million to achieve this, but it’s somewhat unexpected but extremely I think important to note is it’s had a real strong impact of reenergizing Monster internally. The people within the company are really charged up. They are aggressive, they are interested in moving ahead. They are trying to come up with new ideas literally every day, as I said earlier and going after the target.
I mentioned a little while ago that the opportunity here in North America with regard to the customers that we haven’t done business with in over 12 months, the opportunity is enormous. But we do business with less than 25% of companies over 500 people. That means there’s an awful lot of big companies out there that we haven’t tapped in the past 12-plus months. There’s millions literally of companies that are in the small business area that we just have done very little with, with less than 1% of that market.
So the opportunity is tremendous. I think the -- we’ll see continued benefits from the campaign. I think we will get much more surgical now in terms of our market, having laid the foundation that we did in Q1, in our advertising and going after those seeker segments, which will help us gather some of those customers that we haven’t been able to bring into the Monster fold before. And I think that bodes well for the future and obviously we can’t control the economy but at last to some degree it is going to help us offset the decline that I think everyone is feeling.
Hopefully that got most of your points.
Your next question comes from the line of Jeetil Patel from Deutsche Bank.
Jeetil Patel - Deutsche Bank
Thank you. A couple of questions; I guess, Sal, when you look at a lot of the technology and platform investments that you’ve been making, and obviously quite a few products still ahead in terms of releases from your commentary, but do you think that verticalization or social media will be critical elements from a job, kind of a corporate standpoint or a jobseeker standpoint, that’s going to be relevant to long-term success and part of your product pipeline as you look ahead?
And then secondly, can you just give a sense of what the revenue exposure looks like by vertical -- what are some of the top verticals that I think everyone seems to be focused on these days, in particular financial, maybe staffing and you know, tech or retail, whichever one you feel like going through, and then I have a quick follow-up. Thanks.
I’m going to let -- we have Darko here today and obviously most of your question centers on areas that, well, I guess we’ve all been focused on but he spends most of his life thinking about, so I’m going to let him answer for us and then I’ll chime in.
We absolutely think that verticals will be an important part of our portfolio. If you look at the acquisitions that we made recently with Affinity Labs and where we are going with that and integrating in our core experience, verticals will be an extremely important part of that.
All of our products, as we move forward with the development, our focus on being able to expand the new products across a wide range of verticals, whether it is here in North America or globally, and the important thing is that verticals will be not only important from acquiring the right seekers but also presenting the right opportunities to the employer so we can get the right matches between the employers and the seekers through those different verticals.
So the answer is absolutely yes. We think they will become an important part of the portfolio, either through acquisition or through organic expansion of our product lines.
Timothy T. Yates
While we are not giving out the specific percentages by vertical, I think it’s fair to observe that Monster is pretty well diversified, both by vertical and even though we, using technology as an example, we don’t have a specific vertical aimed at the moment at technology, we do a lot of business in the technology space. We have technology, we have staffing, we have the large multi-nationals, and when you combine that with our vertical reach and our diversification across size spectrum, you know, we’re pretty well diversified.
What I would like to add also in support of what’s been said, moving into different verticals is I think important to us from a couple of different points of view also. You’ve heard me talk about in the past that last year we made a number of decisions to reduce different forms of advertising on our career site. Those decisions were made because what had been promoted is to push the creation of advertising revenues in what we felt was a short-sighted way. It was having a big negative impact on our business.
By creating new verticals, not only will we support all the things that both Darko and Tim have said, but I think that what it will give us is a much broader berth to take advantage of advertising revenue in a much broader way, a much less intrusive way than what was done in the -- than what we were able to do in the past. So I think that the opportunity there is significant for us, really a broad spectrum -- for a broad spectrum of reasons.
Jeetil Patel - Deutsche Bank
Just a quick follow-up -- can you talk about the timing of a lot of the vertical strategy rolling out? And I guess just looking at the month of April, EMEI was down about 6.5% as of this morning on a year-on-year basis. I guess can you give us a sense of what you’ve been seeing in April since Europe, I guess things were soft exiting but your U.S. held up pretty well.
And then just Affinity Labs, can you just give a sense of what the revenue contribution was in the quarter? Thanks.
As you know, we are not -- and I appreciate the effort, but as you know, we’ve decided not to give guidance and I’d come pretty close to doing that by answering your question.
I think that the numbers did show this morning that there appears to be a little bit of a -- while things are down, they seem to be turning. Now I don’t want to cause people to read much more into that than what I just said. There seemed to be some signs that things may be starting to reach bottom, maybe start to turn around. But it is very early in the game and I would hate to steer in any kind of direction at this point. What we may be seeing is just a temporary blip and we go right back to where we were going before. So I think it’s really very early in the game to be able to declare a direction in either way at this point.
Jeetil Patel - Deutsche Bank
Timothy T. Yates
We’re not specifically breaking out the results of Affinity Labs from a revenue point of view but it is doing better than we expected when we bought it at this stage of the game. It’s numbers are pretty small and -- how many sites do we have there? 12 different verticals and three launched this quarter.
The whole purpose behind the acquisition of Affinity and some of the actions that we are taking, even the action with regard to Tickle is to focus our energy on expanding the verticals where we really believe there’s promise and there’s opportunity in the future. And to date, these verticals have only been introduced in the bolt-on here in the United States. There’s an enormous opportunity to take them and export them to various locations internationally.
For example, military, which I think everyone knows has been fairly successful, there is no reason why there should not be a military in a number of countries in Europe and perhaps out in Asia. I think as we go into some of these other sites, even some of the sites that we’ve acquired through the acquisition of Affinity, whether it be Police Link -- virtually every country certainly in the world has a police force. Well, Police Link has a place.
So I think the opportunity with these verticals not only within North America but on a global scale is significant.
We have time for one final question and that is from Peter Appert from Goldman Sachs.
Peter P. Appert - Goldman Sachs
Sal, I will limit myself to one question, unlike the last non-compliant questioner --
Thank you very much. This is one of those moments where I wish I was still a compliance officer at [inaudible] Trust, I could come and get him.
Peter P. Appert - Goldman Sachs
You could smack the evil questioner who shall be unnamed. On China HR, what are the diligence issues that have come up? Does it imply that the price might be renegotiated? And how close is that business to getting to profitability?
Let me try and be as clear as I can on this -- we are extremely excited and very interested in participating in a very significant way in the China market. We’d be fools not to -- a population of 1.3 billion people, an economy that is fast becoming the industrial powerhouse of the world. We need to be there and we think there is huge opportunity.
The China HR deal was structured several years ago. I think you all know that there is a VC involved with it. We are looking at the transaction that was put in place then and we feel that there are a number of issues that need to be discussed, negotiated. Obviously they have the right and I wouldn’t blame them for negotiating hard from their end. We have the equal right and need to negotiate strongly from the point of view of our shareholders and we intend to do that.
If that means that the deal is delayed a little bit from getting done, so be it. Our intention is certainly to do it, but we need to be prudent and we need to make sure that we do the right thing for our shareholders as best we can under the circumstances. So that’s really all we’re saying. No one should read into it that we are in any way, shape, or form pulling back from China or that we don’t want to do the deal. It’s just a question of doing it and doing it smart.
Peter P. Appert - Goldman Sachs
I thought the price was preset -- does this mean there’s room to negotiate on the price?
Well, we see a number of issues where I think that there are some things in the original contract that were a little bit nebulous that we’d like to discuss more fully with our counterparty and reach hopefully an amicable solution.
Peter P. Appert - Goldman Sachs
At this time, there are no further questions and I would now like to turn the call back over to Mr. Bob Jones for any final remarks.
Once again, I’d like to thank you for joining us on our first quarter call. To listen to the replay of this call, you can dial 800-642-1687. You can also access the replay through our website in the investor relations section, or please feel free to call me at any time at 212-351-7032 if you have any further questions, and thank you very much.
Ladies and gentlemen, this concludes today’s conference. You may disconnect at this time.