Excerpts from Gilford Securities analyst Ashish R. Thadhani's recent update to clients on Monster Worldwide (MNST):
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- Investment Conclusion. Based on a lower near-term operating margin and the potential for a (shallow but) extended economic downturn – given trends in the North American and International Careers segments and various external indicators (refer to page 3) – we are reducing our estimates as follows: 2008 non-GAAP diluted EPS to $1.30 on revenue of $1.406 billion (4% YoY growth) from $1.50 on revenue of $1.351 billion; and 2009 non-GAAP diluted EPS to $1.60 on revenue of $1.388 billion (1% YoY contraction) from $1.70 on revenue of $1.415 billion. Our non-GAAP estimates exclude employee severance, stock option investigation, security breach and restructuring charges – and imply 6% compound EPS growth in 2007-09.
Our Hold rating remains in effect. MNST shares could remain under pressure due to macro headwinds and its decision to suspend revenue/EPS guidance. Management has acknowledged recessionary pressures in the domestic employment market by way of cautious client decision-making. In Europe, activity across subsidiaries of U.S. companies also weakened toward quarter-end. Longer-term, we believe that Monster is an attractive takeover candidate given divestiture of its low-growth/margin businesses, potential for rationalizing marketing/overhead costs (25- 30% of revenue), departure of founder Andrew McKelvey (31% voting power) and track record of the new management team (which completed the sale of Symbol Technologies to Motorola).
- 1Q08 Results. Non-GAAP diluted EPS of $0.24 vs. $0.35 a year ago on revenue of $370.4 million (13% YoY growth) fell short of our $0.25 estimate on revenue of $340.5 million. As expected, results included heavy brand re-launch expenses of $31.3 million that impacted non-GAAP EPS by $0.16 and non-GAAP operating margin by 850 bps. Revenue resilience is attributed to Careers North America (+$17.9 million variance) and International (+$15.2 million) – offset partially by Internet Advertising (-$3.3 million). Segment operating income surpassed our expectation in Careers North America – but underperformed at Careers International and Internet Advertising.
- Takeaways. Results reflect 13% YoY growth (vs. 19% in 4Q07), an 11.3% non-GAAP operating margin (vs. 21.0%) and 16% YoY increase in deferred revenue (vs. 18%). Revenue growth slowed across-the- board: Careers North America (flat YoY vs. +3% in the immediately prior period), Careers International (+44% vs. +59%) and the Internet Advertising segment (-14% vs. -8%). Excluding non-recurring brand re-launch expenses, operating margin on a sequential basis improved at Careers North America (+50 bps) but declined in the Careers International (-340 bps) and Internet Advertising segments (-760 bps). Company-wide headcount rose 1% QoQ to 5,193 despite the ongoing restructuring plan, although revenue per employee increased 4%.
Monster will overhaul and integrate its sales force to more effectively address available opportunities, e.g., it has penetrated only 25% of the 31K U.S. companies with 500+ employees. Also, non-core online dating and video sharing operations ($2.0 million deficit on revenue of $3.9 million in 1Q08) will be reclassified as a discontinued operation. Monster indicated that global branding initiatives have been received well in the marketplace. Site visits rose 26% in March. Recent examples of product innovation include a new video posting tool. However, citing a weaker environment, management qualified its earlier 25% non-GAAP operating margin target in 4Q08 with “under a reasonable revenue growth scenario.” Separately, due to “nebulous” issues that have arisen during due-diligence negotiations, closing of the ChinaHR.com acquisition will likely be delayed to 3Q08.
Monster generated strong CFFO of $78.4 million (or $0.64 per share) in the quarter. Key outflows comprised capital expenditures ($20.6 million), an acquisition payment ($61.6 million) and stock repurchases ($79.5 million for 3.0 million shares at an average price of ~$26 each). Since 3Q07, Monster has repurchased 10.3 million shares of common stock for $332 million – or ~$32 each – and has $174 million still available under its current program. Monster exited the quarter with net cash of $361.8 million ($2.90 per share), down from $445.6 million on December 31. This figure includes (investment grade but illiquid) auction rate securities valued at $103 million, down from $356 million at year-end.
- Noteworthy developments are summarized below:
- Non-farm payrolls fell by 20K in April – the fourth straight drop since December 2007. Meanwhile, the U.S. Monster Employment Index rose 4% QoQ but was still down 6% YoY.
- Also in April, Monster entered into an agreement to become the exclusive job services provider to msnbc.com – one of the leading news sites worldwide.
- To realign the cost structure with current revenue trends, Monster is implementing a restructuring program that is expected to generate $150-170 million of gross savings annually. Half of this amount or $80 million will be invested back into the business to revitalize growth by way of new product development (e.g., search engine and content), upgraded technology, global branding and sales force expansion. Actions entail workforce reductions (800 positions or 15% of total headcount) and streamlining of administrative functions. Management is targeting a 25% non-GAAP operating margin by 4Q08. Anticipated net savings of $80 million translates into $0.40 per share.
- Employee severance, stock option investigation, security breach and restructuring expenses have amounted to $89.2 million or $0.44 per share since 2Q06. In 2006, Monster admitted to intentional backdating of stock option grants by former officers. The company restated cumulative 1997-2005 net income lower by $271.9 million to reflect additional non-cash stock based compensation. Founder and former Chairman/CEO Andrew McKelvey resigned from the board in October 2006 after declining to cooperate with an internal committee. Since 4Q06, Monster has also lost its CFO and Presidents of the largest business segment and global sales organization. In April 2007, Monster appointed Mr. Sal Iannuzzi (53) to the position of Chairman/CEO. He was a member of the Board since July 2006 and had previously served as CEO of Symbol Technologies. In January 2008, former Chairman/CEO Andrew McKelvey agreed to convert his 4.8 million shares of super- voting stock into ordinary shares – thereby reducing his voting power from 31% to 7%.
- MNST shares are suitable for aggressive investors. In our opinion, principal risks include the following: slowdown in online help-wanted advertising; increased competition; inability to integrate acquisitions and/or translate margin potential into reality; and a correction in the Nasdaq market.
ANALYST CERTIFICATION: I, Ashish Thadhani, certify that all the views expressed in this research report accurately reflect my personal views of the subject companies. I certify that I have not and will not receive compensation with respect to the issuance of this report.