Excerpts from Gilford Securities analyst Ashish R. Thadhani's recent note to clients on Monster Worldwide (MNST):
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Investment Conclusion. Based on a weak hiring environment and lower interest income – cushioned by reduced marketing & promotion spending and resilience in the International & IAF segments – we are adjusting our estimates as follows: 2008 non-GAAP diluted EPS to $1.35 on revenue of $1.402 billion (4% YoY growth) from $1.30 on revenue of $1.406 billion; and 2009 non-GAAP diluted EPS to $1.50 on revenue of $1.415 billion (1% YoY growth) from $1.60 on revenue of $1.388 billion. Our non-GAAP estimates exclude employee severance, stock option investigation, security breach and restructuring charges. We anticipate a resumption of organic YoY revenue growth in 3Q09.
Our Hold rating remains in effect. MNST shares remain vulnerable to macro pressures despite an inexpensive valuation ($2.0 billion enterprise value or 1.4x 2009E revenue, 5.5x EBITDA and 13.3x non- GAAP EPS). We note that deferred revenue fell 10% QoQ. In the domestic Careers segment, revenue contracted YoY (after seven straight quarters of decelerating growth). On the international front, activity has softened in all regions. 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% of revenue), departure of founder Andrew McKelvey (31% voting power) and track record of the new management team (which previously engineered the sale of Symbol Technologies to Motorola).
2Q08 Results. Non-GAAP diluted EPS of $0.40 vs. $0.32 a year ago on revenue of $354.3 million (7% YoY growth) beat our $0.33 estimate on revenue of $350.4 million. Results benefited from lower-than- projected marketing & promotion expenses (+$13.3 million variance or 7.1 cent EPS impact). Revenue was driven by the Careers International segment (+$10.6 million variance) and Internet Advertising (+$3.4 million) – offset partially by Careers North America (-$10.2 million). Operating income surpassed our expectation in all three segments.
Takeaways. Results reflect 7% YoY growth (vs. 11% in 1Q08), a 22.1% non-GAAP operating margin (vs. 11.9%) and only a 4% YoY increase in deferred revenue (vs. 16%). Revenue slowed across the Careers businesses albeit less than our estimates: North America (-6% YoY vs. flat in the immediately prior period) and International (+34% vs. +44%) – while stabilizing somewhat at the Internet Advertising segment (-16% vs. -24%). Due in large part to lower marketing & promotion expenses, operating margin on a sequential basis improved across-the-board: Careers North America (+1400 bps), Careers International (+1410 bps) and the Internet Advertising segment (+1880 bps). Company-wide headcount rose 4% QoQ to 5,396 but revenue per employee declined 7%.
Non-core online dating and video sharing ($3.1 million deficit on revenue of $2.3 million in 2Q08) has been reclassified as a discontinued operation. Due to committed transformational investments and a weakening economic outlook, management indicated that the 25% non-GAAP operating margin target will not be met in 4Q08. Meanwhile, due-diligence negotiations with ChinaHR.com are continuing and Monster hopes to complete this acquisition in 3Q08 at the low-end of a $360-405 million (total) valuation range.
Monster generated strong CFFO of $70.7 million (or $0.58 per share) in the quarter. Key outflows comprised capital expenditures ($29.7 million) and stock repurchases ($6.9 million for 278K shares at an average price of $24.67 each). Monster exited the quarter with net cash of $396.4 million ($3.25 per share), up from $361.8 million on March 31. This figure includes (investment grade but illiquid) auction rate securities valued at $99 million, down slightly from $103 million on March 31.
Noteworthy developments are summarized below:
Non-farm payrolls fell by 51K in July – the seventh straight drop in 2008. Meanwhile, the U.S. Monster Employment Index was down 4% QoQ and 14% YoY.
In late-July, Monster announced the acquisition of Trovix for $72.5 million in cash. Trovix should enable Monster to offer unrivaled search and match capabilities. It uses advanced “semantic search” technology while analyzing resumes and job descriptions by focusing on key attributes such as skills, work history and education to deliver highly relevant, contextual results.
In June, local media alliances targeting the SME segment surpassed 200 weekly/daily newspapers and 100 TV outlets. Separately, Monster announced alliances with Cornerstone OnDemand (a provider of e-learning courses) and HireRight (background screening). It also completed the global roll-out of Monster Video Profile, a tool that enables integration of video into job postings.
To realign the cost structure with current revenue trends, Monster is completing 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, enhanced customer service and field sales expansion. Actions entail workforce reductions (700 positions or 13% of total headcount) and streamlining of administrative functions. Anticipated net savings of $80 million translates into $0.40 per share.
In July, Monster announced a proposed settlement of the lawsuits relating to its historical stock option practices. Terms provide for payment of $47.5 million, of which the company will be responsible for $25.1 million (net of insurance recovery and contribution by another defendant). Employee severance, stock option investigation, security breach and restructuring expenses have amounted to $136.3 million or $0.69 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. In April 2007, Monster appointed Mr. Sal Iannuzzi (53) to the position of Chairman/CEO. In January 2008, Mr. McKelvey agreed to convert 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.
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.