Citigroup analyst Mark Mahaney on Monster Inc.'s (NASDAQ: MNST) results (see also full Monster Inc. conference call transcript):
MNST: Clean Beat & Raise With Several Growth Drivers Ahead
• MNST reported a Clean Beat & Raise March quarter -- $292MM rev and $0.29 vs. Street at $283MM and $0.28. June and '06 guidance cleanly raised above Street. The BIG surprise was rev growth acceleration in both Careers North America and Careers International.
• Fundamentals strengthened -- organic rev growth at Monster Division was 34% Y/Y vs. 29% in Dec., while EBITDA margin expanded 350 bps Y/Y to 24%. Also key, Y/Y deferred rev. growth was a very strong 43% Y/Y, while Monster Division International margins were a very healthy 8%.
• It's hard not to be more positive on MNST. Our estimates increase ('06 EPS goes from $1.24 to $1.27) & our PT rises from $51 to $61. We don't see material valuation upside from here. But we do see stronger sustainable EPS growth due to 1) continued European margin expansion; 2) eCom expansion; 3) pricing power; 4) Asian market traction; & 5) U.S. & Int'l advertising growth.
MNST reported March quarter revenue of $292MM, EBITDA of $70MM, and GAAP EPS from Continuing Operations of $0.29 vs. our estimates of $280MM, $69MM, and $0.28, respectively.
The Beat relative to our revenue estimate was driven by Monster Division revenue, which was $257MM vs. our $243MM estimate. Monster Division deferred revenue was $343MM, up a strong 43% Y/Y and 5% Q/Q. Advertising & Communications revenue of $35MM was below our estimate of $37MM, down 11% Y/Y and down 12% Q/Q. Monster Division organic growth was 34% Y/Y, well above the 29% growth in December and the 30% in September. That’s impressive – it breaks the mild deceleration trend over the past two quarters, and marks a return to the organic growth rates of the June and March quarters (34%). We would expect a return to modest deceleration over the balance of the year, however.
Key revenue highlights from the detailed segment breakdown for the Monster Division include: 1) Better-than-expected North American results, with revenue growth accelerating from 23% Y/Y in the December quarter to 29% in the March quarter; 2) Better-thanexpected International results, with organic International revenue growth re-acceleration from 46% Y/Y in the December quarter to 51% in March; and 3) Slightly stronger-thanexpected Internet Advertising & Fee revenue growth of 31%Y/Y vs. our 28% estimate. What’s going on? In North America, Monster is benefiting from an improved labor market, the continued migration of recruitment dollars online, and strong execution. Monster claims that its North American growth is balanced across all regions, sales channels, and major services lines, though management did single out the staffing sector as a particular new area of strength. Internationally, Monster appears to be benefiting from both strong secular and cyclical growth trends, aided by ramped up marketing spend and salesforce productivity improvements (e.g. in Europe, revenue per sales rep increased 16% Y/Y).
Margins were modestly lower than expected for all three segments, however. Overall EBITDA margin was 30% vs. our 31% estimate, with North America at 37% (200 bps lower than our estimate), International at 7.8% (70 bps lower than our estimate), and Internet Adv. 2 & Fees at 36% (100 bps lower than our estimate). Our view is that MNST is re-investing aggressively in the business, with a particular focus on marketing. Specifically, while Marketing & Promotion spend increased 37% Y/Y, it surged over 70% in Monster’s international markets. Key point: marketing & promotion rose to 22.7% of revenue, the highest we’ve seen since March ’04, so MNST is clearly spending to drive topline growth. Is that a negative? No, but it could be if the law of diminishing returns kicks in. Of if it is a function of a dynamic competitive landscape, with Google Base joining Career Builder as a significant source of competition in North America.
Did Monster’s fundamentals improve? Yes. Organic Monster Division revenue growth of 34% was well above the 29% Y/Y growth in the December quarter and the 30% Y/Y growth in the September quarter. Overall EBITDA margin expanded 350 bps Y/Y to 24.1%, and MNST Division EBITDA margin increased 300 bps Y/Y to 30%. Incremental margin was also strong at 36%.
Were fundamentals better than the Street expected? Yes. Revenue of $292MM was higher than the Street’s $283MM and the $0.29 GAAP EPS from Continuing Ops. beat the Street by $0.02.
Did the company raise guidance relative to the Street? Yes. Midpoint revenue guidance for June is $297MM, which is above the Street’s $292MM. MNST’s EPS guidance range is $0.29-$0.30 vs. the Street at $0.29. For the full year, midpoint revenue guidance is $1,200MM and the EPS range is $1.25-$1.29 vs. Street revenue of $1,201MM and EPS of $1.25. That’s a material EPS raise.
