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Monster Worldwide (NYSE:MWW)

Q3 2012 Earnings Call

November 08, 2012 8:30 am ET

Executives

Lori C. Chaitman - Vice President of Investor Relations

Timothy T. Yates - Executive Vice President and Director

James M. Langrock - Chief Financial Officer and Executive Vice President

Analysts

William G. Bird - Lazard Capital Markets LLC, Research Division

Timothy McHugh - William Blair & Company L.L.C., Research Division

Jeffrey M. Silber - BMO Capital Markets U.S.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Douglas M. Arthur - Evercore Partners Inc., Research Division

Randle G. Reece - Avondale Partners, LLC, Research Division

Operator

Good morning. My name is Jenica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 quarterly earnings results conference call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Ms. Chaitman, you may begin your conference.

Lori C. Chaitman

Thank you. Good morning, and thank you for joining us on Monster Worldwide Third Quarter 2012 Conference Call. We have a lot to cover on today's call. But before we get started, I wanted to let you know that Sal Iannuzzi, Chairman, President and Chief Executive Officer, is unable to join us due to a death in his family. We wish Sal and his family well during this difficult time.

We will have formal remarks from Tim Yates, Executive Vice President and Member of our Board of Directors; and James Langrock, Executive Vice President and Chief Financial Officer. In addition to Tim and James, members of our executive management team are available to answer your questions during the Q&A part of the call. They are Tim Yates, Ted Gilvar, Michael Miller, Lise Poulos and Mark Stoever.

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. 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 and the other risks discussed in our Form 10-Q and our other filings made with the SEC.

With that, I'd like to turn the call over to Tim for his comments. Tim?

Timothy T. Yates

Good morning, and thank you all for joining Monster's Third Quarter Conference Call. As Lori noted, Sal is unable to join us today because of a death of a close relative, so James and I will host the call. Our thoughts are with Sal and his family today.

As a result of Sal's absence, our comments or prepared remarks will be somewhat briefer than normal. Also, many of our staff, investors and analysts on the East Coast have been impacted by Hurricane Sandy and by last night's early snowstorm. We hope for a speedy recovery for everybody who's been affected.

The global economic slowdown continued and deepened during the third quarter. Economic uncertainty remains extremely high. In the face of all this uncertainty, our customers on a global basis continue to restrict their hiring and curtail their recruitment budgets.

This continued and heightened uncertainty is having a number of related negative impacts on Monster. First, during the quarter, total bookings declined 12% year-over-year on a constant currency basis. Europe was down 20% on a constant basis, while the U.S. and APAC were both down 8%, again, on a constant currency basis. Second, while we are confident that we will experience return to top line growth in a more stable economic environment, the recent uncertainty has resulted in our review of strategic alternatives taking longer than we anticipated. Hopefully, now that the election is behind us, our leaders in Washington will act to provide more certainty and a better business environment.

Today, I am going to update you on the status of our strategic alternatives review, and then I will outline a number of corporate restructuring initiatives that we are implementing to increase the company's profitability and strengthen our core profitable markets. These initiatives will happen in parallel with our continuing review of strategic alternatives. Thereafter, James will provide a complete financial review, including our outlook for the fourth quarter.

As you know in March, we engaged Stone Key and Bank of America Merrill Lynch as financial advisors in connection with our review of strategic alternatives to maximize shareholder value. That review is ongoing. To be clear, we have considered and will continue to pursue a gamut of possibilities, including the sale of the company. As part of the review, a substantial number of potential parties were contacted and received management presentations, and due -- extensive due diligence has been and is being conducted. Some of these discussions are ongoing, and we cannot predict the timing or the specifics of the outcome from the process.

While we remain engaged in this process, we are taking a number of actions to focus on our core profitable geographies and immediately increase profitability. We are pursuing a sale of our ChinaHR business. And between now and year-end, we will review our options for our other investment developing markets and will substantially curtail the losses incurred in those markets. We will accelerate our redeployment of operating expense into marketing and sales while at the same time reducing the run rate of operating expense.

The combined impact of these actions will allow us to accomplish a number of objectives. First, we will be better able to support our traditional product and speed the adoption of our new product portfolios in our key European and North American markets as a result of greater marketing and sales firepower both in Europe and in the United States. As you know, recently, we've made substantial progress improving our traffic position and customer performance in the U.S. This is making us more competitive. We believe now is also the right time to increase our marketing spend in some key European markets.

Second, these actions will materially increase our operating income. The current approximate run rate of our China and developing markets business is $50 million of revenue and $85 million of operating expense. So the actions we contemplate will increase operating income by approximately $35 million. In addition, the net impact of our cost reduction and reallocation to sales and marketing should produce a net increase in run rate of operating income of $50 million. The combined impact then will produce a net decrease in operating expense of approximately $130 million and a net increase in operating income of between $80 million and $90 million. For the sake of clarity, while we are not providing guidance at this time for 2013, if one assumed that revenue was flat in 2013 at the 2012 level, our operating income would be $80 million to $90 million higher than in 2012.

None of these actions are likely to have a negative impact on the resolution of our strategic alternatives review, which as I noted, is ongoing. James will now walk you through the results for the quarter and our outlook for Q4.

James M. Langrock

Thank you, Tim, and good morning. The operating environment on the quarter continued to be challenging. Most major economic indicators showed deterioration during the quarter, and unemployment in Europe remained high, with little improvement in the U.S. On a global basis, our clients continue to be conservative and restrict their recruitment spend. In this environment, we are focused on protecting earnings and cash flow.

Slide 1 summarizes the third quarter pro forma income statement from continuing operations. Throughout my prepared remarks, I will focus on results of continuing operations unless otherwise noted. EPS was $0.09. If we did not report ChinaHR as an asset held for sale, EPS would have been $0.04. EBITDA was $38 million. Bookings were $213 million, a decrease of 15% year-over-year and 9% sequentially. On a constant currency basis, bookings declined 12% year-over-year. Revenue was $222 million, a decline of 11% year-over-year and 2%, sequentially. On a constant currency basis, revenue decreased 7% year-over-year. Operating expense was $205 million, a 3% sequential decline. Currency favorably impacted operating expense by $8 million on a year-over-year basis. The net year-over-year impact of currency translation was a negative $1 million. Interest and Other was negative $1.5 million. Equity loss was $300,000.

Slide 2 shows the third quarter's pro forma adjustments, impairment charge and operating results related to our treatment of ChinaHR as being held for sale: $233 million loss from ChinaHR, of which $225 million is a noncash charge; $1.5 million in expense related to our review of strategic alternatives; $31 million tax benefit associated with the reversal of previously recorded tax liability.

Slide 3 shows Q3 operating expense trends. Salary and related was $101 million, a 17% year-over-year decline, reflecting the headcount reduction we accomplished in the first quarter. Marketing expense of $45 million in the quarter compares to $43 million last year. Office and general expense was $60 million.

Slide 4 reviews the quarter's segment performance. Bookings in North America were down 8% on both a year-over-year and sequential basis. EBITDA margin increased to 23%. In North America, the primary driver behind the bookings decline was the Government Solutions business, which faced tough year-over-year comparisons as a result of the resolution in 2011 budget impasse. The decrease in our Government business was partially offset by strong results in our Staffing and Newspaper verticals. We are extremely pleased to announce that after running a successful pilot of 6Sense technology and SeeMore, ManpowerGroup is moving forward with the product. Excluding the results of our Government business, bookings in North America were up slightly on a year-over-year basis. Bookings in Europe were down 20% on a constant currency basis, reflecting continuing economic weakness. All countries are discussed on a constant currency basis.

The EBITDA margin for Europe was 14.3%. In our largest markets, bookings in the U.K., including an additional booking in the U.K. Government business, were essentially flat compared to last year, while bookings in Germany and France were both down 23%. Bookings in Asia, excluding ChinaHR, declined 8% on a constant currency basis. Korea's bookings declined 12%, and India's bookings were essentially flat. EBITDA margin in Asia was 22%.

Slide 5 covers the key balance sheet and cash flow items. During the quarter, pro forma EBITDA was $38 million, GAAP EBITDA was $36 million. Capital expenditures were $14 million. We repurchased $6.7 million of stock or 1.1 million shares at an average price of $6.16. Total liquidity was $308 million.

Slide 6 provides our outlook for next quarter. Going forward, because of the continued uncertain environment and the actions we are announcing today, we're going to provide guidance only for EPS in the fourth quarter. We currently anticipate EPS to be in the range of $0.05 to $0.10 in the fourth quarter.

I would now like to turn the call back to Tim for some concluding comments.

Timothy T. Yates

Thank you, James. In summary, over the months ahead, you can expect for the following. We will continue to pursue our evaluation of strategic alternatives. Please recall in the question-and-answer period that I really can't make any additional comments on this at this time. We are focusing on investing and improving the profitability of our core geographic markets. At the time we initiated our investments in China and some of the developing markets, the outlook for the global economies and those markets was materially different than it is today. As a result, we are taking the necessary steps today to significantly reduce the operating losses in those markets to focus our resources on growing our core profitable markets. We are significantly increasing the run rate of operating income while increasing the firepower in those markets.

Operator, please open the line for questions.

Lori C. Chaitman

Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of William Bird of Lazard.

William G. Bird - Lazard Capital Markets LLC, Research Division

A couple questions. One, on the potential sale of ChinaHR, what would you anticipate using proceeds for? And then second, I was just wondering if you could clarify, beyond shrinking the losses at some of your developing markets businesses, what other options are on the table? Are there other assets in that group that are potentially for sale?

Timothy T. Yates

Thank you. I'll take that question. The -- you will see that we've taken a significant impairment charge on the assets in China, a noncash charge. Whatever proceeds result from the sale would go into -- there's no earmarked use for them. They would go into general cash and, at the right time, presumably be available for increasing our buyback or paying down debt. The other countries that are included, the other markets that are included in developing markets, the small group of assets which most likely will be joint ventured, that will not be a significant cash in or out. And Latin America would -- the business is at such an early stage that most likely that would not result in a sale.

Operator

Your next question comes from line of Tim McHugh of William Blair & Company.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Just had, I guess, a 2-part question. One is the -- can you talk about the impact of the sales? In the past, part of your value proposition always has been the global nature of the platform. So I understand it's going to have a significant positive impact on operating income in kind of the near term here. But longer term, how do you think about that and kind of the value proposition? And then secondly, can you give us more detail on where some of the cuts to the existing business, that $50 million of expense cuts, what -- where is that coming from?

Timothy T. Yates

Tim, I'll take the first part of the question, and James will take the second part of the question. Yes, there are 2 parts to the value proposition I think that we've talked about historically. One is the potential growth of the markets themselves, and really, 2 things have occurred: one is the outlook for the markets themselves are somewhat lower than when we initially made the investment, first; and secondly, the amount of investment required to develop them to the point where they're sufficiently profitable. We believe that this juncture, given the weakness in the other countries, would be better deployed for a quicker return in our core markets. So as tough as the decision is, we feel that, from a tradeoff point of view, this is the right decision to make. The second part of the equation is the amount of cross-border business we do as part of our global proposition. And that is an important factor in our overall sales approach to the market. But the lion's share of that cross-border business is done either within Europe or between Europe and North America. So there is some amount of customer business that would be impacted in the markets that we're getting out of, but not a significant amount.

James M. Langrock

And, Tim, as it relates to the additional restructuring, the cost reductions, as you're aware, we've made heavy investment in product and technology that allows us some flexibility. So we'll continue to shift the dollars into sales and marketing. So we're not going to -- there'll be no impact on quarter-carrying sales people, so it will be in the non-sales areas that we will make the cuts. And again, we have the flexibility with the heavy investments we made over the previous several years.

Timothy T. Yates

And, Tim, I just like to add a thought that I forgot to mention on your first question, which is that in a couple of the markets we are pursuing is part of the transaction, having a commercial arrangement, which would allow us to continue to offer access to the market that's affected. So that's not definitive at this point in time, but it's a possibility as part of the transactions we're considering.

Operator

Your next question comes from line of Jeff Silber of BMO Capital Markets.

Jeffrey M. Silber - BMO Capital Markets U.S.

I know you mentioned you're not going to talk about strategic alternatives, but you did mention in your comments that you did not think this restructuring would have any impact on those dialogues. Why do you think that?

Timothy T. Yates

Because we're close enough to the people we're talking to, to have an understanding of what they're interested in.

Jeffrey M. Silber - BMO Capital Markets U.S.

Okay, great, that's fair enough. I appreciate that. And just a quick follow-up. Bookings down in North America was a change from what we've seen. And I know you mentioned the Government Solutions business. But excluding that, it was still relatively flat, which implied a bit of a slowdown. What specifically has been happening there?

James M. Langrock

The bookings in -- first of all, it's up 1%, the bookings in North America. The driver this quarter was Government being down, as we've had said, is in North America. The Government business was strong in the first half of the year. The Careers business, certain segments are stronger than others this quarter. Staffing and Newspapers were stronger, but we're seeing here, as you know, the economy in North America is sluggish. We're seeing certain verticals, so we haven't really seen much of a change in the business. This quarter is really just the lumpiness in the Government business that brought it down 8%. So being up the 1% is somewhat in line, although we're seeing again the -- the one thing we are pleased about is that the -- our new products on a year-over-year basis grew 20%. They -- so they account nearly 20% of our bookings. So given this environment, we are seeing a good adoption of our new product portfolio: PRS, SeeMore and CAN, so we're very pleased with those results.

Operator

Your next question comes from line of Tobey Sommer of SunTrust.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

In your prepared remarks, you disclosed a couple of metrics, I think, about bookings and sales in the China market. Could you just break those out specifically since that's an asset that you're going to be going to the market with?

James M. Langrock

So you're looking for China specifically, Tobey?

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Yes, China specifically, whether you have bookings or growth rates or margin, whatever you've already disclosed, I was just hoping you could repeat it for me.

James M. Langrock

So bookings in Q3, Tobey, for China was $10 million, and revenue was $8.6 million. And give me one second, I'll give you year-to-date, Tobey. Our year-to-date bookings in China was $29.8 million, and revenue was $31.5 million year-to-date.

Operator

Your next question comes from the line of Glenn Greene of Oppenheimer.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

I just want to go back and clarify Tim's comments. So the $130 million cumulative savings, I mean, I guess, $85 million of that is the ChinaHR and the developed markets, and then there is incremental $50 million throughout the business. Is that sort of across Europe, the United States? And is it sort of headcount takeout? Maybe, I mean, just a little bit more clarity on that incremental $50 million?

Timothy T. Yates

So yes, James will give you that, Glenn.

James M. Langrock

So you're right, the $130 million, approximately $85 million of that is China and developing markets. And the incremental $50 million would be in -- predominantly in the U.S. and in Europe, the remaining of those cost takeouts, that's where that would be.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

That's predominantly headcount?

James M. Langrock

We're going through that now, and we'll have more detail on that, but there will be some headcount associated with that, yes.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Can I squeak in one more? The negative 15% bookings relative to the initial guide of flat to negative 10%, was the main disconnect that Government came in weaker?

James M. Langrock

Europe came in a little softer than we anticipated, clearly, due to the economic conditions. Career was a bit light. Again, that's being driven by the economic conditions. And yes, the -- being a little light was also driven by the Government business, and obviously, that business is lumpy.

Operator

[Operator Instructions] You do have a question from the line of Doug Arthur of Evercore.

Douglas M. Arthur - Evercore Partners Inc., Research Division

Just going back again to the restructuring, I mean, I assume when you're taking this action that you're assuming Europe will remain pretty tough for the foreseeable future, and I'm talking into '13. And then a follow-up on the Manpower arrangements. You feel this gives you sort of credibility in that product to expand it. I mean, what is the kind of leverage you're going to be able to gain from the Manpower adoption into related markets?

Timothy T. Yates

I'll take the first part. You'll recall that the $50 million that we're talking about is a combination of taking non-sales heads and other expense out, offset to some extent by increasing marketing in our core markets and, in particular, Europe. We believe that the economies may well recover. To some extent, they seem to be stabilizing, although it's a little hard given the political environment right now that -- to make any statements. But should things begin to recover like in having the ability to invest more in marketing in those markets, we would be well positioned. If things continue to be weak, we've taken a significant amount of cost out of the company to increase the profitability. So it -- I would not infer that because of the cost cut, that means we think Europe will be weak. Rather, we think it positions us in either scenario.

James M. Langrock

And, Doug, as it relates to the ManpowerGroup, as we said [ph] this morning, we think we have -- we're very pleased with the progress we're making on SeeMore and the pipeline that we're building. And we're very pleased with Manpower moving forward with the SeeMore technology, and we believe that's just the further validation of the technology in the marketplace.

Operator

And your final question do come -- does come from the line of Randle Reece of Avondale Partners.

Randle G. Reece - Avondale Partners, LLC, Research Division

When you talk about reinvesting some cost savings into sales and marketing, how much of that would be, say, a step-up in ongoing expense, such as adding people or infrastructure, versus just online marketing spend?

Timothy T. Yates

The substantial amount of it is for opportunistic online marketing, which, as you point out in your question, is the most flexible expense that we have. So we can regulate that up or down depending on how we see the market opportunity.

Randle G. Reece - Avondale Partners, LLC, Research Division

What -- in what ways do you think you're under-investing or you have opportunities to invest? I'm trying to get an idea of what would trigger that.

Timothy T. Yates

In a couple of markets where we have leadership positions, our traffic position is not what we would like it to be at the moment. So this money will allow us to fix that, and when combined with our product strengths, will allow us to be more competitive in those markets. I'm not saying we're not competitive, but we think it gives us an even stronger position.

Operator

And at this time, we have reached our allotted time for questions. Thank you for joining the Monster Worldwide Q3 Quarterly Earnings Results Conference Call. You may now disconnect.

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