Downgrading Monster Worldwide on Deteriorating Employment Outlook

Excerpts from Gilford Securities analyst Ashish R. Thadhani's recent note to clients on Monster Worldwide, Inc. (MNST):

Downgrading Rating on Deteriorating Economic Outlook

• Investment Conclusion. Based on a combination of high operating leverage and intensifying macro headwinds – evident from trends across the North American Careers segment (one-half of total revenue), Monster Employment Index, deferred revenue and various external indicators (refer to page 3) – we are sharply reducing our estimates as follows: 2008 non-GAAP diluted EPS to $1.50 on revenue of $1.351 billion (flat YoY growth) from $1.75 on revenue of $1.546 billion; and 2009 non-GAAP diluted EPS to $1.70 on revenue of $1.415 billion (5% YoY growth) from $2.10 on revenue of $1.711 billion. Our non-GAAP estimates exclude employee severance, stock option investigation, security breach and restructuring charges – and imply 2%/9% compound revenue/EPS growth in 2007-09.

  We are downgrading our rating from Buy to Hold and withdrawing our target price. MNST shares could come under near-term pressure due to heavy 1Q08 brand re-launch expenses, as well as a decision to suspend guidance (and segment reporting in future periods). Nonetheless, we believe that Monster remains 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. Separately, we note that the implicit $360-405 million valuation to be placed on ChinaHR.com in mid-2008 has positive implications for market-leader 51job (JOBS-Buy).

• 4Q07 Results. Non-GAAP diluted EPS of $0.41 vs. $0.37 a year ago on revenue of $354.0 million (19% YoY growth) beat our $0.38 estimate on revenue of $358.2 million. Operating income comfortably surpassed our expectation at Careers International (40% of total revenue) but underperformed in the Careers North America and Internet Advertising segments. Management acknowledged challenging conditions in the domestic employment market, including curtailed hiring in the Financial Services and SME segments.
• Takeaways. Results reflect 14% YoY organic growth (vs. 15% in 3Q07), a 21.0% non-GAAP operating margin vs. 20.6% in 3Q07 and 23.9% a year ago, and 18% YoY growth in deferred revenue (vs. 25% in 3Q07 and 36% a year ago). Revenue growth slowed further at Careers North America (+3% YoY vs. +5% in the immediately prior period) and the Internet Advertising segment (-8% vs. -3%) while staying robust at Careers International (+59% vs. +57%) -- due to brand/infrastructure investments and improved sales productivity but with the U.K. showing early signs of weakness. Operating margin on a sequential basis improved materially at Careers International (+880 bps) but declined in the Careers North America (-140 bps) and Internet Advertising segments (-740 bps). The performance of Careers North America has been impacted by cyclical and competitive factors, as well as sales force turnover. Company-wide headcount was essentially flat QoQ at 5,146 and implementation of the restructuring plan could result in a ~10% decline through early-2008.

  Monster generated CFFO of $64.2 million (or $0.51 per share) in the quarter. Key outflows comprised capital expenditures ($16.2 million) and common stock repurchases ($97.8 million for 2.8 million shares at an average price of ~$35 each). Monster exited the quarter with net cash of $445.6 million ($3.50 per share), down from $502.8 million on September 30.

Noteworthy developments are summarized below:

• Non-farm payrolls fell by 17K in January – the first drop since August 2003. Meanwhile, the U.S. Monster Employment Index slipped 5% QoQ and YoY.
• The Board augmented its existing share repurchase authorization by $100 million to $450 million. In 2007, Monster repurchased 7.3 million shares of common stock for $262.5 million – or ~$36 each – and it expects to remain active with $253 million still available under the program.
• In January, former Chairman/CEO Andrew McKelvey agreed to convert his 4.8 million shares of super-voting stock into ordinary shares under a settlement agreement – thereby reducing his voting power from 31% to 7% – in addition to paying Monster $8 million.
• Also in January, Monster announced the acquisition of Affinity Labs for $61 million in cash. Founded in 2006, Affinity is a development stage company that operates a network of professional and vocational online communities. Monster expects that this addition will enhance its content offering to the law enforcement, healthcare, education, government, technology and other verticals.
• 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. Importantly, half of this amount or $80 million will be invested back into the business to revitalize growth by way of new product development, 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 in 2008.
• Since 4Q06, Monster lost its founder/CEO, CFO and Presidents of the largest business segment and global sales organization. In June, CFO Lanny Baker was replaced by Mr. Timothy Yates, former CFO of Symbol Technologies -- which was acquired by Motorola in January 2007. In April 2007, Monster appointed Mr. Sal Iannuzzi (53) to the positions of Chairman and CEO. He was a member of the Board since July 2006 and had previously served as CEO of Symbol.
• Employee severance, stock option investigation, security breach and restructuring expenses have amounted to $78.9 million or $0.39 per share since 2Q06. In 2006, Monster admitted to intentional backdating of stock option grants by former officers. Founder and former Chairman/CEO Andrew McKelvey resigned from the board in October 2006 after declining to cooperate with an internal committee. The company restated cumulative 1997-2005 net income lower by $271.9 million to reflect additional non-cash stock based compensation. This restatement did not impact 2006 results. Monster is compliant with SEC filing and NASDAQ listing requirements.

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.

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Comments

[bk329]

Excellent analysis. This stock remains a terrible investment at current levels, unless you believe take-over is imminent. Current management professional, but lack insight - and pig-headed enough to not be looking for help from the right parties. US interests (Google, AOL) should be more interested in the main advertising game, not classifieds. Others (News? WPO?) are potential brokers. Non-US interests in this sector are quite strong, but financing a likely problem for all but those tied to recruiters. Most likely scenario is uninformed management continues to lose ground in US, be lucky offshore, and takeover does not take place. Stock to drift to ~$20 unless institutional investors get active, and approach the less-obvious owner-managers of this business. Institutional holders are among the smartest on the block and globally - why don't they act?

[Long-ShortGuy]

But you have to wonder how much of this is priced in already. Let's be honest -- a prediction of falling employment isn't exactly a surprise.

[mp0331]

This stock has been hit from all sides for many reasons and for many months. I don't think that the downturn was priced in but I do feel that the emotional toll of the option scandal and management changes hit the stock much harder than warranted. I actually believe that MNST is a good VALUE because of its US market position, revenue growth under difficult conditions, mid-double-digit international growth and investment in ChinaHR (which is TREMENDOUSLY more valuable today.) If you add in MNST's new and very imaginative marketing, I see increased growth AND share.

[bk329]

Actually you really have to question the amount being spent on ChinaHR. ChinaHR seems a long way from turning a profit, and is well south of key competitor 51job on all available operating metrics. Monster is placing a higher value on their #2 or #3 player ChinaHR than the market places on publicly listed #1 player 51job. Outside-in, looks like another crazy, value destroying move. The leaders in thinking in this space are well known to investors - I would think its time the major investors made themselves heard.

[mp0331]

It's not my argument but ChinaHR is CLEARLY #2 and climbing.

Published：2007-07-30 13:40:58
【CNETNews.com.cn】 Analysys International says in its recently released report China Online Recruitment Market Quarterly Tracker Q2 2007, that China entire online recruitment market size has reached RMB 216.36 million in the second quarter of 2007, increasing 7.6% quarter-on-quarter and 34% year-on-year.

According to the report of Analysys International, the recruitment websites with services oriented nationwide and province-wide accounted for 74.6% and 21% of the total revenue of China online recruitment market respectively.

51job led the China online recruitment market with the market share of 30%, followed by ChinaHR and Zhaopin with the market share of 26% and 15%.

[bk329]

ChinaHR revenue share is questionable as an indicator of market strength. Owner/managers deal with Monster, whereby Monster would buy remainder of company "based upon a multiple of ChinaHR’s 2007 revenue audited in accordance with U.S. GAAP. This multiple was determined when Monster made its initial investment in ChinaHR in early 2005", incented the incumbent owner-managers to "buy" revenue over the previous year. The information released by Monster is opaque on this point, which suggest that ChinaHR numbers are "puffed up", and likely distance to 51job is substantial - if Monster released its ChinaHR numbers after the deal is done, they could readily dispel this view (an unlikely outcome give Monster no longer provides guidance).