|Shares Out. (in M):||92||P/E||15||6|
|Market Cap (in $M):||561||P/FCF||10||6|
|Net Debt (in $M):||155||EBIT||70||194|
Our search for portfolio additions often has us looking under the hood of companies that cause the typical investor to physically recoil at the mere mention of the name. If coverage from the sell-side is lackadaisical and the shares are all but forgotten, even better. That is why we began flipping through Monster’s recent filings. What we found in MWW is a well-known career search property with industry tailwinds, strong cash flows, internal margin expansion levers, and a compelling risk/reward. What attracted us even more to the story was the evolutionary strategy that management has undertaken over the last several quarters. While the specter of owning a stock that will yield 15-20% fully-taxed diluted EPS ($260m NOL notwithstanding) in the next 12-18 months is compelling by itself, we like the “going exponential” facet of the story, as we explain below. [note: cfavenger posted a good report on MWW a little over two years ago. Please see that write-up for additional detail on the story]
Monster Worldwide got its start by taking newspaper job classifieds and putting them on-line. It was a first-mover and instrumental in driving the shift from print to digital. In the process, Monster became a recognizable and trusted brand that to this day garners 23m monthly uniques (35m globally), second only to indeed.com in the job website category.
Monster’s business expanded rapidly from inception and performance ebbed and flowed with the economic tide. It was no surprise then when Monster was heavily impacted by the strongest recessionary period of our era with the unemployment rate spiking and job openings dropping to historic lows (and remaining there for years). What took management ostensibly by surprise was the changing competitive landscape with hundreds of competitive upstarts and multiple new/viable competing business models (social, aggregation, passive seekers, etc.)
Monster didn’t miss one big thing, rather it seemingly missed numerous things big and small. The entire space was impacted by LinkedIn during the downturn because it offered its services for free. Monster’s major competitors began innovating - Dice Holdings was able to find a balance by continuing to add value in distinct verticals; Careerbuilder morphed its business by adding additional products, services, and verticalization; Indeed layered resumes on top of job aggregation; etc. Monster failed to innovate and shareholders learned the hard way that being the first and the biggest were not enough to ensure survival. Nonetheless, Monster’s incoming management team (lifted from MOT/SBL) followed the traditional immune response of defending the status quo and trying to become even larger.
Despite standing on the edge of a recessionary cliff, Monster set about acquiring half a $billion worth of melting ice cubes in an effort to solidify its competitive position and expand to new markets. Remember hotjobs.com? Monster also bought a Chinese job site, JV’d its way to an Australian presence, launched Brazil, and tucked-in several other properties/technologies. While management swung for the fences with shareholder capital, MWW’s former CEO enjoyed lavish and apparently undeserved compensation, its COO was charged by the SEC for options back-dating, and the investment community lost faith. Market share was also on the decline; by October 2010, Indeed.com had surpassed Monster’s web traffic and LinkedIn was offering up nearly 100m global members in an entirely new way for employers to engage prospective employees.
Monster was put on the block in 2012 but found no takers; not surprising as the organization was in the middle of integrating sizable acquisitions and getting clobbered by competition. Following the failed effort to monetize the Company, management began “rationalizing” many of the non-core assets it had purchased and (to their credit) began repurchasing what would total a quarter of the Company’s stock. Operationally, MWW’s flailing CEO and outmoded thinking rendered it unable to recover along with the US employment market - Monster's core US career revenue declined 10% between 2011 and FYE2014. International was even worse - a combination of shaky disparate economies and fierce competition drove International sales down more than 30% and turned the international segment from a positive contributor to a money loser.
Several years into fighting sharp, modern competitors with a newspaper classifieds model, management seemingly woke up to the reality that MWW could not compete successfully if it continued along its then current trajectory. In a special presentation to shareholders in May 2014, company leaders outlined a strategic plan to rescue Monster from irrelevance based on an entirely new view of the world and Monster’s place within it. In fact, management could be accused of having copied each element of the plan from the award winning book Exponential Organizations if not for the fact that the book hadn’t yet been published.
From Linear to Exponential
In his book Exponential Organizations, Salim Ismail crystallizes a set of elements present in “exponential” organizations (ExO) that allow essentially two guys in a garage to quickly build a company that can rapidly compete with / surpass incumbent “linear” behemoths in a matter of just a few years. In essence, trying to explain how Uber, AirBnb, Waze, etc. could exist.
According to Ismail, an ExO begins by articulating a Massively Transformative Purpose (MTP) which is basically an audacious solution to a wide-ranging problem that elicits the support of internal and external constituents [e.g. Google’s “organizing the world’s information”]. Then, rather than try to own and vertically integrate everything, an ExO leverages external infrastructure, resources, and other assets; it automates customer facing activities and exploits the large amounts of data it generates to add additional value to existing and new customers.
As it relates to Monster
Monster’s MTP, coined in May 2014, is “All the People, All the Jobs.”
The career advertising / search market has experienced increasing complexity from the perspectives of both job seekers and employers. With 30k job sites in the US addressing the same audience with varying pricing models and market segments, the landscape is highly fragmented. Recruiters need to decide among thousands of places to advertise positions. As well, job seekers need to visit numerous resources to discover all of the available jobs in which he or she would potentially be interested. Neither can be assured that they’re seeing everything. Moreover, resume databases have been equally fractured with no single resource ensuring a comprehensive candidate search. Employers have to choose among databases, thereby missing out on a good chunk of the target audience. In addition, the social web creates an entirely new way in which employers can uncover and communicate directly with talent, causing recruiters to bounce between even more databases and networks. Monster’s defined its MTP to address this growing complexity.
Monster’s strategy is to add massive scale to the business by collecting and organizing the entire universe of available jobs through multiple strategies so that candidates have all access to “all the jobs” with a trusted brand. Further, and in addition to its extensive resume database, Monster is collecting and organizing social profiles on the web so that employers have access to “all the people,” again with a trusted brand. Monster has also developed a hosted platform to manage the entire process. The strategy is organized along three strategic pillars:
I. Monster Reach (Jobs)
Scale: Massive expansion of jobs through collecting content at scale from both traditional and social sources. It includes jobs sourced directly from customers, collected across other career sites, and collected from social platforms. This capability came with the acquisition of Gozaik and represents an exponential increase in the total job hosting volume, offering one place for job seekers to find the right positions.
More jobs enable job seekers to find Monster. A candidate can start with a search on Google and end up on a relevant page of jobs powered by Monster with vertical job content and editorial (initially in tech, health care, and retail).
More jobs allows Monster to bring insight into company hiring trends that can drive smart customer acquisition. Once Monster can see all of a company’s jobs on its network, it can deliver a few candidates to that company for free, and then offer a significantly higher flow if they become a paying customer.
Indeed.com (private) has built its business on aggregating job listings from disparate sources whereas Monster had always gone direct to clients with a duration-based job advertising model.
Performance-Based Pricing: Monster previously offered only a duration-based model. They’re now offering both duration pay-per-click (PPC) ad models for multiple consumption types. With PPC, Monster can serve literally millions of new customers that want to price this way.
More jobs increases each visitor’s engagement and repeat visits. This traffic enables a pay-for-performance model, introducing new price points and allowing Monster to penetrate price conscious customers (e.g. long-tail of 19m SMBs) that had previously been priced out of the Company’s service.
Cragislist.com has been a go-to choice for SMBs looking to collect a handful of resumes to fill a single position at a low price point. With Monster coming into the space with its PPC offering, SMBs can now pay roughly the same amount but generate interest from dozens of candidates.
Monster’s recent roll-out of Twitter Cards allows customers to run automatic distribution of jobs to their respective followers, as well as targeted jobs to individuals on social platforms.
II. Monster Connections (Candidates)
Scale: Massive expansion of the candidates that a customer can access from Monster and now social profiles.
Uncovering “Passive” seekers – people are leaving bits and pieces of information about themselves all over the Internet (job sites, articles, patent filings, etc.) Monster is combining data points with professional summaries on social profiles into a single profile to give employers a powerful view of a candidate.
In addition, a recruiter would traditionally have had access to 25m searchable resumes on Monster. MWW has millions more users with resumes set to private in order to selectively apply for positions. Monster can leverage these through its communication tools (below)
Communication: Introducing the ability to directly communicate and engage with the right candidates, no matter the origination.
Monster introduced a messaging platform that allows recruiters to communicate with passive seekers allowing those seekers to keep their identities private while still seeing the opportunities. By doing this, Monster unlocked an additional 25m resumes that are set to private.
Monster’s acquisition of TalentBin allows recruiters to search for, and communicate with, candidates sourced from social platforms increasing the pool by more than 100 million candidates.
III. Monster Solutions (Software)
Cloud-based talent management leveraging success in the government sector to expand Monster’s commercial base.
Providing a platform for end-to-end sourcing or integrating components into a company’s existing work flows. MWW helps solve the complexity of siloed point solutions from accessing candidates, running automated email campaigns, tracking applicants, and storing information, to managing work flow, and offering it all on a user’s platform of choice (e.g. mobile). In addition, the pipelines of most point solutions have to be filled with candidates from other sources.
Ultimately, “All the People, All the Jobs” is going after the entire space with a recognizable brand. Indeed is best known for job aggregation, Dice Holdings is best known for drilling down into specialized verticals, Craigslist has garnered a significant share of SMBs looking to fill one-off positions, etc.
SCALE and IDEAS
Ismail’s framework mashes external and internal characteristics of an ExO into two tidy acronyms: SCALE and IDEAS. The varying elements of Monster’s strategy (most of them new) are organized along the lines of SCALE and IDEAS as defined.
Results of Monster’s Transition Are Promising
Monster’s strategy was laid out in May of 2014. On 1 July 2014, Monster began the US roll out of Phase I of its new product set. This initial phase saw the introduction of MWW’s integrated messaging platform, Twitter Cards, social profiles, and niche sites focused on high-value audiences. The release of core international markets followed three months later. In January 2015, Monster launched the second phase of its social ad product, expanding social targeting and distribution.
There is a ~2 quarter lag between bookings and revenue recognition. Internal training on new products began in July 2014 and roll-outs were staggered throughout the last few quarters. Thus, we haven’t yet seen the impact of the new strategy in the headline numbers. There are however, a handful of metrics that we’re able to track as leading indicators of how things are progressing:
Monster had been experiencing negative bookings and revenue trends for several years. In 2Q14 however, Monster stabilized its core North American bookings, and then began to grow. In the last three quarters, core North American Careers bookings grew 7%, 8%, and 6%, respectively. New products represent about half the growth in bookings. We expect revenue growth to follow. [Monster has also recently stabilized European bookings on a constant currency basis; international is 1/3 of revenue)
In addition, prior to the Monster reach initiative, Monster’s job content averaged 250k job advertisements in any given month. Monster’s current steady-state average is well over four million jobs per month, a 16-fold increase.
Further, 1Q15 saw a 34% y/y increase in the number of recruiters engaging on the platform, and they’re staying 60% longer. Mobile engagement grew substantially going from 27% of all seeker interactions a year ago to 43%, and more than 90% of candidates’ social job transactions take place on a mobile device.
Finally, recent management commentary is that there installations of its cloud-based platform have doubled. This business is a sleeper asset as per-seat revenue is in the tens of $thousands annually, margins are above corporate average, and it has plenty of runway for growth.
MWW’s Stock Represents an Attractive Risk/Reward
Strong Cash Flow: despite the issues Monster has faced, it hasn’t reported a negative EBITDA year, and its operations haven’t burned cash in a single year, since 2002. Aside from 2013 and 2009 during which working capital was an aggregate $150m drag, MWW hasn’t had negative FCF in the last decade despite significant capital investment. In the TTM, even with cash used for CEO severance and announced restructurings, MWW still generated $54m of FCF (10% yield), and management has guided to improvement going forward.
Margin Expansion: Monster’s “Reallocate to Accelerate” program will reduce expenses by $10m per quarter ($40m or $0.43 per share per annum) by 4Q15. Based on cost cuts and non-“heroic” revenue assumptions, management expects to achieve 30-35% EBITDA margins by 2Q16. In contrast, the street has MWW doing 20% EBITDA margins in 2016 on higher revenue, which means analysts don’t believe the cost cuts(???). Analysis of sell-side projections indicates the average analyst expects FY16 expenses to be only $7m lower than FY15. While I’m typically skeptical of dramatic margin expansion stories, Monster’s primary expansion lever is within management’s control.
Street Expectations: If management is able to achieve its targets, consensus numbers will have to increase. The magnitude of the guidance / consensus gap is striking. The sell-side expects Monster to do $0.61 EPS in 2016. If MWW grows revenue in-line with trailing bookings and generates its targeted EBITDA margin, the Company will generate more than $1.30 per share fully-taxed (despite NOL). I don’t care what one thinks of Monster Worldwide, 4.7x earnings is difficult to ignore. At Dice Holding’s (DHX) multiple of 20x, Monster’s stock price would be $20+ assuming dilution from the $140m convert (i.e. $1.30 * 20x doesn't equal $20), 200%+ above today. [Note: we're not taking management's guidance at face value, but even achieving half of management's targets would result in a dramatically higher stock price]
Iannuzi Is Gone, Capital Allocation Improved: As cfavenger aptly stated in the messages section on his 2013 VIC writeup, the new CEO doesn't sound like he's brain dead and is a welcome improvement from the prior CEO. MWW has repurchased 25% of the Company since 2Q13. Management has recently noted that “…we have no plans for acquisitions, we have no plans which would dilute the stock. Other than for new hires, we have not made any broad-based equity grants and we’ll not do so – and we’ll do so only as we achieve our current EBITDA and revenue objectives. And…we will continue to review our non-core assets.”
Industry Tailwinds: the number of job openings in the United States as measured by the JOLTS survey has spiked in recent quarters to the highest it has ever been, eclipsing the turn-of-the-century tech bubble, and handily surpassing the mid-decade housing bubble. Also, commentary from the industry is that pricing has stabilized given LNKD's transition from free to paid.
Although the international segment has stabilized on a constant currency basis, if the Euro remains weak it could be a y/y headwind in the next few quarters. Also, a further deterioration of the Eurozone economies would put pressure on this segment which represents 1/3 of revenue.
Monster has a $140m convert with a $5.33 conversion price, representing potential significant dilution. A couple of things to note, however: 1) the notes cannot convert before 2019 unless the price is 130% above the conversion price or $6.92; 2) MWW can only issue up to 19.99% of the stock upon conversion without shareholder vote, with the rest being paid in cash; 3) MWW entered into a capped call transaction to reduce potential dilution and / or offset cash payments it would have to make. The cap price is $7.035. If we model MWW earning 32.5% EBITDA margins on $750m of 2016 revenue, and then subtract $50m of D&A, $12m of cash interest, and tax the result at 35%, we end up with $115m net income, give or take depending on minority interest for the Korean JV. It is on this $115m that we contemplate a 20x multiple (similar to DHX) to get to a market value of $2.3b, and then back into the number of shares that would be outstanding assuming dilution. Our analysis suggests that MWW would have 114m shares outstanding putting the price per share at $20.
THIS REPORT IS NEITHER A RECOMMENDATION TO PURCHASE OR SELL ANY SECURITIES MENTIONED. THE AUTHORS MAY OR MAY NOT HAVE A POSITION IN ANY SECURITY DISCUSSED IN THIS REPORT. FURTHER, THE AUTHORS MAY BUY OR SELL SHARES IN ANY COMPANY MENTIONED, AT ANY TIME, WITHOUT NOTICE. THE INFORMATION CONTAINED HEREIN IS BELIEVED TO BE CORRECT AS OF THE POSTING DATE. READERS SHOULD CONDUCT THEIR OWN VERIFICATION OF ANY INFORMATION OR ANALYSES CONTAINED IN THIS REPORT. THE AUTHORS UNDERTAKE NO OBLIGATION TO UPDATE THIS REPORT BASED ON ANY FUTURE EVENTS OR INFORMATION.
3Q15 - Revenue growth will inflect to positive for the first time in recent history.
4Q15 - Cost cuts complete at a run-rate of $10m per quarter.
1H16 - Non-herioc revenue growth coupled with expense reductions result in margins higher than street ests. Consensus would need to be revised upward, revealing an undemanding valuation.