A look behind Monster.com's sudden slump

It's quite a turnabout for Monster.com, a leading online job site and product of 1999's booming job market. Although Monster.com held out as long as it could in the face of a weakening economy, it now has to pare back amid slowing growth.

Monster.com is cutting about 10 percent of its work force and will soon have to integrate HotJobs.com, an acquisition that may close in the current quarter. It is also moving faster to make new ventures--such as Monster.com Europe and Monstermoving.com--profitable.

"Monster.com's problems are cyclical, and this is its first down cycle," said Edward Atorino, an analyst at Dresdner Kleinwort Wasserstein.

Although analysts remain confident in Monster.com's long-term prospects, they do anticipate tough quarters ahead for the online recruiting site as corporations pull back on hiring.

TMP Worldwide, Monster.com's parent company, issued a profit warning last week, and analysts were surprised that the company's interactive business slumped so quickly.

TMP, which also runs a host of offline human resources businesses, largely blamed a recruiting slowdown after the Sept. 11 terrorist attacks and said revenue for its interactive division, largely Monster.com, would be below estimates. TMP projected interactive revenue to be in the range of $655 million to $675 million for 2001, $60 million below estimates but up about 44 percent from a year ago.

Revenue in the third quarter will be roughly flat and then fall in the fourth quarter, the company forecast. Sales are anticipated to be flat in the first and second quarters of 2002.

"We see a recovery in the second half of next year," said TMP CEO Andrew J. McKelvey on a conference call with analysts. "Although unemployment is rising, it is still at historically low levels."

Behind the slowdown
To understand why Monster.com's sales growth deteriorated so quickly, it helps to look at how it gets paid.

TMP and Monster.com make money through charging corporations commissions and fees related to various services such as combing the company's database. Monster.com also garners some advertising revenue, but analysts say it's slight.

That profit model means that Monster.com could see a huge influx of people looking for a job, but not benefit because corporations aren't hiring.

In fact, it's just the opposite. The tech sector, a hiring haven in recent years, has seen a slew of layoff announcements from tech leaders such as Cisco Systems and Sun Microsystems. The U.S. unemployment rate is up to 4.9 percent, and many economists are talking about a 6 percent rate in the near future because of the Sept. 11 terrorist attacks.

Atorino said it is likely that corporations, which were cutting back dramatically on hiring anyway, "jammed on the brakes" and canceled contracts with Monster.com following the attacks on the World Trade Center and the Pentagon.

Monster.com had managed to increase sales in the second quarter 7.4 percent from the first quarter largely because it had long-term contracts with corporations. Now that those contracts are up, Monster.com may have problems renewing them.

"A lot of these contracts are up or under rolling renewals," said Kelly Flynn, an analyst at UBS Warburg.

Monster.com and TMP Interactive CEO Jeff Taylor said that the company hasn't altered its pricing structure to compensate for the slowdown. "It is not an issue of pricing; it's an issue of demand right now," Taylor said.

Competition? What competition?
One reason Taylor hasn't had to alter its pricing for Monster.com's services may be because it's the leader and is buying its main rival.

In June, Monster.com acquired HotJobs.com in a stock deal valued at $460 million at the time. Meanwhile, TMP has acquired a slew of companies this year.

The HotJobs.com deal price is fixed at 0.2195 shares of TMP and is now valued at about half of its June price. Nevertheless, the deal, which is being reviewed by the Federal Trade Commission, is expected to close in late December or early 2002.

Once the deal closes, Monster.com's primary rival will be CareerBuilder, the online job listing effort of newspaper publishers Tribune and Knight Ridder. CareerBuilder bought HeadHunter.net in August.

Monster.com, which reported a second-quarter operating profit of $36.1 million on sales of $142.2 million, expects the HotJobs.com deal to add to earnings for TMP, but analysts aren't so sure.

"This HotJobs deal could prove dilutive to 2002 earnings if an economic recovery is postponed or if companies prefer to rehire laid-off workers rather than advertise for new ones," said John Mahoney, an analyst with Raymond James Associates.

Long-term outlook
While acknowledging that Monster.com could be dealing with its first recession, analysts expect it to rebound once the economy turns.

"Even though Monster.com doesn't have much of a history, the online adoption curve is steep," Flynn said. "Companies are using the Internet a lot more for recruiting."

Indeed, Taylor said there are still pockets of the economy hiring. "Companies don't stop hiring in a downturn; they just slow down," he said.

Taylor's remedy is to mine Monster.com's database to highlight areas for the company to target. Key areas he noted are health care and information technology and regions such as the Southeast, where companies are still hiring.

"It's like a puzzle," he said. "As soon as we find out who's hiring, that's what we'll target."