Tuesday, March 18, 2008

This Guidance is not Guidance

MNST, which suddenly saw the light at the end of last year and decided it would no longer issue guidance, "corrected" analysts today on what number they should plug into their models for Q1 operating expenses. This "correction" should have the result of reducing the non-GAAP EPS by about half of what analysts currently projected for the quarter. Below are a rough snapshot of consensus estimates before the announcement.

Revenue: $369

Non-GAAP OPEX: $300

EBITDA: $85

EBIT: $52

Interest Inc: $6

EBT: $58

Net Income: $38

EPS: $.30

And now my own estimates, using this announcement as guidance:

Revenue: $368

EBITDA: $54

EBIT: $37

EPS: $.19

These are pro-forma estimates, which means they don't include one-time charges. Given the decline in business and the ongoing restructuring, I would not be surprised if actual GAAP earnings were to turn negative.

The important takeaway from this announcement is that we are finally starting to see the consequences of heavy investment in a business with declining growth. EBIT margins should decline by over half YoY. If this trend continues, as I expect it will, the affect on MNST's operating results, and share price, should be severe.

I also think this announcement speaks a lot to management credibility. If there was any doubt that management was withholding guidance on principle, those doubts should be put to rest. Their operating margin guidance (another form of guidance that apparently doesn't count) is now basically unattainable unless trends reverse themselves drastically in the back half of the year. Expect this to be the first of many "corrections" to come.

Author is short MNST. Above writing should not be construed as "guidance" of any kind. Do you own DD.

44 comments:

bigboss said...

good call on MNST man, one thing that has always kept me from shorting this trainwreck is that this company seems like such a good bolt on acquistion for any of the newspaper/media companies... any thoughts on why youre comfortable on that?

Research Intensive Investing said...

Thanks for the comment. Buyout talk has floated around MNST for a while, but I think the odds are relatively unlikely. Most the newspaper companies are part of the group that owns a portion of CareerBuilder, MNST's biggest competitor. MSFT, who I would be most worried about buying MNST, is also part of that group, so the odds there are relatively low. GOOG would not buy them b/c it does not fit in with their typical sort of acquisition. Main value of MNST is not its tech but its reach. GOOG has great online reach, so they'd be better off buying one of the next gen online platforms (e.g. Simply hired) and leverage their own traffic, rather than paying a premium for MNST's.

NWS is a possibility. That said, with MNST's numbers trending down and all the macro concerns, I think it's unlikely a buyer will step in. The dual class structure makes this one difficult to go after, too. Also, management has a huge incentive to stay public: due to the cyclical business swings, they'll get options priced ultra cheap once the cycle plays out. When the stock and business recover eventual, after the cycle turns, they'll make a killing on those options. They can also make a very compelling argument that any offer is lowballing, given where the stock was trading previously. I don't think they'd be able to agree on price with a potential suitor.

Andrew said...

Hi Research Intensive Investing,

I'm emailing you in regards to an email I sent to you last month about a partnership, have you had a chance to think about it?

If you have any questions or would more information, please advise me and we can go from there.

Kind Regards,
Andrew Knight

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