51job, Inc.
Q1 2018 Earnings Call Transcript

Published: 5 May 2018

[Operator:]

Good day, and welcome to the 51job First Quarter 2018 Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] I would now like to turn the conference over to Linda Chien, Vice President and Head of Investor Relations. Please go ahead.

[Linda Chien:]

Thank you, Claudia, and thank you all for attending this teleconference to discuss unaudited financial results for the first quarter ended March 31, 2018. With me for today’s call are Rick Yan, President and Chief Executive Officer; and Kathleen Chien, Chief Operating Officer and acting Chief Financial Officer. A press release containing first quarter 2018 results was issued earlier today, and a copy may be obtained through our website at ir.51job.com. Before we begin, please note that today’s discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities and Litigation Reform Act of 1995. All forward-looking statements are based upon management’s expectations at the time of the statement and involve inherent risks and uncertainties that may cause actual results to differ materially. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the U.S. Securities and Exchange Commission, including our annual report on Form 20-F. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements, except as required under applicable law. Also, I would like to remind you that during the course of this call, we will discuss non-GAAP measures. Please refer to the press release for a description of these non-GAAP measures and their significance to management in evaluating the company’s performance. Reconciliations to the most directly comparable GAAP financial measures are provided where available in the tables appended to the press release. This conference call is being recorded and broadcasted on the Internet, and a replay will be available through our website at ir.51job.com. I’ll turn the call over to Rick.

[Rick Yan:]

Thank you, Linda, and welcome to today’s call. I will begin with a review of the first quarter, followed by Kathleen with a detailed discussion of our financial results and our guidance for the second quarter of 2018. Finally, we’ll open the call to your questions. We are very pleased to begin the year confidently as we carry strong momentum in sales execution and operating efficiency into 2018. Total revenues exceeded our forecast and grew 33% to RMB 811 million in the first quarter. This better-than-expected top line, plus economies of scale and scope at the core of our business model, resulted in healthy profitability, with non-GAAP EPS coming in at RMB 3.76. Our online business maintains solid and consistent performance as revenues increased 30% in the first quarter. In line with our high-quality growth strategy, we saw a 26% improvement in ARPU, led by continued upselling efforts that moved customers up the right cart and drove greater spending on multiple online services. In addition, this February, we adjusted our unit prices for our job posting and resume downloads, essentially raising the bar for new users and increasing the pricing for basic packages that are primarily purchased by less sophisticated employers. In absolute terms, the unit price increases were modest, ranging from CNY 10 to CNY 20 or more for a listing or download. As such, our decision for these adjustments was strategically motivated, aimed at helping us better evaluate customer potential and reallocate sales attention and resources accordingly. In fact, we are reassessing the number of customers that each account representative can effectively cover with the belief that reducing the client list can actually deepen account penetration and increase overall customer spend. In the near term, while we work through the new pricing and establish a higher entry price point for new customers, we expect employer count growth to moderate this year, and ARPU improvement will be the main driver for online revenue growth in 2018. We believe this upgrade and recalibration of the customer base is also important for the future realization and monetization of our product portfolio. As we acquire, develop and introduce more innovative solutions, we see an opportunity to elevate product acceptance and effect faster product adoption with an audience of more professional employers in HR going forward. In the other HR services area, demand was extremely robust across the board, and revenue growth accelerated to 40% in the first quarter. Our sales team continued to successfully cross-promote these value-added services that can enhance recruitment effectiveness, improve employee productivity and alleviate day-to-day HR administrative burden. With the tremendous progress we have made in rolling out assessment services over the past two years, these scientifically based tests and tools have become not only a natural complement but a critical component of the hiring process among our customers. To complete these hard-to-fill positions and retain top talent, employers are increasingly turning to us for assistance with placement projects, training programs and compensation analysis. Our BPO business is also on a better growth trajectory with more worker managed in our system, and we move ahead with the goal to step up customer usage. We believe that our unmatched capabilities to fulfill – to fully serve employers in any and every way continue to distinguish us from others as we efficiently tap into more assets of the HR department and its budget. Turning now to our current market assessment, we feel hiring sentiment is positive and favorable in 2018. In prior years, we are carrying out their recruitment plans, pricing going into competition among themselves for key talent. We are optimistic about market demand and economic conditions, and we will push ahead with our action plan for the year. two decades in, 51job remains the pioneer and leader on the forefront of our industry. Our mission has stayed the same

[Kathleen Chien:]

Thank you, Rick. In my following presentation, please be aware that all financial numbers are in our reporting currency of the Chinese renminbi, unless otherwise stated. Also, please note that all growth rates are on a year-over-year basis as compared with the corresponding period in 2017 unless otherwise indicated. Our results for the first quarter of 2018 includes a full consolidation of Lagou to our financial statement. As Lagou’s contribution to 51job’s overall results was not significant, we will not be discussing or providing separate details for Lagou. Total revenues for the first quarter of 2018 were CNY 811 million, representing a 33% increase. Our online revenues for the first quarter grew 30% to CNY 548 million due to a significant uplift in the average revenue per customer and a modest increase in customer account. Through upselling by the sales force as well as some price hikes for certain online products, our online ARPU rose 26% overall. We estimate the number of unique employers increased 4% to 375,000 companies compared with 362,000 in the year-ago period. In line with our strategic focus to improve the distribution of sales resources to the higher potential customers, we do expect to have limited net customer additions this year as the new pricing takes effect. Therefore, the composition of online revenue growth will heavily be weighted toward ARPU in 2018. Also, please note that the estimated number of unique employers reported here only represents those customers currently tracked on 51job’s management system and does not include employers from Lagou. We are in the process of establishing operational collaboration between 51job and Lagou, and we believe that Lagou’s current employers are largely a subset of 51job’s existing customer base. Revenues for other HR services increased 40% to CNY 263 million in the first quarter. The strong growth was due to customer adoption and usage of BPO, training, assessment and placement services. Our sales team’s improved outreach efforts and the inclusion of these value-added services to form a complete end-to-end HR solution have driven robust interest and demand for employers. We believe that the customer evaluation process we are undergoing for the online business will also positively affect the growth of other HR services longer term as we better identify the appropriate employers for cross-sell opportunities and look to further improve the customer uptake of these more sophisticated service offerings. Gross profit grew 35% to CNY 596 million, and gross margin improved to 74.4% as a result of the scale benefits and operating efficiency. Included in cost of services in the first quarter was share-based compensation expense of CNY 3.6 million. Sales and marketing expenses increased 34% to CNY 275 million in the first quarter. The increase was primarily due to higher employee compensation expenses, headcount additions and greater advertising spend. Included in sales and marketing expenses in the first quarter was share-based compensation expense of CNY 3.1 million. We expect to continue to invest in the sales force and support our many brands and platforms with marketing and advertising activities. G&A expenses increased 19% to CNY 86 million in the first quarter. The increase was mainly due to higher employee compensation, rent and office expenses. Share-based compensation expenses included in G&A was CNY 16.2 million in the first quarter. Our income from operations increased 43% to CNY 236 million, and operating margin was 29.5% compared with 27.4% in the year-ago quarter. Excluding share-based compensation expense, operating margins would have been 32.3% compared with 31.1% in the year-ago quarter. In the first quarter, under mark-to-market accounting, we recognized a very significant noncash loss of CNY 589 million associated with the change in the fair value of the convertible notes. During the first quarter, the trading price of our ADSs on NASDAQ increased significantly by over 40% from $60.85 at the end of 2017 to $86.04 at the end of the first quarter, which resulted in a corresponding rise in the value of the convertible notes during the period. As the notes are a liability on the company’s balance sheet, the increase in fair value was recorded as a loss on our P&L, although it has no impact on the company’s cash flow or cash position. In the first quarter, due to the change in the value of the RMB against the U.S. dollar and the foreign currency impact on our U.S. dollar cash deposits and U.S. dollar-denominated convertible notes, we recognized a noncash foreign exchange gain of CNY 36 million. Other income in the first quarter included CNY 0.6 million in local government financial subsidies compared with CNY 50 million in the first quarter of 2017. Due to the significant impact of the change in the fair value of the convertible note, we recorded a net loss attributable to 51job of CNY 333 million in the first quarter. Basic and fully diluted loss per share was CNY 5.46 or USD 0.87 per share. However, excluding share-based compensation expense, the gain from foreign currency translation, change in the fair value of the convertible notes as well as the related tax effect of these items, our non-GAAP adjusted net income attributable to 51job increased 15.5% to CNY 243 million in the first quarter. Non-GAAP adjusted fully diluted EPS was CNY 3.76 or USD 0.60 per share, which is ahead of the guidance that we had provided back in March. Now turning now to our guidance for this quarter. Based on the current market conditions, our total revenue target for the second quarter of 2018 is in the estimated range of CNY 855 million to CNY 885 million. For the non-GAAP fully diluted EPS target, our estimated range is between $3.70 and $4 per share under the if-converted method. Please note that this non-GAAP EPS target range does not include share-based compensation expense, the impact of foreign currency translation, any change in the fair value of the convertible notes nor the related tax effect of these items. Total share-based compensation expense is expected to be between CNY 22 million and CNY 23 million for the second quarter of 2018. Guidance for earnings per share is provided on a non-GAAP basis due to the inherent difficulty in forecasting the future impact of certain items such as the gain and losses from foreign currency translation and the change in the fair value of the convertible notes. We’re not able to provide a complete reconciliation of these non-GAAP items to expected reported GAAP earnings per share without unreasonable efforts due to the unknown effect and potential significance of such future impact and changes. The guidance we’ve provided reflect our current forecast, which is subject to change. This concludes our presentation. We will be happy to take your questions at this time. Operator, please go ahead.

[Operator:]

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Wendy Huang with Macquarie. Please go ahead.

[Wendy Huang:]

Thank you, managements. Congratulations on the set of results. So my first question is about your other HR services. So you mentioned that the customer demand and adoption were extremely robust of some of the value-added services. And also, I think you touched upon a few of those names in the prepared remarks earlier. I just wonder if you could give more color around those value-added services that has driven the other HR’s revenue growth. And also, for the BPO, can you give us an update on the customer accounts and also ASP? And how have you seen the penetration deepen in the past few quarters as well? Lastly, on the Lagou situation, can you provide more color around its customer accounts and also employee headcount as well as margin?

[Kathleen Chien:]

Wendy, let me try to answer each of the questions to the extent possible. Firstly, on other HR growth, I think we were very pleased actually that we saw actually good uptick across all the different products and services within this bucket. And that included, for example, we talked – we touched on training services. We talked about the assessment product. We talked about some of the placement services and the RPOs. And I think across the board, it was an indication of the fact that, I think, the demand is fairly solid in the marketplace, so it’s a favorable environment, in general. And I think that employers are recognizing that these tools and services are a very effective and useful complement to the baseline services that we had provided historically and that this is something that would help them be able to attract and retain valued talent for their organization for the growth in the future. So I think that whether it’s training, it’s assessment, RPO, placements and as well as the baseline of the BPO recruitment, I think it’s really across the board that we had a very strong performance. So it wasn’t related to any single product line, if you will. Second question relates to the BPO service. I think we continue to employ the same strategy on this front, which is really to try to deepen the penetration of the large customers we serve rather than to grow the customer count, per se, if you will. And so that is the same situation we continue to explore in Q1. So our customer count did not meaningfully change for the BPO segment, and so that is still in sort of a four-digit, close to five-digit kind of a number. That hasn’t really changed. And there’s no changing in the pricing, if you will, on that front. And lastly, on the Lagou situation, obviously, this is the very first quarter that we’ve just completed the consolidation, and we’re starting up with more operational collaborations, if you will. And I think that we continue to be very optimistic about the segment that it targets and serves very specifically because we do feel that this is a very high-value and high-growth segment. But I think that in terms of where it is, in terms of scale overall, it is actually relatively small compared with where 51job is today. So we have not separately discussed their situation. In terms of just, I think, talking about margin, it’s too early. They are still loss making at this point. We continue to make strides to continue to grow the business, and we are positively looking for good results all throughout the rest of the year as we continue to push along our integration. So I hope that answers most of the question.

[Wendy Huang:]

Yes, I just want to follow up on your Lagou comments. Because this quarter, actually, your overall gross margin, OP margin continued to expand in spite of the consolidation of the Lagou. So can you provide some color on that?

[Kathleen Chien:]

Yes, but I think that goes back to the revenue beat, if you will. I think we’ve always discussed the fact that if we have very strong top line growth, as long as we do have that, I think that we believe that there’s more leverage in our model. And so it’s really the 51job core, if you will, that has excelled, I think, in terms of helping us continue to gain leverage. As I said, Lagou is actually, at this point, lossmaking. So relatively speaking, it’s not helping overall results, but at the same time, it is something that we have expectations for the future. So that is where it is at. But it is small in size compared to 51job at this point.

[Wendy Huang:]

Thank you.

[Operator:]

Our next question is from Alicia Yap with Citigroup. Please go ahead.

[Alicia Yap:]

Good morning, Rick, Kathleen and Linda. Congrats on another solid quarter. So my first question is related to the accelerated growth in both the online services and also the HR. So the 30% growth – no, the 40% growth you’ve got seems to be the highest over the past couple of years. Given it is actually a relatively slightly late Chinese New Year this year, ideally, the 1Q should face slightly tougher comps, but yet you guys actually achieved a very good growth rate. So I wonder how much of this growth is pull forward from the second quarter? Or is it mainly driven by all these improving operational efficiency and the scale effect that you are now harvesting? And then how much of that will be also contribute from the pricing adjustment, the increase that you have in February? And if this is benefiting from the operating efficiency, then your 2Q guidance seems a little bit conservative. So any colors on these will be helpful. And then second question, just quickly follow up on the cost and margins. So you did mention the Lagou comment earlier, but then we wanted to see, given you should start to enjoy some of the synergies, right, from the acquisitions and all that, so any reason why margins should not be heading higher the rest of the year?

[Kathleen Chien:]

Alicia, let me try to address the growth question, and I will talk a little bit about cost and pricing, in general, then maybe. I think growth-wise, I mean, I think, obviously, we’re very pleased that we’re able to achieve a very strong quarter despite the sort of the late Chinese New Year, if you will. I think, overall, that just means to us that, a, I think our sales force continue to execute well and that the customer adoption for other services continue to move along at a faster pace than we have seen historically, if you will. Obviously, it’s a late Chinese New Year so it doesn’t help as much, but I would say that a lot of what we saw in Q1, I think, is really the momentum that we had built starting from last year, if you will. So I would say that on that front, when you talk a little bit about the pricing impact of things, I think pricing probably has a small impact, but I would not attribute more – most of the growth from the first quarter to pricing. That was an added bonus, if you will, and that will be something that will help us throughout the rest of the year because as contracts come up for renewal, that will be something that we’ll discuss more. But I would say that it has some positive effect, but that’s not the primary growth to Q1. Secondly, maybe, on just talking a little bit about cost and margins in general and how the Lagou situation impacts that, I’d say that at this point in time, I do think that, overall, we kind of go back to the same point that as long as the total revenue growth is robust, and to some degree, we came in ahead of our guidance in the first quarter as well, so whenever that happens and we have a cost base that we had to kind of budgeted in, if you will, if we’re ahead on revenues, that always helps margins. So that is something that we always enjoy. In terms of how Lagou is going to impact that and whether or not we would be able to absorb this loss, if you will, and continue to make strides on margins, well, it just depends on our total growth overall. And so that’s something that we are hopeful that we continue to make progress, and that Lagou itself will be making progress, 51job itself will make progress, and that these are things that are moving in the right direction for us. But in the short term though, we are not necessarily so concerned about a point or two here and there on the margins because these are short-term things and that we want to make sure that at least we’re still making the right investments for longer-term growth, and that’s the focus. So we will not be necessarily trying to manage margins aggressively for this year.

[Alicia Yap:]

Can I follow up just on your first answer regarding the growth? So in that case, the second quarter should be benefiting a little bit on the easier comp in terms of the whole Chinese New Year time period difference, but then with some pricings a little bit add-on bonus impact and also your continued efficiency, is that – should be fair for us to think that your 2Q guidance is actually a little bit conservative?

[Kathleen Chien:]

I would like to say that we’ve always been – we try to be fair with guidance, and we apply the same principles to give guidance. I think that’s the best picture we see. I’m not sure – I would not characterize it as conservative because it’s the same principle we’ve applied. But I think last year versus this year, we obviously feel that. Last year, I think first Q to second Q, the differential was a little bit higher, if you will, but I think – we’re working on large bases and larger bases all the time. So I think that, again, we try to present the picture as best as we see it today. And hopefully, we’re always happy to do better, but we’re giving realistic guidance based on what we see and hear back from the front lines.

[Alicia Yap:]

Great, great. Thank you. Congratulations again.

[Operator:]

[Operator Instructions] Our next question comes from Ryan Roberts with MCM Partners. Please go ahead.

[Ryan Roberts:]

Management good morning and thank you for taking my question, and also congratulations on very solid quarter. My question actually touches a bit on, Rick, what you mentioned earlier about the outlook, and then Kathleen, what you covered talking about with respect to the adds this year, on the customer adds. If the – the outlook sounds like it’s pretty supportive. It sounds like demand is there. Why throttle back on customer adds right now? It sounds like that’s an opportunity in the market. And I understand you’re focusing more – it sounds like you’re focusing more on ARPU, but could you give us some insight as to why your strategy is to, what it sounds like, scale back a little bit on the customer adds?

[Kathleen Chien:]

Yes, Ryan, thanks for the question. Actually, that’s a good point to bring up, and it gives us a chance to kind of maybe outline our thinking a little bit more here. But I think what we’re saying is that, essentially, not all customers are of equal size and equal potential. And I think that we feel that, historically, we have actually not recognized that principle too much in our sales management, and that was sort of the DNA of the company for the first 15 years of its history, if you will. In the last couple of years, I think we’ve strived to push our sales guys to at least look at a more balanced perspective when we approach it. But in fact, I think that, still at this point, I think that we still feel that maybe there are certain customers that we need for them to become larger sized and more professional in its kind of a scale and structure before it becomes a more attractive customers to us. Now obviously, you can say that for the online platform, whether or not someone can come in and at the RMB 500, RMB 1,000, yes, it’s incremental revenue to us, but incrementally, it doesn’t really add that much to the total sales force and our total revenues, if you will. So I do think that we recognize that it’s actually very important to make sure that we’re working and qualifying customers that we think that we want to work with for a longer term because some of them of the very small guys do not have a lot of growth potential. And to be honest, a lot of customers in this segment, the low-end segment, may not actually be able to even enjoy and use a lot of the other services that we can actually offer. So I think it’s really trying to, again, really push ahead on our strategy of making sure that we qualify customers and, at least, allocate resources accordingly. And so we’re not saying that we don’t want to add customers or throttle back necessarily, it’s just, again, going through a qualification process. And as we go through a little bit of an adjustment to make sure that we’re hopefully aligned and behind that strategy, we may not be as willing to take on a lot of the small guys, if you will, because if it takes time and resources, and sales resources are very precious, and that it is something that we need to balance.

[Ryan Roberts:]

Actually on that last note about the sales resource being precious, especially for smaller-sized accounts which may not grow over time and being selective, I think that makes a lot of sense in terms of the qualification. But that sounds like a fantastic problem that can be solved by more of a technology approach to serving, let’s say, small-size accounts that, again, that you just mentioned, lots of incremental revenue. I think there are some other platforms – some other Internet platforms have taken more of an automated approach, the more self-service approach to small-sized accounts. And I think – I’m just wondering if that’s something that you’re exploring. I think that’s something that could be interesting.

[Kathleen Chien:]

The technology solution is something that we feel like is not the barrier. The fact is, in the China marketplace, a lot of the low-end, sort of – I don’t want to say customers are not real recruiters or they’re actually trying to use the platform for other reasons and means. It is something that is a problem sometimes in the China marketplace when people put up postings that they may not be really looking for a candidate and maybe trying to source certain information or other things. So again, I think the technology issue is not something that is troubling to us. I think for some of the fully self-service options, when there’s no human touch at all, we find that, that has not worked well, and it’s actually not received well from the jobseekers’ side, where we have had received complaints from users, that they are a little bit concerned about the quality of some of those type of employers in the past. And in fact, we have a pretty stringent policy in making sure that we try to qualify customers somehow. And I think the technology angle doesn’t fully support that. So I think that you’re right, that there’s definitely a lot of the self-service options that can be offered, but I just think that, for us, we think that it is something that we can use, but I think we need to be careful about how it’s used, if you will. So I think, for us, at this point, I would say that this is a very concerted effort that we’re making to make sure that we’re actually realigning some of our sales resources, and that, yes, some people might think of it as a lost opportunity for some of these small guys, but it is a conscious decision, and I think it’s the right choice for the longer term to make sure that we have a quality kind of an aspect to all that we do in terms of the employees that come on our platform and in terms of the users’ experience, if you will.

[Ryan Roberts:]

Got you. Thank you very much for the other color, that’s very helpful.

[Operator:]

The next question is a follow-up from Wendy Huang with Macquarie. Please go ahead.

[Wendy Huang:]

Thank you. I noticed that you added 200 sales headcount and increased the total direct sales force to 4,300 on the ground this quarter. But in terms of city coverage, that has remained unchanged at 196 cities, I just wonder if you can give us some color in terms of how you actually cover such a big number of cities and, also, the revenue distributions among those cities. And also, can I confirm with you that the CD-related fair value change impact on the GAAP earnings, so that impact should expire in April 2019 next year, right?

[Kathleen Chien:]

Yes, the second question is, yes, the convert notes mature next April. So hopefully, that – the impact will be no later than that point, if you will. So that is correct. Our sales coverage, in general, we can hear our sales people, and they’re always situated in office locations that we already have sales presence, so that has not changed. In terms of contribution, I don’t think we ever kind of talked about the contribution by city just because, for a lot of large accounts, they may be situated in Shanghai or Guangzhou or the headquarters, if you will, but the service that we offer could actually cross into multiple cities. So it’s hard to define that in terms of where that kind of ends up. I’m not sure if that’s something that we’d be able to help fully answer. We expect that, this year, we’ll continue to add to the sales force because we do believe that we’ll continue on to serve more customers, but in terms of that number of customer each account representative can serve is something that we’re still looking at and reassessing.

[Wendy Huang:]

So how many direct sales force do you target to reach or expand by the end of this year?

[Kathleen Chien:]

We expect to add a single-digit percent maybe on the higher side as a kind of a target that we’re looking at. But this is something that we’ll continue to look at throughout the course of the year to see how we track.

[Wendy Huang:]

Thanks, Kathleen.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Rick Yan for any closing remarks.

[Rick Yan:]

Thank you for joining us today. We look forward to speaking with you next quarter, and we value your continued support of 51job. Have a good day. Thank you. Bye-bye.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect. Thank you.