51job, Inc.
Q1 2017 Earnings Call Transcript

Published: 5 May 2017

[Operator:]

Good evening and welcome to the 51Job, Inc. First Quarter 2017 Conference Call. All participants will be in listen-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, Operator and thank you all for attending this teleconference to discuss unaudited financial results for the first quarter ended March 31, 2017. 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 2017 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 provision of the U.S. Private Securities Litigation Reform Act of 1995. All forward-looking statements are based upon management expectations at the time of the statement and involved inherent risk and uncertainties that may cause actual results to defer 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 20F, 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. Reconciliations to the most directly comparable GAAP financial measures are provided 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. Now I will 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 2017. Finally we will open the call to your questions. We are pleased to begin the New Year with an encouraging set a results that demonstrates our continued progress in strengthening our online business and raising sales productivity. First quarter revenues were RMB6.08 million in line with our expectations and non-GAAP EPS was RMB3.46 which exceeded our forecasts due to better operating efficiency in the receipt of financial subsidies. Our online revenue growth accelerated to 19% in the first quarter, on the back of solid sales execution and product innovation we not only benefited from robust customer acquisition to start the year, but also maintain a healthy overall ARPU level. The number of unique employers using our online services increased by nearly 16,000 compared to the first quarter of 2016. While an influx of new customers starts creating a near term drag on ARPU due to the lower priced initial purchases our ongoing upselling efforts to increase spend by our existing largest size customers mostly offset this effect. Our reorganized sales force is operating with greater focus and precision and regained further conviction in our high quality growth strategy that targets both volume increase and ARPU improvement. In the other HR services area, revenues increased 9% in the first quarter led by our greater of business process outsourcing, training and placement services. Although we will have to absorb the impact of VAT or revenue recognition a year-over-year comparison in this segment for one more quarter. We have recently dedicated more resources to drive customer adoption of this value added HR services. We're highly confident in the growth and market potential of these services as well as our ability to maximize penetration and share wallet of our customers HR projects. Turning now to our current market assessment with economic conditions in China appearing generally stable, employers has been active in 2017. We maintain a positive outlook on White Collar recruitment demand and we are optimistic that market conditions will remain favorable. Although conversations with customers in the claim modest headcount increases similarly magnitude to those in 2016, we continue to observe rising expectations on quality and job match [indiscernible] and employers alike. Even as our data base growth and now contain more than 110 million users and over 105 million resumes the conversation is no longer just about quality and traffic. It is increasingly a challenge of who is the right person for a job and how does the right job finds its mate. This has been at a call of our product development activities, and we are pleased at the roll of new services to address this evolving condemned has been very well received by both job seekers and employers. With tools for assessing and individuals fit in abilities, online background checks for vetting candidates, and notable platforms and channels for this disseminating job information. We continue to lead the industry and innovation. We believe the cohesiveness and effectiveness of our offerings continues to differentiate us from the competition, well also generating more monetization opportunities. Through internal development as well as external acquisitions, and investments we will continue to establish our firm position as a one stop shop and we are confident that we will build a complete HR services eco system for long term growth and profitability in China. I'll now turn a call over to Kathleen.

[Kathleen Chien:]

Thank you, Rick. In my following presentation please be aware that our financial numbers are in our reporting currency of the Chinese Renminbi unless otherwise stated. Also please note that our growth rates are on year-over-year basis as compared to the corresponding period in 2016 unless otherwise indicated. Our total revenues for the first quarter of 2017 were RMB608 million representing a 16% increase. Our online revenues for the first quarter grew 19% to RMB420 driven by the better than expected new customer acquisitions. The number of unique employers rose to more than 361,000 companies compared with 302,000 in the year ago quarter. Although new customers traditionally begin with the purchase of lower priced introductory packages that do diminish ARPU, we are pleased to have largely offset this effect in the first quarter through these successful upselling efforts that increases spending by existing more established employers. Revenues for other HR services increased 9% to RMB188 million in the first quarter. The growth was primarily driven by customer usage of our BPO, training and placement services. The anniversary of the business task to VAT transition on other HR happened this May after which time, the year-over-year revenue comparisons will be probably applicable again. As a result that we do expect improved growth rates for other HR services later this year. Gross profit grew 18% to RMB441 million and gross margin increased to 73.5%. Included in cost of services in the fourth quarter was share based compensation expense of RMB3.5 million. Our sales and marketing expenses increased 15% to RMB2005 million in the first quarter. The increase was primarily due to the higher employee compensation expenses and headcount additions. Included in sales and marketing expenses in the first quarter was share based compensation expense of RMB3 million. Despite the impact of VAT sales and marketing expenses as a percentage of revenues decreased by 50 basis points compared to the first quarter of 2016. While we will continue to make investments to expand our sales force customer base and product offerings we remain focused on sales productivity and efficiency as well. GN&A expenses increased 6% to RMB72 million in the first quarter. Net increase was mainly due to higher employee compensation and office expenses. Share based compensation expense included in G&A was RMB15.5 million. Income from operations increased 29% to RMB164 million and operating margin increased to 27.4% compared with 24.8% in the year ago quarter. Excluding share based compensation expense our operating margin would have been 31.1% compared with 29% in the year ago 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 recognize a foreign exchange loss of 40,000 in the first quarter. Under mark-to-market accounting we recognize a loss of RMB25 million in the first quarter associated with the change in the fair value of the convertible notes. Other income in the first quarter included RMB50 million in local government financial subsidies. We see that this subsidy was earlier than previous years, which mostly occurred in the second quarter in 2015 and 2016. Therefore as a result please note that the timing difference will affect the year-over-year quarterly EPS comparisons in the first half of 2017. Net income attributable to 51job for the first quarter was RMB163 million. Fully diluted EPS was RMB2.74, US$0.40 per share. Excluding share based compensation expense the loss from foreign currency translation, the change in the fair value of the note as well as the related tax effect of these are non-GAAP adjusted net income attributable to 51job was RMB210 million in the first quarter. Non-GAAP adjusted fully diluted EPS was RMB3.46 or US$0.50 per share. Turning now to our guidance, based on current market conditions and factoring in the remaining effect of the VAT transition of other HR services, our total revenues target for the second quarter of 2017 is in the estimated range of RMB640 million RMB660 million. For the non-GAAP fully diluted EPS target our estimated range is between RMB2.8 and RMB3.0 per share under the converted method. Please note that this non-GAAP EPS 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 tacked effect of these items. Total share based compensation expense is expected to be between RMB20 million and RMB21 million for the second quarter of 2017. This guidance reflects 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 will now begin the question-and-answer session. [Operator Instructions] The first question comes from Alicia Yap of Citigroup. Go ahead please.

[Alicia Yap:]

Hi good morning, Rick, Kathleen and Linda, congregations on results. I have a few questions, number one, wanted to get more colors on the business momentum and the trend. And I think you mentioned the isolationists on some of the numbers of employer, but just wanted to get a sense you know the online recruitment revenues improvement, how much was it is driven or how by the accelerator growth in the numbers of employers and how much was that due to earlier Chinese New Year and a stronger seasonality for Q1. And then do you think that there has more related to also the overall upbeat and healthier economics activity this year versus last year, any colors you could provide and is it more or so company specific reasons right given that you have improved product offering and also successful upselling after the several quarters of the investment into your sales efforts. So just kind of some colors in terms of the momentum and how should we think about this on our recruitment revenue growth in the next few quarters?

[Kathleen Chien:]

Okay, thank you, Alicia for the question. I guess, I'm just you touched upon quite a few issues in kind of discussing this. I think - we think it is a combination of a number of factors obviously, I think overall general economic environment, I would - we would probably say that we don't think that it's materially changed since last year, so I think the economic situation is not the main driver of I think our growth overall, I think we're pretty pleased with the customer uptick that we've had this past quarter. So I think we're a little bit ahead of our own expectations on that front, and I think that's more of a reflection of the sales we reorganization that we had gone through. Last year and year before that and then that is really one of the main reasons behind that. I think maybe slightly we can look at also the earlier Chinese New Year maybe part of it also the strength of the 1Q. So I think that that is also part of the equation as well. So I'd say probably just on your being as a little bit ahead on the customer acquisition side, as a result of our sales reorganization efforts a little bit of the early Chinese New Year effort, but also our own upselling and increased productivity coming from that reorganized sales force.

[Operator:]

Thank you. The next question comes from Joe Hu of Macquarie. Go ahead please.

[Joe Hu:]

Hi. Thank you for taking my question. And so I have two questions if I may, and the first one is also regarding the customer growth. So could management have elaborate more on the new customer profile, is that slightly different than your existing customer mix and also just wondering how much that was coming from acquisitions versus your organic customers? And then my next question is on your HR businesses right, obviously the VAT impact will be largely down by May. So could you just help us understand that the full year outlook and how should we think about the growth in the second half? Thank you.

[Kathleen Chien:]

I guess to the customer side, I don't think that the type of customers overtime bring into that different from SMEs that we recruited in the past few years if you will, obviously we were not getting sort of huge Fortune 500 companies at this point time, because there are existing customers. So from that perspective that profile those companies are just SMEs that we continue to kind of push further down in terms of the penetration on in coverage. In terms of number of growth of our type of customer acquisition overall I mean we've had a very healthy kind of growth this past quarter so closer to 20% is where we're at. So I think it's just the effort that the entire sales force pushing ahead and getting the job done if you will. And then second question on the HR business side, maybe or just the VAT transition how does that impact the other HR services overall. Yes, we think that obviously we have higher expectations for the second half of this year in that revenue bucket just because that part of the result in the last three quarters have been slightly unfavorable in terms of looking at comparison just because that the definition of revenues are up because of the VAT transition, took down revenues by about 6% in that category. So where do expect that a gross to pick up when we actually have more applicable year-over-year comparisons so we are looking for that.

[Rick Yan:]

There might be misunderstanding on the first question, we talk about acquiring new customers, but there's organically above sales force that means the acquisition and investments that we make in other companies they mostly contribute to our product portfolio they don't act to our customer accounts, so most of the new customer acquisition are done organically by our reorganized sales force.

[Operator:]

Thank you. The next question comes from Thomas Chong of Bank of China International. Go ahead please.

[Thomas Chong:]

Hi. Good morning. Thanks for picking my questions. I have two questions; the first question is, the management talks about the sentiment of course different key verticals for this year. We understand the macro environment is okay, but just want to see if there is any difference in trend across difference industries. And my second question is about the headcounts, can management give us some color about a lot of sales force in first quarter and our expectation for 2017? Thanks.

[Kathleen Chien:]

Okay. Let me answer the second question first perhaps. We actually ended last year, I guess the year-over-year comparisons and still headcount growth were in the high single digits close to 10% that's kind of where we ended up we're now close to 4,000 people in terms of the sales force. And we are expecting to continue to add to our sales force, is always a very important part of our sales and marketing strategy and that I think we are looking for similar types growth rates this year. So that kind of where we're headed on the sales front. Can I go back to the first question and in terms of just industries, a verticals, I - we always kind of shy away from I guess paying too much attention to that because overall we don't have a single industry vertical that is the overwhelming kind of contribution to our portfolio so I think that there's always a kind of slight differences between the different verticals over the course of each year, but it's not meaningful in terms of where is that. I think the ones I've been performing well, IT continued support form well as a sales function, I think financial services continue point quite well, and so these are nothing new, I think the real state is maybe still kind of not fully recover, but I think things are still, okay. So overall I think the overall sentiment is reasonable and demand to solve it. So I think that we are pleased with everything so far.

[Operator:]

Thank you. [Operator Instructions] The next question comes from Ryan Roberts of MCM Partners. Go ahead, please.

[Ryan Roberts:]

Good morning, Rick, Kathleen and Linda. Thank you for taking my question. There is a couple of quick ones from me. On the top line you mentioned the kind of ARPU GAAP from kind of the existing customers more to the customers and newer ads. I just wanted to kind of give us some color on that, so you can get a sense of when you see the new customers that we've kind of added over the last couple of quarters, about how long it takes to kind of work its way to kind of more normal contribution on a per customer basis. And secondly, just also on the BPO, so the other HR segment, is that kind of a returns you're more kind of growth mode in terms of what we're seeing on the financials. How should we looking at the margins going forward, it seems like we've had gross margin bounce around a little bit over the past couple of course I'm just kind of curious as we get to a more normalized state how much time we should be looking at that? Thank you.

[Kathleen Chien:]

Yeah. Maybe I try to talk with the second question first and maybe with the BPO, I think when we look at our own business. I think we are mostly people driven business, and I think we look at our cost structure of the look at how we planned out our budget if you will. We actually kind of configure ourselves to a service and better levels as to do our planning and I think when our revenue growth is actually higher we always get leverage kind of a cross the different buckets or services so. I think they'll first quarter we have a pretty pleased with where we stood today, and I think as a result of that we are coming ahead with growth margin leverage we're getting better operating leverage as well. So that kind of flow through the whole thing, it's less related to specific business segment growth if you will. So I think that is something that we expect that whether not is growth from online services or BPO or training or whatever bucket of services that's less important to us in terms of how that affects our margin. The more important thing is our total revenue growth overall so that kind of our situation if you will. And part of that is also because we do leverage the sales force to sell all services so it's not just for one particular bucket of revenue shrinks. And then going back to the ARPU side that really just talking about online recruitment in general, I think what we've said in the last year as well is that we are targeting to try to improve our hold up our ARPU better than previously so we've actually put a lot more emphasis into our organization in terms of making sure that the upselling efforts for more established companies that have worked with us longer is something that we look for much more closely versus the five years of our operations. It's hard to just generalize and say how long it takes for the ARPU to walk up some companies because they have very specific situation may actually grow faster others may not is really depends on their own business prospects. But overall, I think that we've had more success in making sure that even one customer account if you will or customer acquisition is higher than what we expect we're still holding up ARPU much better than we were in the early years. So I think that that's really kind of where we are. And also I think what I think that we're also trying to do more of in addition to just the up selling within the online services, we've actually I think also made a lot more effort and trying to penetrate more in the cross telling as well. So hopefully will have better result you can report back to shareholders in the coming quarters as well. So I think a lot of effort that we've put in last so it will be result and I think that will hopefully that will become one more transparent of time as well.

[Operator:]

Thank you. The next question comes from Alicia Yap of Citigroup. Go ahead, please.

[Alicia Yap:]

Hi, thanks for taking my follow-up question. I just have two very quick one, one is in terms of the jobs activities, what is the kind of like the anticipated increase on the average labor cost this year? And then second is on the cloud business, so can you remind us how does your human resources services currently implemented, so given in the clouds deployments and adopting clouds is one of the big area, currently what is your thinking and planning for the cloud service for your BPO business? Thank you.

[Kathleen Chien:]

Okay, I guess the first question just generally labor kind of a wage increases, it will wage inflation if you will, I actually think that this year we're looking at a little bit more modest expectations versus last year. I think last year sure we were talking probably still higher single digit, this year I think we're probably looking a mid-single digit is more likely the scenario for most people that we've looked that and survey and so I think more modest expectations. Second question relates to the cloud service types for BPO, I think and the way we look at it, I mean whether or not it's our online recruitment services or BPO services or what we try to do is make sure that we actually have a pretty robust technology platform what actually can be try to deliver some of the services in a more self-service fashion if you will. And I think that is a general trend that's happening, in addition to the fact that a lot of the connections that we have with individual users if you will whether or not they're an employees, that's actually working with us under the BPO services or a job seekers are looking for a job on the online recruitment side. We are offering more mobile based solutions on top of web solutions, and I think that that is the general trend of ongoing. And I think the adoption is going to be increasing actually over time as well as something that we're seeing more and more, because I think a lot of our customers are now willing to take on more of these things to reach out and maintain their connection with their employers as well. So I think that kind of the general trend that's going on in the marketplace.

[Operator:]

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

[Rick Yan:]

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

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.