51job, Inc.
Q1 2016 Earnings Call Transcript

Published: 7 May 2016

[Linda Chien:]

Thank you all for attending this teleconference to discuss unaudited financial results for the first quarter ended March 31, 2016. A press release containing first quarter 2016 results was issued earlier today, and a copy maybe obtained through our website at ir.51job.com. With me in person for today's call is Kathleen Chien, Chief Operating Officer and Acting Chief Financial Officer. Due to an unforeseen event Rick Yan, our President and Chief Executive Officer, is not present with us today and will share his presentation via a recording. Before we begin, please note that today's discussion will contain forward looking statements made under the safe harbor provisions of the US Private Securities 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 US Securities and Exchange Commission, including our annual report on Form 20-F . Any forward looking statement 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 share Rick's recorded message.

[Rick Yan:]

Welcome to our first quarter 2016 conference call. Please accept my deepest apologies that due to a last minute personal matter I am traveling and unable to join this call live. I have recorded this message to you to provide a review of the first quarter and an assessment of current market conditions. First quarter results were very much in line with our expectations as total revenues reached RMB524 million and non-GAAP EPS was RMB2.43. We are pleased to start off 2016 with continued momentum in realizing our strategic goals of increasing online customer spend and improving cross-selling of our other related HR services. Our online revenues grew 13% in the first quarter driven by a combination of customer additions and higher ARPU. The number of unique employers increased by 5% to over 302,000 companies as we maintain selective in acquiring quality new clients. Online ARPU increased 8%, the fourth consecutive quarter of year-over-year improvement. Despite macro headwinds we have continued to achieve greater revenue per customer and increased our wallet share of customer budgets. The strong effectiveness and return on investment of our products and services are resonating with employers as they place more value and importance on skilled talent. Also with job seekers becoming more focused on career development and corporate fit when finding the best opportunity for themselves, we believe our expansion into new targeted platforms, Yingjiesheng for campus and 51jingying for experienced professionals, strengthen job search relevancy and connect the right candidates with the right employers. In other HR services we maintained a consistent and solid growth trajectory. Revenues increased 18% in the first quarter led by the continued customer adoption of our business process outsourcing services. Concurrent with the rise in online ARPU we are driving cross-selling upside in other HR services maximizing our sales coverage network and customer relationships. With multiple points on potential customer engagement we remain uniquely positioned in China. Under the single 51job umbrella employers are able to effectively and efficiently meet all the HR needs for hiring, to training, to retention, to administration. Turning now to our current market assessment. Based on the activity we have seen so far in 2016, we maintain a positive stable outlook on recruitment market conditions. We observed standard fluctuations in line with historical patterns in the post-Chinese New Year peak season and hiring demands abstained more direct year-over-year growth throughout. At this point we do not anticipate a material change in recruitment behavior from employers for this year. We believe the new novel of economic growth has sunken in with enterprises in China and they have taken actions to adjust to this environment. With a sense of greater recruitment market stability we move forward more confidently in tactical execution of our online sales strategy to drive better growth. Over the past several years the development of our BPO business in particular has been affected by government regulations. Since 2014 when rules on labor dispatch workers and contracts were issued we have been heavily involved in assisting customers with a wide range of required compliance work. We are pleased to share that the deadline for those regulations were successfully met on March 1 of this year. On a positive note, the completion of this milestone frees us up to – reallocate resources and efforts towards new business development and customer prospects. However the recent announcement that value added tax be adopted in all industries in China effective May 1 has created a new near term wrinkle. We are awaiting more clarity from local authorities on how value added tax should be applied to BPO services, and Kathleen will go into greater detail on this matter in her upcoming presentation. In this period of economic transition as we maneuver through some macro and regulatory road bumps in China we are confident that our business fundamentals remain strong and unchanged. The operational forecast stays squarely directed on serving employers and job seekers. With HR departments seeing increased responsibility and workers no longer wanting just a job but the right job, we believe our services are more important and essential to our users than ever. Innovation and expansion form the pillars of our long term growth plan, and we will continue to invest to strengthen the core 51job brand, build out our new targeted job seeker platforms and explore additional opportunities that address the evolving needs of workers and employers in China. Again, please excuse my absence and I look forward to speaking with you real time next quarter. Kathleen will now provide a detailed financial discussion after which time she will take your questions.

[Kathleen Chien:]

Thank you for listening to Rick's message. In my following presentation please be aware that all financial numbers are in the reporting currency of the Chinese Renminbi unless otherwise stated. Also please note that all growth rates are on year-over-year basis as compared to the corresponding period in 2015 unless otherwise indicated. Our total revenues for the first quarter of 2016 were RMB524 million, representing a 14% increase. [Online recruitment services] revenues for the first quarter grew 13% to RMB352 million. The increase was driven by higher average revenue per unique employer and in line with our strategic plan for modest growth in new customers. Our continued emphasis on prioritizing high quality sales resulted in an 8% ARPU increase. We also added about 14,000 employers to the online customer accounts compared to the year ago quarter. This 5% increase in customer volume nears a gross of sales headcount in the first quarter and indicates that we are maintaining consistent customer coverage and transaction productivity. Revenues for other HR services increased 18% to RMB172 million in the first quarter driven primarily by the greater customer usage of our outsourcing services. Other HR contribution of total revenues continued to increase on a year-over-year basis representing 33% in the first quarter. Gross profit grew 13% to RMB372 million and gross margin was 72.8%. Included in cost of services in the first quarter was share-based compensation expense of RMB3.4 million. Sales and marketing expenses increased 24% to RMB178 million in the first quarter. The increase was primarily due to higher employee compensation expenses, headcount additions and greater advertising and promotional spend. As we had anticipated, due to an earlier Chinese New Year when compared to 2015 more advertising and marketing activities were captured and their corresponding expenses were recorded in the first quarter of 2016, which resulted in greater year-over-year percentage increase. Included in sales and marketing expenses in the first quarter was share based compensation expense of RMB3 million. Our G&A expenses increased 8% to RMB67 million in the first quarter. The increase was mainly due to higher employee compensation, depreciation and office expenses. Share based compensation expense included in G&A was RMB15 million. Operating income increased 3% to RMB127 million and operating margin was 24.8% compared with 27.7% in the first quarter of 2015. Excluding share based compensation expense our operating margin would be 29% compared with 32.5% in the year ago quarter. Due to the recent change in the value of the RMB against the US dollar and its impact on the convertible senior notes we issued in 2014 we recognized a foreign currency exchange gain of RMB5 million in the first quarter. Under mark-to-market accounting we also recognized a loss of RMB40 million in the first quarter associated with the change in the fair value of these notes. Net income attributable to 51job for the first quarter was RMB86 million. Fully diluted EPS was RMB1.48 or $0.23. Excluding share based compensation expense the gain from foreign currency translation, the change in the fair value of the notes, as well as the related tax impact of these items, our non-GAAP adjusted net income attributable to 51job was RMB142 million in the first quarter. Under the if-converted method our non-GAAP adjusted fully diluted EPS was RMB2.43 or $0.38 per share in line with the guidance that we gave back in early March. Now turning to our balance sheet, we ended the first quarter with a strong position of RMB5.25 billion in cash and short-term certificate of deposits, equivalent to approximately $814 million. The use of cash resources will be focused on pursuing investments in M&A opportunities as well as execution of our buy-back program. As mentioned in Rick's prepared remarks, effective May 1 of 2016 the value added tax or VAT has replaced the business tax for all industries in China. Because they completed the transition of our online revenues to VAT in 2015 these new regulations primarily affect our other HR services revenues. The change from business tax to VAT will cause the definition of total revenues to be different and while it will be included is less than under the previous definition. Mid-second quarter total revenues for other HR services will transition from being reported on a gross basis to a net of tax basis starting May 1. In addition for our business process outsourcing services, which is the biggest contributor to other HR revenues, there is currently some ambiguity on the appropriate tax calculation method to be applied under the VAT policy. Some last minute announcements were made specifically directed at BPO services, and we are in the process of clarifying the implementation guidelines with relevant authorities, especially in regards to the issuance and deductibility of the official tax receipts, or fapiaos, which are important to clients for their own tax reporting purposes as well. During the transition period, we have had to delay the onboarding of new BPO customers into our systems, which will limit our growth expectations for the second quarter. We expect these contracts and the contributions to be captured in the second half of 2016 instead. Turning now to our guidance, based on current market conditions and factoring in VAT's impact on other HR services our total revenue target for the second quarter of 2016 is in the estimated range of RMB540 million to RMB560 million. For the non-GAAP fully diluted EPS target our estimated range is between RMB2.30 and RMB2.50 per share. Under the if-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 tax impact of these items. Total share based compensation expense is expected to be between RMB24 million and RMB25 million for the second quarter of 2016. This guidance reflects our current forecast, which is subject to change. That concludes our presentation. I will be happy to take your questions at this time.

[Wendy Huang:]

Hi management. Thanks, for taking my question. So this is Wendy Huang from Macquarie. So I have two questions, first regarding the tax policy change on the BPO – so actually before this tax policy change also there were labor law changes, which actually affected dispatch workers and also affected your – the BPO business. So it seems to me that there are lots of regulatory uncertainties affecting this business, so how should we actually assess the regulatory risk of this business in the longer term? And second question is your sales and marketing cost as a percentage of revenue increased a lot this quarter. I'm not sure if that's just a seasonality or it is because the company expected to actually become more aggressive in doing the sales marketing? Thank you.

[Kathleen Chien:]

Thank you for your questions Wendy. Let me go one by one I guess. With the HR services in regards to regulation I think there's two things going on. I think obviously there's been a lot of attention being directed towards this particular segment because I do believe that this is actually a growth area for the future. And I think government has taken a lot of steps and have taken – issued various guidelines to try to structure the businesses in this area a little bit more better so that they would have more control and oversight over the development of the industry over the long term. So although that there are some growing pains in this area, we actually think that the regulation is really aimed to try to make the industry grow more healthily in the long term rather than otherwise. So we still feel very confident about the prospects of it. Related to this particular quarter though, there is some transition headwind on the VAT side, and unfortunately this is something that we had wished for more clarity and maybe had been given more time for the policy to be implemented, but the guidelines that were given when actually the transition was announced was not very clear in this particular area. In fact there was actually some last minute amendments to the guidelines that were issued, in particular to our industry, which is why there's been more ambiguity as I referred to earlier in this business. But we expect that this is a short term and it's a short term transition that we need to go through, which will obviously have impact on this quarter's results and our ability to take up business now. But I think once we work through it, again we don't think that this should be something that should concern the development industry and affect it negatively. So we still feel positive about the prospect of development in this industry for sure in the long term. It's just a little bit of a hiccup and growing pains in the interim at this point in time. Secondly, I guess on the sales and marketing question, I think that there is two things going on I would say in terms of the spending increases this quarter. Partly it is seasonality because unlike last year and this year, the comparison is always kind of going back to when exactly does the Chinese New Year date fall within the quarter. This year it happened earlier versus last year, so some of the marketing expenses and sales expenses would actually then be kind of moved up versus second quarter. So there is a little bit of a seasonality between the two quarters that's always been shifted because of the timing of Chinese New Year. And on top of that though, obviously this year we're actually going to be spending a little bit more also to develop the Yingjiesheng and also the Jingying side as well. So there is a little bit of that as well. And then thirdly, in particular, we actually decided this year to move up the timing of some of the salary increases that we were going to make for salespeople, which happens on an annual basis and instead of doing that in the second quarter, we actually moved it up this year to first quarter. So there is a little bit of timing difference there as well. So that's kind of what's happening on the sales and marketing front. So I think that we do expect that this year with the pushing up the newer products on Yingjiesheng and also on Jingying, that will actually increase our sales and marketing costs a little bit, but I would expect that that is only a few percent of revenues and so that is kind of in line with our expectation. But the first quarter does look a little bit more than what you would expect otherwise just because on a year-on-year basis, there is a seasonality to consider and also the timing of some of the salary adjustment we have made related to the sales force.

[Wendy Huang:]

Thanks Kathleen. Just to follow up on that, so what is the percentage of your salespeople's salary increased this year? How is it compared to previous years, whether it's higher or lower and also I know that you have this salary survey every year for whole China market. So what's your observation about the – those white collar market and also blue collar market if you have the data regarding the salary increase?

[Kathleen Chien:]

Yes on the overall salary structure, we actually thought that this year we would say that overall, in aggregate, it is slightly lower than last year but not significant. Last year we looked at an average aggregate about 8% plus, but this year we're talking about 7% plus is what our survey shows us. So it's a very minute different if you will, slightly lower this year but still growing. In terms of then differentials between the different types of workers if you will, we still continue to see that the blue collar segment has very robust growth and also certain verticals still continue to be in demand. So that is still happening. So I think while that – I think most people have been concerned with the overall kind of economic environment and the growth of companies and their profitability, that hasn't been fully translated into stopping wage inflation from happening. So that's kind of what we're seeing at this point in time. In terms of ourselves on how we looked at our adjustments, this year I don't think we've actually taken a different approach to it. We've also continued to actually reward our salespeople because we think they're a very important business driver. So we have not tried to lower our adjustment because of the slight market differences. That's kind of where we are.

[Wendy Huang:]

Thanks, and also to follow up on the demand side, I think in previous few quarters, you mentioned that you tried to ramp up your campus recruitment. You have also done some investments in those areas, and so the purpose then actually to tap into the different pocket of your existing account, is actually those internet companies, but based on my observation on those internet companies, lots of them have come through this year. So how will that actually affect your business?

[Kathleen Chien:]

To be honest I don't think that the internet company in itself is going to drive the entire market and so fortunately, that's always the case for us because there's always different industries that's growing faster than others. So maybe internet will be not as robust this year versus previous years, but having said that, I think although if there are maybe so-called headcount freezes, people still need to actually account for how to deal with replacements and turnovers if you will and I don't think that people are shutting off their campus recruitment either because I think these are long term investments that I think most companies would agree that they need to have a pipeline for the future. I think campus recruitment is a very big part of that pipeline. In terms of the intake numbers, maybe they will vary somewhat a little bit, but I don't think we'll have a true picture on that until the second half of the year anyway because most of the recruiting that's done on campus for larger companies, actually happened in the fall rather than at this point in time, first half of the year where it's actually our latent stage of the game.

[Wendy Huang:]

Thanks Kathleen. I have one final question, so on the competitive landscape. So given the ongoing process and also [Indiscernible] job privatization you mentioned, how have you actually seen the competitive landscape change and whether it's kind of available for you guys to kind of navigate? Thank you.

[Kathleen Chien:]

Honestly speaking, the privatization and other things going on, it's more so the capital markets maneuvering, so I don't think it actually has too much impact on the business fundamentals, so I don't think that that has changed too much. I know that there is a lot of noise out there with the capital market transaction that people are looking at or planning or discussing, but it hasn't really I don't think has a direct impact on the business fundamentals.

[Wendy Huang:]

Okay, thank you.

[Kathleen Chien:]

Thank you.

[Operator:]

We will now take our next question. Please state your name and company. Your line is open, please go ahead.

[Xin Wang:]

Hi management. This is Xin from Citi. My first question is regarding the BPO market. So could you provide more color on the current BPO market size in China and your market share? My second question is how many sales headcount as of end of Q1, and my final question is could you provide more color on the operating metrics on your campus recruitment website and the Jingying website regarding revenue contribution and number of users? Thank you.

[Kathleen Chien:]

Let me try to answer them, maybe not in quite the order that you have said and if I miss anything, please just correct me. Just on the last part with campus of Jingying at this point in time, we are not sharing any specific operating metrics as I think we're just kind of building out the business for the most part in terms of just trying to get more user engagement. Especially with Jingying actually, actually much newer product and so at this point in time, I don't think there is anything that we'll be sharing specifically on operating metrics there. Just for your information at the same time though, Jingying were not actually in the monetization phase yet, so which is why we're not really sharing any revenue contribution or financial metrics as we're really not – nothing that we're talking about there. With Yingjiesheng, the campus product, last year we can talk about the fact that basically it's still single percentage of revenue of our online services. So it's still fairly small but it is something that we continue to work on. So that's kind of the magnitude of what its size is in our portfolio of services. So that is kind of where it is. Second, maybe if I – you asked about the sales headcount. We are actually about 3,500 plus, so on a year-over-year basis I think our headcount versus last year at this time is up about 5%. So that is the sales headcount numbers that we have and – sorry, can you actually just remind me of the specific other question that you wanted to have answered? I'm sorry.

[Xin Wang:]

Yes. Other question is about the BPO market size in China and your market share?

[Kathleen Chien:]

Yes. Honestly speaking, BPO size in market – I don't have a good answer for that because I think that's a market under development and so a lot of it is not transparent if you will but what we will note is that obviously historically this is a market that's dominated by government agencies or government entities if you will. And I would expect that our market share would be in the single digit percent of total market size wherever we are at this point. So it's still quite small. So we are still in early stage of development and I think that we are still relatively small in terms of the total market that we could be addressing.

[Xin Wang:]

Thank you.

[Operator:]

We will now take our next question. Please state your name and company. Your line is open, please go ahead.

[Ryan Roberts:]

Hi, this is Ryan Roberts calling from MCM Partners. I just wanted to ask a quick question kind of more about the, on the customer side of things. I think during the remarks you said that basically it's kind of a – we're settling into a new normal in China and even though – kind of it seems kind of flattish, demand seems flattish, however it sounds like you were seeing some interest in some verticals. And I'm just kind of curious how you look at that kind of structural shifts, one, if it's material from your point of view and two, if so, how do you think – how are you looking at approaching that?

[Kathleen Chien:]

I guess if I understand you correctly, I guess you're talking about just the fact that the China's entire economy is transitioning from more the manufacturing base to a more service oriented kind of structure. Is that kind of the underlying question?

[Ryan Roberts:]

Yes. Because I think in your remarks you mentioned it is – the overall hiring demand was kind of – it sounded again kind of flattish and I'm just kind of – so basically that structural change, yes.

[Kathleen Chien:]

Okay. To be honest, this is something that's actually multi-year in development overall. I think that the growing pains of this or the transition pain is that a lot of the companies, they're struggling to think about how their mix will be going forward, because obviously there are a lot of companies, that are manufacturing base. Because of the fact that the cost of labor has risen quite significantly in the last few years in China, they've felt quite a lot of squeeze on the margin side. So they've learned that that's actually not a very sustainable structure and not a sustainable business to continue on. And so there's been a lot more focus on consumer-led kind of businesses, obviously service-oriented businesses. And I think that's something that because historically we've always played much more in the white collar space, that is not something that has impacted us too much in terms of our growth and development over the last few years. What has been interesting, however, is that some of the more service economies, so lower-end kind of jobs where some of it is blue-collar, some of it is just more like hospitality and services kind of worker, that's kind of lower end or less-educated workers, if you will, that market has actually grown quite a lot, and that's a market where maybe historically we haven't been as penetrated in that may present a new opportunity for us. And so that is something that we'll have to look at and think about how we should actually focus on and attack that industry, because that's something that historically maybe we haven't been as focused on penetrating because we've focused much more on the white-collar so people that are in an office environment sitting in front of a computer, if you will. So that's been what's going on; these are kind of multi-year changes, if you will. I think that we're glad to see that overall I don't think there's been further deterioration in the economy, if you will. I think a lot of people were quite concerned. But we think that it's something that everyone feels like, okay, we understand where the market is and we understand what we need to do and we need to just adjust our expectations and move on from there. So that's something that gives us more comfort I think, at least customers are more certain about what the prospects that they're facing, and I think that they can adapt themselves accordingly. So I think that's what we're seeing in the marketplace.

[Ryan Roberts:]

Okay, thank you. That's very helpful.

[Kathleen Chien:]

Thank you.

[Operator:]

[Operator Instructions] We will now take our next question. Please state your name and company. Your line is open, please go ahead.

[Unidentified Analyst:]

Hey guys, thanks for taking my question. I'm curious on the ARPU side of the business, how much of the ARPU is really driven by M&A versus new products versus any particular end market verticals versus the organic drivers, and I have another follow-up.

[Kathleen Chien:]

At this point, because the new price and new services are contributing very little as a percentage of overall revenues, I mean, most of this is organic so that's kind of where we are, for the ARPU side specifically.

[Unidentified Analyst:]

Okay. So it's still BPO contributing as the majority of this increase in other HR revenues?

[Kathleen Chien:]

No, no, no, the ARPU. ARPU is defined – actually only is calculated on online revenues, so it has nothing to do with the calculations and when – when we talk about other HR services, that has no impact on the ARPU, as we talked about earlier. So ARPU is actually defined as purely just online-related services and recruitment segments and so most of that is organic.

[Unidentified Analyst:]

Okay, okay. And what about the other HR revenue, how much of it is really – I missed that question earlier. How much of it is related to seasonality versus new products or BPO or any regulatory et cetera? I just want to clarify it because obviously this has been a very strong performance for the quarter that we haven't seen in a while, so I just want to get a better understanding of the drivers.

[Kathleen Chien:]

For the other HR services in the first quarter I'd say that it's still mostly led by the growth in the business processing – I will say services segment, so that will be the bigger driver within that. Obviously there's a little bit of it also coming from just new products because we've actually then consolidated the contribution from Yingjiesheng as well in the first quarter. When you actually compare year-over-year it is a slight difference there, but other than that I mean it's really mostly driven by the other – the business process outsourcing services will be the biggest driver in that particular area.

[Unidentified Analyst:]

Okay. And comment a little about – I understand that the first question you got about sales and marketing spend, and your comment about seasonality, how should we think about sort of the payback or how are you guys going to scale these sales and marketing expenses over time, because obviously as a percentage of revenue you've ramped up quite a bit over time, so just your thought process for the longer term, how you guys think about this?

[Kathleen Chien:]

I think two things are going on here. One, we talked about seasonality, so if you look at first and second quarter, sometimes the – whether or not it's revenues or costs and there's a little bit of shift, depending on where the Chinese New Year falls. But I think overall and also because this year specifically we actually as I said earlier, we actually decided to increase the sales comp structure actually earlier than we had done last year. So when we look at second quarter then perhaps then the differential or the growth rate won't look as high versus the first quarter. Although when we look at the first half year results and that we should be actually more in line in terms of hopefully tracking to revenue growth and tracking marketing and sales growth will be more in line. This year versus last year, though we will expect that maybe there will be a couple of percentage more points revenue side overall and we'll be putting in that to investing into growing the new products. So that will be the only difference.

[Unidentified Analyst:]

Okay. And comment a little about the new products, the two [Indiscernible] M&As you guys are talking about. Obviously you don't need to give me any numbers, but qualitatively have these businesses been performing reasonably well on a like-for-like basis since you guys have acquired or you guys have yet to start monetizing the opportunity yet?

[Kathleen Chien:]

The businesses that we acquired last year we believe are tracking to our expectations, so I think they are actually on the right trajectory.

[Unidentified Analyst:]

Okay. Okay. And also, competitively, can you talk about what's been going on in the marketplace in general like has there been any new entrants into the business; are there any existing players getting more competitive, sort of where are you guys stacked up both on the online side of the business as well as the other HR services, if the environment has gotten a little bit more competitive or how would you see it versus a year ago?

[Kathleen Chien:]

I think on our recruitment side there has been not too much new stuff going on. I think that's been pretty stable. I think on the other HR services side, especially on the BPO side, it's actually been more about regulatory than it has been about competitors, because I think a lot of the regulations or guideline changes or taxation changes, that actually affects the entire industry and not us in particular. So that's been what's going on in the marketplace.

[Unidentified Analyst:]

Okay. Okay, great. I will jump back into the queue. Thanks.

[Kathleen Chien:]

Thank you. Okay. Well then, thank you everybody for joining us today. We look forward to speaking with you again next quarter and we value your continued support of 51job, and so have a good day everyone. Thank you.