51job, Inc.
Q3 2005 Earnings Call Transcript

Published: 20 Nov 2005

[Operator:]

Good day, ladies and gentlemen. Welcome to the 51job, Inc.’s Third Quarter 2005 Conference Call. At this time, all participants are in a listen-only mode. Following today’s presentation, instructions will be given for the question-and-answer session. If anyone should assistance at any time during the conference, please press the “*” key followed by the digit “0” and an operator will assist you. As a reminder, this conference is being recorded today. Now I would like to turn the conference over to your host, Ms. Linda Chien, Investor Relations Manager of 51job. Please go ahead.

[Linda Chien:]

Thank you, operator, and thank you all for attending this teleconference with 51job management. With me today are, CEO Rick Yan and CFO Kathleen Chien. Management will discuss un-audited financial results for the third quarter of 2005, which is for the three months ended September 30, 2005. A press release containing third quarter results was issued earlier today and a copy can be obtained through our website at ir.51job.com. Before we begin, I would like to remind you that during this call, statements regarding targets for the fourth quarter of 2005, future business and operating results constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the Private Securities Litigation Reform Act of 1995. These statements are based upon management’s current expectations, and actual results could differ materially. Among the factors that could cause actual results to differ are the number of recruitment advertisements placed, sales orders received and customer contracts executed during the remaining weeks of the fourth quarter of 2005; any accounting adjustments that may occur during the quarterly close; fluctuations in the value of the RMB against the US dollar and other currencies; behavioral and operational changes of customers in meeting their human resource needs as they respond to evolving social, economic and political changes in China; introduction by competitors of new or enhanced products or services; price competition in the market for the various human resource services that the company provides in China; and fluctuations in general economic conditions. For additional information on these and other factors that may affect the company’s financial results, please refer to the risk factor section of the company’s filings with the Securities and Exchange Commission. 51job undertakes no obligation to update targets prior to announcing final results for the fourth quarter or as a result of new information, future events or otherwise. Now, I will turn the call over to Rick Yan, Chief Executive Officer.

[Rick Yan:]

Thank you, Linda. Good morning, everyone, and thank you for joining us. I will begin today’s call with an overview of third quarter highlights. Then, Kathleen will go through our financial results in more detail. Following her comments, I will discuss current operating conditions and provide our outlook for the fourth quarter of 2005. Then we will open the call to your questions. We are pleased to announce that third quarter revenues and EPS came in above expectations. Total revenues were RMB161 million, or approximately US$20 million. This was higher than the range of RMB145 million to RMB155 million we guided to in August. Although revenues exceeded our forecast by only about 4% compared to the upper end of the range, profitability was 60% higher than expected. Excluding the foreign currency translation loss, adjusted value to earnings per common share were RMB$0.48, greater than the $0.22 to $0.30 range we forecasted. In Quarter 3, we achieved a record gross margin level of 54.7%, 1% higher than Quarter 3 2004 and more than 4% higher than Quarter 2 2005. One of the main competitive strengths of our business model is the scalability of our service infrastructure and the operating leverage we can achieve with revenue growth. With actual cost of services and operating expenses tracking close to our budget, the revenues we generated above our Quarter 3 forecast essentially flow straight into our bottom line. We are especially pleased with the results in light of our observation that the growth in market demand for HR services continues to lack last year’s levels. We aim to build upon our success in Quarter 3 with continued efforts to drive top-line growth and achieve further margin improvements. A key highlight of the third quarter was the continued solid performance of the online recruitment services business. We are encouraged by the growing customer and job seeker acceptance of our online platform this year. Unique employers using our online services reached over 34,000 in the third quarter, which was 10,000 more than last year’s Quarter 3. Another bright spot in Quarter 3 was the growth of the other HR related services business. Excluding revenues from the stationery business we exited late last year for like-to-like comparison, revenues for the other HR services segment increased almost 84% over Quarter 3 2004. This segment includes several HR related products and services, such as corporate training, business process outsourcing and software tools and applications. As a pioneer of these newer value-added services, we believe that we are well-positioned to capitalize on the growing development and sophistication of the human capital market in China. Overall, we are pleased that we successfully executed our strategic initiatives in the third quarter, which resulted in our exceeding financial targets and substantially improving profitability. We aim to build upon this momentum for the remaining of the year. I will now turn the call over to Kathleen for a more detailed review of the financial results.

[Kathleen Chien:]

Thank you, Rick. Third quarter total revenues were RMB161 million, a 21% increase over the same quarter last year. Excluding the stationery business, which we ceased to actively operate in November of 2004, total revenues grew 27% over the same quarter last year. Year-over-year growth was driven by increased recruitment advertising volume, higher number of customers and a contribution of new cities. Our print advertising revenues rose 20% over Q3 2004, primarily due to higher page counts, which were partially offset by lower average revenue per page. The estimated number of print advertising pages was about 3,100 compared with 2,400 pages in last year’s third quarter. As we extended our geographical footprint into smaller-sized cities and the revenue contribution increases, we expect the overall trend in average revenue per page to decrease over time. However, please note that changes in our average revenue per page do not necessarily reflect our margin trend. You can see that although average revenue per page was 7% lower than last year’s Q3 level, our gross margin this year was 1% higher. Online recruitment services revenues grew 37% to RMB44 million in Q3. The increase was driven primarily by a higher number of employers using our online platform and unique employers using online recruitment services were over 34,000 in the third quarter this year compared with over 23,000 in Quarter 3 of last year. Gross margin came in at 54.7% compared with 53.7% for Quarter 3 of last year, compared to Q2 of 2005 gross margin improved by about 440 basis points on economies of scale and improved efficiency. Sales and marketing expenses for the quarter were RMB28 million. The increase over Q3 2004 was due to the expansion of our sales force and increased spending on promotional and brand building activities. Compared to the second quarter, sales and marketing expenses increased slightly in absolute amounts, but decreased by approximately 80 basis points as a percentage of net sales. General and administrative expenses for the third quarter were RMB22 million and increased over the prior year’s level, primarily as a result of higher professional services fees, public company expenses, additional costs related to opening more offices and increased personnel. Sequentially compared with Q2; G&A expenses decreased by approximately 60 basis points as a percentage of net sales. Operating income was RMB30 million versus RMB33 million for the third quarter last year. Compared with the second quarter of 2005, operating income increased 62% as a result of improved gross margin and operating leverage. On July 21 of this year, the Chinese government changed its policy to permit the RMB to fluctuate within a band against a basket of certain foreign currencies. This resulted in an appreciation in the value of the RMB against the US dollars. At the end of the third quarter, the exchange rate per US$1 was approximately RMB8.09 compared with the previous peg of RMB8.28. As the RMB is our functional currency, capital selling (ph) standards require translation of our foreign currency assets into RMB at the end of each reporting period. Therefore, the appreciation of the RMB in Q3 resulted in a corresponding RMB10.6 million foreign currency translation loss on our US dollar assets. This foreign currency translation loss is a non-cash item and does not impact our cash earnings or cash flow. Excluding the foreign currency translation loss, non-GAAP adjusted net income for Quarter 3 was RMB27.5 million and adjusted fully-diluted earnings per common share were RMB 48 cents. Expressed in US dollars and reflecting the common share to ADS ratio, our adjusted fully-diluted earnings per ADS was US$0.12. Turning to GAAP results, net income for the third quarter was RMB17 million compared with RMB24 million in the same period last year. Fully-diluted earnings for Q3 were RMB 30 cents per common share, which is equivalent to US$0.07 per ADS. I am pleased to note that our share count this year is almost 85% higher than in Q3 of last year as a result of the new common shares issued in our IPO and the conversion of preference shares, which both occurred in early October 2004. We increased our cash and investment balance at the end of Q3 to RMB885 million from RMB865 million at the end of Q2. During the third quarter, our use of cash included the repurchase of approximately 232,000 ADSs in the open market for an aggregate consideration of US$3.3 million. Also, in October, we signed a letter of intent to purchase a new office complex in Zhangjiang High Technology Park. This complex is expected to become our new corporate headquarters and to house our technology and online operations. The purchase price of the new premises is approximately RMB114 million and we expect to incur additional expenses associated with taxes, renovations, moving and other related activities. We expect to begin occupying the new complex in late 2006. Now I’ll turn the call back over to Rick for his comments on current market conditions.

[Rick Yan:]

Thank you. Similar to our observations earlier in the year, our market assessment continues to indicate that the growth in market demand for recruitment services has been more moderate in 2005. We have heard similar feedback from a cross-section of HR managers stating that they had fewer new positions to fill and less employee turnover this year when compared with 2004. We believe that recruitment activities have been generally slower in 2005 when compared with 2004 across the industry. We closely monitor competitor publications and websites, and our analysis continues to validate our market leadership position in print advertising and online recruitment services. Because our competitors are private and any financial results they might disclose may not be prepared under US GAAP standards, we rely on operational matrices, such as the number of advertising pages per week, the number of job postings and traffic reached to gauge our performance against the rest of the industry. By each of these measures, we remain the clear leader, with strong local presence in more than 20 cities, combined with the premier national brand for HR services. We also believe that our business model is unique among the industry for achieving growth and, at the same time, sustainable profits. Many of our competitors have adopted strategies that call for continued sacrifice of near-term profitability in the hopes of generating future returns. Many of these competitors started their business a few years ahead of us and also received venture funding earlier than we did. When we raised our first and only round of venture funding in early year 2000, we were the market follower. Over the past five years, despite the later start, we successfully grew and became the market leader in the industry. We also turned profitable in 2002 and have achieved two consecutive years of increased profitability. Our track record of achieving and strengthening our market position, market leadership position while, at the same time, improving profitability is unmatched in our industry. We will continue to be disciplined to deliver profitability and returns in the near-term while further positioning and growing our business for the long-term. In the fourth quarter of last year, we experienced a marked decline in sales in the latter part of December, a situation that we have not seen in our past history. Based on conversations with customers, we attribute the sales slowdown primarily to HR departments depleting their budgets earlier in 2004 and to many hiring managers taking holidays at the end of the year. We will be monitoring this situation closely this fourth quarter to see if last year’s late December slowdown signaled a new incidence in seasonality and customer behavior pattern in our business. Based on current market and operating conditions, our total revenue target for the fourth quarter of 2005 is in the range of RMB140 million to RMB150 million, which would approximate a growth of 16 to 25% over fourth quarter 2004 revenues. Our fully-diluted EPS target for the fourth quarter of 2005 is between RMB 20 cents and RMB 30 cents. Please note that this EPS range relates to our business operations and does not factor in foreign currency translation losses or gains that may arise from any future RMB revaluations. For the rest of the year, we remain focused on executing our business model and driving sales productivity. In line with our traditional spending patterns, we expect to increase expenses in preparation for the seasonally strong first quarter. The period after Chinese New Year holidays is typically a strong season for recruitment advertising. As such, we will be making appropriate investments in our operations to ensure that we meet customer demand and maintain our high services standards during this traditionally busy period. Chinese New Year falls in late January in 2006 compared with mid-February this year. The HR services industry in China remains underdeveloped and under-penetrated. As the market leader and the premier brand in the industry, we believe that we are best positioned to capture revenue opportunities from this continuing development. With the industry’s most visited websites, widest geographical footprint, largest direct sales force and broadest HR product portfolio, we are a leading choice amongst HR managers in China. That concludes our presentation. We will be happy to take your questions at this time. Operator?