51job, Inc.
Q1 2015 Earnings Call Transcript

Published: 12 May 2015

[Operator:]

Good morning, afternoon, evening, ladies and gentlemen, thank you for holding. Welcome to the 51job, Incorporation First Quarter 2015 Conference Call. At this time all participants are in a listen-only mode. After the presentation there will be an opportunity to ask questions. Instructions will be provided at that time. [Operator Instructions]. I will now hand the conference over to Ms. Linda Chien, Vice President and Head of Investor Relations. Thank you, madam. Please go ahead.

[Linda Chien:]

Thank you, Jama, and thank you all for attending this teleconference to discuss unaudited financial results for the first quarter ended March 31, 2015. 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 2015 results was issued earlier today and a copy may 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 targets for the second quarter of 2015, future business and operating results constitute forward-looking statements within the meaning of 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 expectation 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 second quarter of 2015; any accounting adjustments that may occur during the quarterly close; fluctuations in the value of the Renminbi 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, regulatory and political changes in China as well as stock market volatility; 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; acceptance of new products and services developed or introduced by the company outside of the human resources industry; any risks related to acquisitions or investments the company has made or will make in the future 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 Factors 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 second quarter of 2015 or as a result of new information, future events or otherwise. Also I would like to remind you that during the course of this call we will discuss non-GAAP measures. Reconciliation to the most directly comparable GAAP financial measures are provided in the tables appended to the press release. This conference call is being broadcast on the Internet and is available through our website at ir.51job.com. Now I'll turn the call over to Rick.

[Rick Yan:]

Thank you, Linda and welcome to today's call. I will begin with highlights of the first quarter, followed by an assessment of current market and operating conditions. Then Kathleen will provide a detailed review of our financial results and provide our guidance for the second quarter of 2015. Finally we will open the call to your questions. As we expect results for the first quarter was significantly impacted by the late Chinese New Year holiday in 2015. To start-off the recruitment peak season was essentially delayed into March this year which let us time constrained to capture employer activity and recognize revenues in the first quarter. While the revenues came in slightly lighter than forecast at RMB458 million, we remained financially disciplined with earnings above expectations of non-GAAP EPS at RMB 2.39. We ended the March quarter with a robust amount of advance from customers on the balance sheet and we will see realization of more peak season orders in the second quarter of this year versus 2014. Revenues for our online business increased 3% in the first quarter. Our strategic priority remains dedicated to the expansion of our customer base. The number of unique employers increased 11% to nearly 288,000 corporates for the quarter. However, this volume growth was partially offset by a 7% decline in ARPU, due primarily to the combination of the late Chinese New Year and the impact of the 6% VAT policy change. While we have maintained a generally stable pricing policy over the past year these external factors will continue to materially impact year-over-year comparisons for the first half of 2015. As we further build out the employer base we are matching that with solid consistent growth of our job seeker network. We ended the March quarter with an accumulated 87 million user accounts, 78 million resumes and over 20 million downloaded activations of our mobile apps. With the addition of new online properties such as 51JingYing we are aiming to create more avenues through which to engage individual users and improve effectiveness for our customers. On the other HR services front revenue growth was 14% in the first quarter. Although this area was also affected by the late Chinese New Year holiday we saw solid cross-selling which drove usage of our BPO and training services. Good execution by the sales force to promo these value add services continues to increase our wallet share of customer budgets, deepen employer relationships and leverage our service infrastructure. We will further benefit from these improved sales efforts when we complete the operational adjustments to our BPO services and resume coverage rollout. Turning now to the current market conditions, while recruitment activity has remains positive so far this year, we are sensing more employer caution and moderating demand. We believe that hiring pattern may see greater volatility and fluctuations this year as companies face the reality of a slower economic growth environment in China. Although employers in general are placing increased value on human capital and acknowledging the benefits of building a [indiscernible] pipeline companies with limited financial resources or operating in challenging segments of the economy may need to adjust their plans. As employers adapt one thing however remain consistent. The Chinese government has stated a commitment to support a healthy labor market during this economic transition period. With recent policies that promote entrepreneurship and foster innovation we believe the long-term secular trend driving demand for skilled workers will persist. While we continue to monitor market conditions closely we will move ahead with our strategic plan. We are focused on increasing market penetration with our customer acquisition efforts and introducing new products which extend our service coverage to new demographics and strengthen our overall network. This year with the launch of 51JingYing and acquisition of a campus recruitment website on track to be completed in the second quarter we will have a meaningful presence and critical mass across the entire lifecycle of a white collar worker. From recent graduate to experienced professionals we will have a targeted user interface with specifically relevant content to address each stage of his or her career. This completed link is another important milestone in our multi-faceted one stop shop strategy that has been at the foundation of our history and success. We have more products and services in development as we look to generate more new revenue opportunities, leverage our sales force and achieve greater operational efficiency. Our vision is clear to make the 51job brand synonymous with high quality HR solutions in China. We have confidence in our strategic plan and believe that we are making progress towards a long-term future of sustainable profitable growth. I will now turn the call over to Kathleen for a detail financial discussion of the quarter and the year.

[Kathleen Chien:]

Thank you Rick. In my following presentation please be aware that all financial numbers are in currency of the Chinese Renminbi unless otherwise unless otherwise stated. Also please note that all growth rates are on a year-over-year basis as compared to the corresponding period in 2014, unless otherwise indicated. Total revenues for the first quarter of 2015 were RMB458 representing a 5% increase. While hiring activity was solid in the post Chinese New Year peak season the lateness of the lunar holiday in 2015 affected the amount of revenues that could be recognized prior to the quarterly close. As a result we will capture a greater portion of peak season online recruitment revenues in the second quarter of 2015 versus the pattern in 2014. This revenue shift has been factored into the second quarter guidance that we have provided. Also as a reminder since June 1, of 2014 we have transitioned from paying a 3% business tax on gross revenues received in our online business to being subject to a VAT rate of 6%. This policy change has reduced the amount of online revenues we recognized and will continue to weigh on the year-over-year comparison until the one year adoption market reached in June of 2015. Affected by the late Chinese New Year and the VAT policy change, our online revenues for the first quarter grew 3% to RMB310 million. Unique employers using our online services increased 11% nearly 288,000 companies in the first quarter of 2015. We did experience higher than expected turnover rate in the sales force this season, which impacted our customer growth in the first quarter. While pricing was generally unchanged over the past year, our ARPU decreased 7% in the quarter due to the VAT policy change, the late Chinese New Year as well as the increase of new customers, who generally purchased introductory lower price services. Revenues for other HR services increased 14% to RMB146 million, which was primarily driven by the growth in the usage of our outsourcing and training services. The late Chinese New Year also affected this business area by delaying the hiring, onboarding and departure in employees which affect the activity levels of our BPO business. Our print revenue decreased 72% to RMB2 million in the first quarter. We expect to maintain a print publication in the remaining city of Xian for the full year of 2015 but it's impact and contribution will be negligible to our overall results going forward. Gross profit grew 5% to RMB329 million and gross margin was about 74%. Included in cost of services in the first quarter was higher share-based compensation expense in the amount of RMB3.5 million. Our sales and marketing expenses increased 9% to RMB143 million in the first quarter primarily due to more sales headcount versus the same period last year and higher employee compensation expenses. Included in sales and marketing expenses were share-based compensation expense of RMB3 million in the first quarter. As we track customer demand and activity we will likely make adjustments to our sales force expansion this year and be on a more modest hiring pace. While this will effect growth of the online customer base in near term we feel that these measures will drive overall productivity improvement and better align our organization to promote the cross selling of our widening product portfolio. Our G&A expenses increased less than 3% to RMB62.5 million in the first quarter. The increase was primarily due to higher employee compensation expenses which is partially offset by a decrease in professional services fee. Share based compensation expense included in G&A increased to RMB15.2 million in the first quarter of 2015 compared with RMB13.8 million in the same quarter of the prior year. Operating income for the first quarter increased 3% to RMB123 million and operating margin was 27.7% compared with 28.5% in the first quarter of 2014. Excluding share based compensation expense, our operating margin would be 32.5% compared with 33.2% in the year ago quarter. In April 2014, we completed an offering of convertible senior notes. Under mark-to-market accounting we recognized a gain of about RMB57 million in the first quarter associated with the change in the fair value of these notes. Affected by the impact of their value gain, the net income for the first quarter was RMB173 million compared with RMB180 million in the same quarter of 2014. Under the if-converted method our fully diluted EPS for the first quarter was 2.06 which excluded the impact of certain P&L items related to the convertible note in the numerator income and included the maximum number of potentially converted shares to the denominator of the common shares. Excluding share based compensation expense, and loss 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 increased 3% to RMB142 million in the first quarter. Under the if-converted method our non-GAAP adjusted fully diluted EPS was 2.39 or US dollars $0.39 per share. Regarding our balance sheet we ended the first quarter with cash and short term investments totaling RMB4.68 billion equivalent to approximately RMB755 million. During the first quarter we repurchased about 54,000 ADS’ from the open market for an aggregate consideration of approximately RMB1.7 million. We also utilized about RMB42 million from our existing cash resources for the purchase of office space in Shanghai in the first quarter. Turning now to our guidance, based on current market conditions, our total revenues target for the second quarter of 2015 is in an estimated range of RMB480 million to RMB500 million. For the non-GAAP fully diluted EPS target our estimated range is between RMB2.25 and RMB2.45 per share under the if-converted method. Please note that this non-GAAP EPS range does not include any share based compensation expense, the impact the foreign currency translation, any mark-to-market adjustments for the convertible notes nor the related tax impact of these items. Total share based compensation expense is expected to be between RMB23 million and RMB24 million for the second quarter. This guidance reflects our current forecast which is subject to change. That concludes our presentation we will be happy to take your questions at this time. Operator?

[Operator:]

Thank you. Ladies and gentlemen at this time we will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Alicia Yap. Please state your name and company followed by your question. Please go ahead with your question. Alice Yang your line is open. Unfortunately we can’t hear Alice so we will go on to the next question. The next question comes from Xin Wang. Please state your company followed by your question. Your line is open. Please go ahead.

[Unidentified Analyst:]

Hi, this is [indiscernible] from BOCI. Thank you for taking my question. My first question is regarding the competition landscape. Since 58.com acquired chinahr.com and also -[indiscernible] said it will start online recruitment in China, their website, IT sector. So it seem some players have this intent to enter this online recruitment business that has some overlap with your business. So how do you see the competition landscape in a bit longer term and how is our 51job position among these domestic players? Thank you.

[Kathleen Chien:]

Thank you for your question. I think obviously recruitment is a space that has a fundamental need that businesses have if you will and I think that we’ve been operating in this sector for a long time. Chinahr.com is not a new name in our market space, is a company that actually started even before us technically and has its origins from 1997 or 1998. So it’s a company that obviously has been around for a long time. It’s not a new name to us therefore so we don’t think that is something that is considered new competition, even with a different ownership if you will. I mean the business is the same, the need that you are trying to serve is the same. So we don’t think that has a real impact on what we do day-to-day. When you mentioned about Lago [ph] trying to get into a different vertical, again I think that recruitment again is a need that is something that needs to happen all the time and I think vertical players need to think about the verticals that they need to explore but fundamentally whether or not they have the right demographics of users going to their site and applying for a position is really how ultimately we can actually measure our own success or failure and that’s what we have to focus on continually regardless of any potential new entrants or existing entrant with a different ownership if you will.

[Unidentified Analyst:]

Thank you. My second question is that as you mentioned that employers may adjust to slower economic growth in China this year. So how do you see the recruitment demand in 2015 and what will be your growth driver this year and especially any specific sector that had pretty strong recruitment demand in the first quarter or this year as you expected? Thank you.

[Kathleen Chien:]

I think what we are seeing overall is that we don’t think that this year is as robust as it could be or maybe it’s a little bit below our expectations if you will at this point in time. I think we are seeing little bit more of that probably from the SME segment versus the larger customers. So that is what it is. So I think that how we actually run our business I think we will continue to focus on customer acquisition. We are continuing to make sure that we are trying to deliver candidates to our customers that does not change. We don’t have as much of sort of tailwind for us this year but it is an environment that we’ve been through before and I think that we just need to continue focus on execution.

[Unidentified Analyst:]

That’s all my questions thank you.

[Kathleen Chien:]

Thank you.

[Operator:]

Your next question comes from Alice Yang. Please state your name and company followed by your question. Please go ahead with your question.

[Alice Yang:]

Hi Rick Kathleen and Linda thank you for taking my question. This is Alice from Macquarie. My question is about the growth of number of unique employers in this quarter. Essentially the growth rate is a little bit slower than before. I just want to know in addition to the late Chinese New Year if that - is there any other change that you observed in this quarter and how we see the growth for the full year? I have a follow up if I may.

[Kathleen Chien:]

Hi I think yeah. I think the lateness of the quarter definitely have its impact because quarters are made up of three month. And we only had basically one month or less than one month of busy activity versus the prior year. So that does have a big impact on us. But having said that I think I think we view that this year the overall environment is not as robust as we would like it to be and that's something that we have to factor into our planning for the year. And I think we are looking at making some adjustments potentially to our own sales force expansion and plans if you will. And so I think seems like people are on a little bit more of a modest hiring pace. So that's something that we have to take in account for our plans this year.

[Alice Yang:]

Understand, thanks. And as you said that due to this sort of slower than expected growth or less robust marketing environment you said you may adjust your sales force expansion. So may I know that you will be more aggressive to landing more customers and given that overall environment is less, I mean robust or you will cut back your sales expansion to focus more on the bottom line.

[Kathleen Chien:]

I think we are going to be on a more moderate hiring pace than, I think is what we're saying. I think we'll continue to focus on driving top line growth, but I think that we will be more cognizant that we may not bring as many new sales people in the organization, because typically in environments where market demand is not as robust it actually makes it harder for new sales guys to become successful in the same amount of time if you will. So I think we will then be focused more on trying to drive penetration also in the existing accounts and making sure that the sales people within the organization can grow. But now the new sales people that we’ll be taking maybe more limited so.

[Alice Yang:]

Understand, thanks. My last question is about ARPU. May I know that - excluding the 6% VAT what was the decline in ARPU?

[Kathleen Chien:]

Well the overall decrease is 7%. So VAT was bulk of it. So essentially pricewise was fairly stable.

[Alice Yang:]

Okay, understand, thanks.

[Kathleen Chien:]

Thank you.

[Operator:]

Your next question comes from Juan Lin. Please state your company name followed by your question.

[Juan Lin:]

Hi good morning this is Juan Lin calling from 86Research. My first question is about Xian [ph], could you please share the revenue contribution of Xian [ph] and some operating metrics of this new business lines.

[Rick Yan:]

This is a pilot site we launched a couple of months ago, we are still in the pilot operations stage. We are not picking any revenues now and we are pushing it to some of our targets users basically exactly the search industry. So we are still in the early stage of beta testing this website.

[Juan Lin:]

Thank you. And my second question is also related to ARPU. Actually ARPU is down slightly even without the VAT impact. So how should we expect ARPU, how do we focus ARPU going forward and should we expect ARPU to start growing in the second half because of the slowing down recruiting new customers or should we expect ARPU to continue declining going forward.

[Kathleen Chien:]

I think second quarter there will still be the VAT impact which will be more transparent but I think otherwise I think our ARPU hasn't changed that much, bringing it up 1% or 2% or down 1% or 2% is not that meaningful. So I would expect probably more of a flattish kind of a trend is what we're looking at.

[Juan Lin:]

Thank you. That's all my questions.

[Kathleen Chien:]

Thank you.

[Operator:]

Thank you. Your next question comes from Alicia Yap. Please state your company and your question.

[Alicia Yap:]

Hi good morning this is Alicia from Barclays. Hi good morning Rick, Kathleen and Linda. Thanks for taking my questions. I have two quick questions. Number one is to follow-up on the guidance. So it does look like on the sequential basis you did show a slightly better Q-over-Q growth than the previous year. But the year-over-year still look low. Is that mainly because of the VAT difficult year-over-year comp and that would also mean we should see a stronger year-over-year growth starting 3Q this year?

[Kathleen Chien:]

Yes, I think on the couple of things going into play here. I think obviously second quarter we will still feel bigger impact with the VAT adjustments, if you will and I think that is something what we are kind of taking account of into the guidance. We are still kind of trying to see let’s say overall market demand will kind of stabilize at. As I said I think we feel that so far this year that maybe it is a little below our original expectation to be low. But hopefully we will get on a better track in the second-half of the year anyway. So and that won’t be a situation that we will not have to deal with the impact of the VAT. So that should put us in better position in the second half of the year.

[Alicia Yap:]

Can I follow-up on the slower demand, are you seeing across the board, or is it any particular industry that stand out to be weaker than you expect?

[Kathleen Chien:]

I would say that we feel that overall it is actually just weaker then we expect, rather than segment specific. And I think what we feel that also is that I think feel that the SME impact seems a little bit more higher than the larger corporates who I guess have longer planning horizons and actually budget and think about investment on a longer-term basis. So I think that’s what we are observing so far.

[Alicia Yap:]

I see and then my second question is related that there was - recently there was a reported news on potentially a dominant classified site in China was looking into acquire one of your competitor. So how should we see that affecting you or the overall competitive landscape if the reported news were proven to be true? Thank you.

[Kathleen Chien:]

Alicia, are you talking about the 58 and China HR acquisition specifically?

[Alicia Yap:]

Yes.

[Kathleen Chien:]

Okay, I was sure, that was the one, yeah. They have actually put out the news on it and actually I think that is something that has materialized. So that is the situation. I don’t believe that, that is something that will necessary change how we run our business, because I mean China HR obviously is the name that most people are familiar with if you have been in the recruitment say for a long time and it’s certainly a company that we have fought against for many, many years in our history. So I don’t think that having a different backer would change our view on the business. I think you know ultimately it is always about our own execution, how we can go to market, how we make sure we deliver value to customer. So I think that is where we continue to focus on. I think that having a different ownership is not really what something that we worry about too much in terms of change of trajectory of a company. But that I believe has materialized. So yes, that is the situation but I don’t think that we see that it will be a big impact on the business.

[Alicia Yap:]

So you don’t foresee given 58 having kind of HR that they are potentially moving more on to the upstream which is competing directly with you versus previously there were more on the blue color, right. So you don’t think that would be any impact in terms of the duopoly situation that you guys enjoy with staffing?

[Kathleen Chien:]

No, because you know China HR still exist as a site. It never went away if you will, in the interim. I mean they had different ownerships but it is something that always existed so that is why I said. I think they are going to market under the China HR brand I guess is what they would end up doing I suppose under this situation but it is a brand that people knew about and has existing for long-time so having different ownership. It may mean, to be honest, it maybe, let’s say increase marketing spend coming from those guys. But I think that is something is not ultimately the only criteria by which people would chose a service provider if you will but I think that would be something that potentially could change in terms of how they go to market how they spend their money. But other than that it is a brand that has been around for a long time. So it is not a new name or not a new entrant, really in our definition.

[Alicia Yap:]

Okay, great. Thank you, thank you for the answer.

[Kathleen Chien:]

Thank you, Alicia.

[Operator:]

Thank you. Our next question comes from the line of David Li. Please state your company name and your question.

[Unidentified Analyst:]

Hi this is David Lee from Lazard Investors [ph]. Hope you guys can hear me okay. Thanks to Rick and Kathleen and Linda taking my question. Just quickly historically if I remember correctly the other HR revenue growth tracked fairly closely with online recruitment revenue growth rates and this quarter is I think is the first quarter in a long time where it diverge a little bit obviously relative strength of HR versus online. Can you maybe just comment a little bit color on that like what drives sort of the strength in the other HR revenue growth?

[Kathleen Chien:]

David, thank you for the question. I think historically if you look at the overall longer term trend it is true that they actually tend to exhibit kind of a very similar pattern. But I think the volatility between the segment is actually quite different. Recruitment actually has much higher volatility. So there have been period where it’s much lower but there’s also been periods it’s been much higher growth in HR. So I think kind trades itself off a little bit but inherently I think other HR services is actually a more stable kind of type of business. So you don’t see as much of change in terms of trajectory overall. Obviously with recruitment it is actually much more seasonally impacted. So we’re talking about the timing of the Chinese New Year being more significant as a influencer in the first quarter. So that actually has a greater impact on the revenue mix and shift overtime on the recruitment business versus the other HR services and that’s why I think you will see that in the first quarter that obviously it looks like the recruitment actually underperformed versus other HR services.

[Unidentified Analyst:]

Okay, great. And I have a follow-up. Just talk little bit about maybe in granularity, in terms of your ARPU if you exclude sort of the VAT, if you exclude sort of the impact of Chinese New Year, what ARPU will sort of be otherwise for both online and other HR services? I am just kind of curious what they are - what would they be otherwise on a year-over-year basis?

[Kathleen Chien:]

The ARPU actually is only related to online revenue. So has no bearing on the other HR services. So if you are looking at just online revenues then VAT actually has a 6% swing. So if the overall ARPU actually changed about 7% than the bulk of it is actually related to the VAT. So other than that the pricing level didn’t significantly change.

[Unidentified Analyst:]

Okay, great. Thank you and I will jump back in the queue and follow-up later on. Thanks guys.

[Kathleen Chien:]

Thank you.

[Operator:]

[Operator Instructions]. Mr. Rick Yan there are no further questions at this time. Please continue with any final comments.

[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:]

Ladies and gentlemen, this concludes the 51job Incorporation first quarter 2015 conference call. Thank you for participating. You may disconnect.