51job, Inc.
Q2 2015 Earnings Call Transcript

Published: 11 Aug 2015

[Operator:]

Good morning, afternoon and evening. Ladies and gentlemen, thank you for holding. Welcome to the 51job, Inc.'s Second Quarter 2015 Conference Call. [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, operator, and thank you all for attending this teleconference to discuss unaudited financial results for the second quarter ended June 30th, 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 second 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 the third 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 fourth quarter of 2014; any accounting adjustments that may occur during the quarterly close; fluctuations in the value of the renminbi against the U.S. 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 third 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 second quarter, followed by an assessment of current market and operating conditions. Then Kathleen will provide a detailed review of financial results and provide our guidance for the third quarter of 2015. Finally, we'll open the call to your questions. Total revenues for the second quarter came in RMB508 million, ahead of our guidance, led by strength of our other value-added account services. While we navigate through this period of softer recruitment demand in 2015, we are pleased that strengthened cross-selling efforts are generating high-quality revenues from our core customer base. As we dedicate our attention on product development and new service rollouts, we continue to operate with financial discipline to balance investments and profitability. Non-GAAP EPS for the second quarter was better than expected at RMB3.04, which was bolstered by the receipt of some local government financial incentives. The revenue growth of our online business was 8% in the second quarter and reflects the weaker employment sentiment we are seeing, as well as the remaining impact of the VAT policy change on a year-over-year comparison. We stepped back on new customer acquisitions and the number of unique employers increased 7% to about 300,000 corporate for the quarter. However, ARPU increased slightly when compared to the year-ago quarter due to successful upselling of customers to higher-priced services, which would have grown more if not for VAT adoption. We are directing our sales force to place greater emphasis on value creation over quantity, especially during this time that we are bringing several more targeted and sophisticated service offerings to the market. Although we are moderating the pace of corporate customer acquisitions, the popularity of 51job.com continues to grow solidly among jobseekers. As of the end of June, registered user accounts have surpassed 90 million and the number of resumes available on the website reached nearly 82 million. We added almost 4 million resumes to the database in this past three months, our best quarter result ever. As we build our new communities and fold in [ph] websites through acquisition or investment to the 51job family, we are on track to achieve the milestone of 100 million people on 51job related platforms this year. The focus on quality by the sales force is also yielding solid results in our other HR services area. Revenues increased 19% in the second quarter, driven by improvement of our BPO business and continued momentum of training services. Although headwinds brought on by regulatory changes last year are not fully behind us, we believe the inherent recurring nature of the BPO business will continue to create some buffering effect against today's tougher economic climate. Our broad and comprehensive suite of HR solutions gives us the opportunity to engage with employers and jobseekers at any stage of the talent management circle, as well as the business circle. We will continue to enhance our competencies across all aspects of HR-related services through in-house development, as well as investments. Turning now to our customer -- to our current market assessment. While we continue to observe employer caution, we believe demand this year has maintained within a certain band of stability, albeit a slower growth rate compared to last year. Fortunately, we have not seen a direct correlation of market volatility in China to hiring patterns. However, we feel there continues to be a high level of economic concern, which does weight [ph] on corporate plans and budgets, especially those of smaller-sized companies. We are not able to predict how long this market tone will persist, but it is likely that a slower environment for recruitment will stay for the remainder of 2015. No matter how market conditions play out, we are pushing forward and making significant progress in executing our long-term multi-product strategy strategic blueprint. In the second quarter we completed the acquisition of Yingjiesheng, our first material transaction in Company history. For those in China, you're probably already familiar with Yingjiesheng which is a leading recruitment website targeting college graduates and students. Operating commercially since 2007, Yingjiesheng has built an amazing network across campus communities in China, primarily through word of mouth. Unlike 51job.com, which is positioned for more experienced jobseekers, the content and opportunities on Yingjiesheng are dedicated to a younger audience, including thousands of active online discussion forums and career guides. We are excited that this combination with Yingjiesheng gives us an established and direct channel to engage with the next generation of white collar workers. The Yingjiesheng sites will continue to be independently run by its founders under its existing brand and identity, but we have fully integrated the sales and customer management functions into 51job. We look forward to introducing and cross-selling Yingjiesheng's services to a much larger customer base starting this fall [ph] campus recruitment season. During the second quarter we also completed several investments in other HR services companies including Zhiding Youyuan, which provides talent assessment tests and tools. Zhiding Youyuan was founded by a group of psychology PhD graduates from Beijining Normal University, with work experience in HR management and who specialize in organizational behavior. Zhiding Youyuan will strengthen service offerings in our training business and help enterprises to better allocate personnel resources. We believe there is also potential to better incorporate testing into our full service recruitment modules and projects, which could be especially applicable to improving graduate hiring by sophisticated employers. Finally, we'll continue to make strides on our internally developed product initiatives. Although our high-end recruitment website 51JingYing remains in a beta stage, we have received good feedback from hunters and jobseekers, and continue to focus on improving the user interface and functionality. Behind the scenes, we have other ideas in incubation that we aim to introduce to the market soon. As we position 51job for the future, we stay continuously focused on value creation for all stakeholders, to connect our jobseekers with the best and most relevant opportunities, to deliver tangible, successful results for our employers, and to enhance profitable returns for our shareholders. 51job is embarking on its next evolution as we widen our coverage to new demographics, develop more targeted HR solutions, and create high-quality services segments. While we fully expect customer adoption of the newer services to be a gradual and measured process, we are confident in this strategy. We'll penetrate deeper into corporate budgets to achieve our vision as the one-stop shop for all HR needs in China. I'll now turn the call over to Kathleen for a detailed financial discussion of the quarter.

[Kathleen Chien:]

Thank you, Rick. In my following presentation, please be aware that all financial numbers are in our reporting currency of the Chinese renminbi unless otherwise stated. Also please note that all growth rates are on a year-over-year basis as compared to the corresponding period in 2014 unless otherwise indicated. Total revenues for the second quarter of 2015 were RMB508 million, represent an 11% increase. As a reminder, please note that 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 record on our financial statements which has affected growth rate, margin and ratio calculation. The one year anniversary of VAT adoption was reached in June of 2015 and going forward we will resume like-for-like year-over-year comparison starting in the third quarter. Online revenues for the second quarter grew 8% to RMB336 million. The number of unique employers using our online services increased 7% to 300,000 companies in the second quarter. While pricing has been generally unchanged over the past year and in spite of the negative VAT impact, our ARPU increased 0.3% in the quarter. We saw better upselling of higher-priced services, in particular to our larger-sized customers. As Rick mentioned earlier, we will scale back on new customer acquisition in light of the current conditions and instead we'll focus on deepening relationships with our existing and more established employers who will be the key initial audience for the uptake of new services as well. Revenues for other HR services increased 19% to RMB171 million in the second quarter, which was primarily driven by the improved performance of our outsourcing business and continued strength in our training services, solid cross-selling efforts by the sales force increased spending per customer in this area as well. Other HR's contribution to total revenues in the second quarter was 34%, compared with 31% in the year-ago quarter. We expect that this trend of increased contribution will continue through this year. Gross profit grew 11% to RMB362 million and gross margin was about 73%. Included in cost of services in the second quarter was higher share-based compensation expense in the amount of RMB3.7 million. Sales and marketing expenses increased 22% to RMB174 million in the second quarter. The increase was primarily due to the greater advertising and promotion expenditures as the late Chinese New Year in 2015 pushed more activities and a larger portion of spending into the second quarter versus the first quarter. We also had a modest growth of sales headcount versus the same period last year and incurred higher employee compensation expenses due to wage increases. While we expect sales staff addition to be moderate for the rest of 2015, we stay on track with our marketing plans, especially as we roll out new services to employers and jobseekers this year. Included in sales and marketing expenses were share-based compensation expense of RMB3 million in the second quarter. Our G&A expenses increased 8% to RMB66 million. The increase was mainly due to higher employee compensation expenses, especially share-based compensation which was partially offset by a decrease in professional services fees. We expect to incur some additional expenses in Q3 related to the integration of new businesses which had been factored into our EPS guidance. Share-based compensation expense included in G&A increased to RMB16 million in the second quarter of 2015, compared with RMB13 million in the same quarter of the prior year. Operating income for the second quarter was RMB122 million, essentially unchanged from last year, and operating margin was 24.6% compared to 27.8% in the second quarter of 2014. However, excluding share-based compensation expense, operating margin would be 29.3%, compared with 31.9% in the year-ago quarter. In April of 2014, we completed an offering of convertible senior notes. Under mark-to-market accounting we recognized a loss of about RMB26 million in the second quarter associated with the change in the fair value of these notes. Other income in the second quarter included RMB45 million in local government financial subsidies versus RMB32 million in the year-ago quarter. Net income for the second quarter was RMB137 million, compared with RMB52 million in the same quarter of 2014. Our fully diluted EPS was RMB2.33 or $0.38. Excluding share-based compensation expense, gain from foreign currency translation, change in the fair value of the notes, as well as the related tax impacts of these items, non-GAAP adjusted net income increased 10% to RMB182 million in the second quarter. Under the "if converted" method, non-GAAP adjusted fully diluted EPS was RMB3.08 or $0.49 per share. During the second quarter we completed a number of acquisition and investment transactions which were all funded by our existing cash resources. We purchased 100% of Yingjieshen for RMB250 million and Yingjiesheng has been fully consolidated into our financial statements since early April. Revenues from Yingjiesheng were included in our online services business in the second quarter but its contribution was very small given the seasonality in that business. Going forward we will include Yingjiesheng revenues in our online revenues in our financial presentation. We also made several investments, including a 60% stake in Zhiding Youyuan for RMB18.7 million. Due to its closing in late June, Zhiding Youyuan was reflected in our balance sheet but did not contribute to our P&L in the second quarter. Other non-controlling strategic investments completed during the second quarter totaled approximately RMB20 million and were accounted for under the cost method and included in long-term investments on our balance sheet. We continue to actively pursue many opportunities. We ended the second quarter with cash and short-term investments of RMB4.6 billion, equivalent to approximately $745 million. During the second quarter we repurchased about 100,000 ADSs from the open market for an aggregate consideration of approximately $3.1 million. Turning now to our guidance. Based on current market conditions, our total revenues target for the third quarter of 2015 is in the estimated range of RMB505 million to RMB525 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 share-based compensation expense, the impact of foreign currency translation, any mark-to-market adjustments for the convertible notes, nor the related tax impact of these items. Total share-based compensation expenses is expected to be between RMB20 million and RMB21 million for the third 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] Your first question comes from the line of Alicia Yap from Barclays. Your line is open, please go ahead.

[Alicia Yap:]

Hi. Good morning, Rick, Kathleen and Linda. Thanks for taking my questions. A couple of questions for me. Number one is regarding the Yingjiesheng. So I understand the revenues is relatively small in the second quarter, but in terms of modeling, could you give us some color in terms of how much expenses that we should be -- model going forward? And then on the 3Q guidance, how much of that also be contributing from Yingjieshen? And then second, similar, which is the 60% stake in Zhiding Youyuan. So your guidance probably reflected that consolidation, and how much on the revenue and expenses for that?

[Kathleen Chien:]

Hi, Alicia. Thank you for the question. I think just related to Yingjiesheng and Zhiding, I think for Yingjiesheng, second and third quarter both are actually lower seasons in general. So I would say that in terms of what is included in our forecast or guidance, that would be very minimal impact from the top line perspective. We're talking about literally, I would say, probably 1% of revenue, is probably the range. We're looking at low single digit if you will, because it is very small for this season. I think we obviously have some expectations once we go into the fall for the campus in the fourth quarter, but I think we will wait to give a little bit more color and guidance on that next quarter as we kind of see how we are on track on the customer integration and sales push on that front. But I think regardless, given the size in general of our total online operations, we do not expect that the contribution will be more than single-digit percent of revenues overall for this year. So that would be how we would look at the revenue contribution for the businesses for the initial kind of couple of quarters of integration. On the cost side, I think that what we can comment on is that, if you look at the purchase price of let's say Zhiding, I mean it is actually a very small number relatively speaking compared to Yingjiesheng. It is actually a small operation at this point in time in general. So I think that we expect that, again, given that situation, that we're not thinking that they will have material impact in general and that again we're talking about adding a few percentage points to our total cost structure at this point. So I don't think that should change the total trajectory of our cost structure but it will add maybe a couple percent.

[Alicia Yap:]

So, Kathleen, can I follow up, when you say 1% or low single digit for Yingjiesheng, is it 1% of the online revenue or 1% of the total revenue?

[Kathleen Chien:]

I'm talking about just online revenues related to that.

[Alicia Yap:]

I see. Okay. Got it. And then my final question is more in terms of the macro environment. So I think as we're heading into the second half, given what had happened last couple of months or so in the market sentiment, so is the recruitment conditions or the sentiment, is it getting worse compared to the first half? Any change on let's say the wage increase or maybe the incentives or willingness to hire from the employers? Thank you.

[Kathleen Chien:]

I think our assessment right now is that, I think, the sentiment I don't think is recovering to an improved path but I don't think that it actually has significant deterioration either. So I think it's kind of a so-so situation. But having said that, I think wage increase continues to be fairly significant in the marketplace, especially for positions where people are still competing a lot for talent in the areas of test and development and also in the sales area which I think is something that continues to happen. So this year it's a little bit different, I guess, when we went through the financial crisis where we felt that there was no wage inflation, and then demand was actually relatively weak. This year I think the demand is not -- I wouldn't characterize it at the same level, but it's not been so strong, but wage pressure continues to be there as well. So I think it's, you know, that's kind of how we see the market at this point in time.

[Alicia Yap:]

Great. Thank you. I'll get back to the queue. Thanks.

[Kathleen Chien:]

Thanks, Alicia.

[Operator:]

Your next question comes from the line of Wendy Huang from Macquarie. Your line is open, please go ahead.

[Wendy Huang:]

Thank you. First, the Company seems much more aggressive in terms of pursuing the M&A opportunities. Can you share with us what are the potential ones that you're still looking at? And secondly, operating margin seems dropped to the lowest level in the past five years. So, how should we expect the OpEx to trend up going forward and how will the OP margin change in the medium term? Thank you.

[Kathleen Chien:]

I'll answer the second one first and then maybe Rick can also add in on that. I think for the margins, yes, I think that, you know, obviously, second quarter we actually spent a fair amount of money on sales and marketing, and it is actually at the highest percentage we probably had in the last five years, or more, if you will. But I think part of that is obviously we made some commitments early in the year hoping that this year would be more robust than it has turned out to be. But we do not choose to pull back on that and we made commitments to continue to market to users and consumers and continue to move forward on it. But having said that, we think that, you know, we've already said that we will now be more moderate in our hiring activity this year, so we will be looking to kind of also control our costs a little bit on that front given the current environment, and maybe slow down the customer acquisition a little bit. So I hope that we will be keeping our costs in line and kind of hoping that to trend back down in the second half of the year a little bit. It will still be higher than what it was last year by a couple of percentage points most likely, but I think that at least we're not hoping to inflate that further, if you will. And then on the M&A question, unfortunately we can't actually give any specifics. Obviously if we were at that stage where we actually could reveal a little bit more detail specifically, we would. But I think, you know, we continue to look at opportunities where we feel that we could actually deploy our sales resources to actually increase the business volume if we were to get into any sort of investments or partnerships or acquisitions. And so as Rick mentioned earlier about the Yingjiesheng acquisition, that is of the same kind of mindset as we approach it, because we feel that obviously we have a very important asset in terms of the custom-built base that we've actually accumulated and built over time, and we hope that we will be able to leverage that and be able to push more products and services to customers so that we will be able to then, you know, fully maximize those relationships, and again at the same time then get better sales customers, if you will, so.

[Rick Yan:]

Yeah, we have communicated consistently that we want to be the one-stop shop for HR customers. So we will continue to expand our product service offerings either through internal product development or investment in other properties. But I'm going to think that we'll probably do it -- all the M&A activities that we do will be focused on kind of customer synergies or jobseeker synergies. And we'll be focused on the HR industry. And I don't think we will be kind of a pure financial investing in that sense. We do want to look for strategic rationale when we look at M&A deals.

[Wendy Huang:]

Okay. Just to follow up on your comments. So on the sales and marketing cost increase, that was mainly due to the headcount increase. And so, in other words, it was not really driven by the advertising campaign, et cetera, right?

[Kathleen Chien:]

No. I think we've also actually spent more this year on marketing because we made those commitments early on before the sort of how we kind of looked at the year because of the very late Chinese New Year. And so, some of the spending was pushed into Q2 anyways, and it was actually at a higher level than it was historically.

[Wendy Huang:]

So those marketing campaigns were not continuing to Q3, right?

[Kathleen Chien:]

We will continue to push actually on some marketing. Percentage-wise it will be higher than what we spent last year. But we will be monitoring a little bit on the sales front instead.

[Wendy Huang:]

Okay. And on the M&A front, I understand your comment earlier. Just wonder if you have any plan maybe to go back to visit the executive search area in terms of strengthening that business and looking for some M&A opportunities. And also on the HR outsourcing front, given that you are trying to provide like one-stop HR services, so, is there any kind of acquisition candidates out there that you might eyeing on?

[Kathleen Chien:]

I think, no, we're not ruling anything out, but I think I would upfront and say that we will probably be less interested in looking just an executive search property because most of that is completely offline and we don't believe those are very scalable businesses. On the outsourcing side, we probably would have a different view on that, and I think we've historically been looking at a lot of opportunities. And I think the challenge has always been that most of the more sizable players in that business has been -- or are government or government-related agencies if you will, so the ownership and the ability to participate and get involved in those transactions has been more limited in the past, if you will. But we definitely continue to look at many of the agencies, that anything that an HR department could potentially use as a service provider, if you will, and I think that we're very open-minded in that space. We continue to be actually actively looking.

[Wendy Huang:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Your next question comes from the line of Thomas Chong from Citigroup. Your line is open, please go ahead.

[Thomas Chong:]

Hi, good morning. Thanks management for taking the question. I have three questions. The first question is regarding the recruitment demand. Can management comment about the recruitment demand in top-tier as well as lower-tier cities? Do you see any difference? And my second question is talking about the online recruitment revenue. Can management comment about the revenue coming from SME and key accounts in second quarter? And should we expect the key accounts to increase in revenue contribution given there are more uncertainties regarding the smaller customers? And my final question is regarding the third quarter revenue guidance. Can management comment about the customer -- the number of customers and the ARPU trend for the online recruitment services? Thanks.

[Kathleen Chien:]

Hi, Thomas. Thank you for your questions. In terms of just demand sort of between cities. I think we've always made the observation that I don't think that there's significant differential between sort of the different tier of cities in our opinion. We feel that, when we talk about the macro conditions, that is actually a general kind of situation where it does permeate and affect all cities across the board, if you will. So I wouldn't say that the demand profile would be significantly different across different levels or tiers of cities as defined. So I wouldn't say that. In terms of the size of companies and how they reacted in the current environment. I think we will probably agree with your directional kind of feeling in the sense that we do feel like what's been more impacted this year so far has actually been more the SMEs because I think that they have more limited financial resources and that they're typically more ad hoc anyway and has less planning. So in sort of situations where there's more volatility in the marketplace or there are more uncertainties, I think they're the ones that actually kind of get impacted and go away in the marketplace. So I think, you know, and that reflects I think our comments ourselves talking about the fact that we're actually kind of probably going down on the new customer acquisitions which will be more the SMEs, if you will, and trying to focus our energies and redirect that to the larger customers, and deepening our relationship with them during this time. So I think that is how I would answer the first two questions.

[Rick Yan:]

Yeah. On the third quarter, in terms of customer count and ARPU, I think we have communicated that given the current demand environment, we will -- will be moderate in terms of sales headcount additions. So you will see the customer count increases will be more moderate compared to previous quarters. And normally when we're adding less customers, you will see the ARPU will slightly go up because we could penetrate the larger customers over time. And when we have a lot of new customer adding, they tend to purchase the more lower-priced packages. So I would say that you would see a more moderate customer count growth and a moderate increase in ARPU.

[Thomas Chong:]

Thanks. May I have a follow-up question regarding the number of sales force? I remember in the first quarter it's about 3,400 sales. How many are there in second quarter and how should I think about for the full year? Thanks.

[Kathleen Chien:]

We actually did not increase our headcount in the second quarter. So this reflects our comments earlier about trying to moderate our headcount growth and just expecting that we are actually not going to have a strong new customer acquisition. We will be --

[Thomas Chong:]

Thanks.

[Kathleen Chien:]

-- in the second half of the year but it will be limited. Yes.

[Thomas Chong:]

I see. Thank you.

[Operator:]

Mr. 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. Bye-bye.

[Operator:]

Ladies and gentlemen, this concludes the 51job, Inc.'s second quarter 2015 conference call. Thank you for participating. You may now disconnect.