51job, Inc.
Q1 2006 Earnings Call Transcript

Published: 12 May 2006

[Operator:]

Good day, ladies and gentlemen, welcome to 51job, Inc., Q1 2006 conference call. Operator instructions. Now I'd like to turn the conference over to your host, Ms. Linda Chien, Investor Relations Director 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 unaudited financial results for Q1 ended March 31, 2006. A press release containing Q1 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 second quarter of 2006, 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

[Rick Yan:]

Thank you, Linda. Thank you for joining us on this call. I will begin today's conference call with highlights for Q1. Then Kathleen will go through our financial results in greater detail. Following her comments, I will discuss current operating conditions and provide our outlook for Q2 2006. Finally, we'll open the call to your questions. We had a solid Q1 with total revenues of RMB 173 million, or approximately $21.5 million. This was in line with the revenue guidance we provided in late February of RMB 165-175 million. Q1 results were driven primarily by the growth of our print advertising and online services businesses. Our print advertising revenues grew 35% QoverQ and 14% YoverY. This also marked the first time in our operating history that we had surpassed RMB 100 million in print revenues in a single quarter. Pricing for our print product is city-specific and we closely monitor the pricing environment in each individual market. In Q1, we optimized pricing in some cities by reducing discounts and price promotions. We also selectively increased prices in certain markets. As a result, average revenue per page increased for the third consecutive quarter, to approximately RMB 35,000. Our online business continues to exhibit significant revenue growth. In Q1, we were able to attract many first-time corporate users through our sales and marketing efforts. We also saw increased purchases of higher-priced visibility packages to attract jobseekers during the post-Chinese New Year recruiting peak season. The number of unique employers using our online services grew to over 38,000, 48% higher than Q1 2005. A key highlight of Q1 was the substantial margin improvement we achieved. Benefiting from economies of scale and improved efficiency and combined with higher pricing in print and faster growth in the online business, gross margin for Q1 reached a record level of more than 55%. We also continued to improve our productivity and leverage our service platform. Despite operating four additional offices compared to Q1 2005, the increased financial impact from the new stock options expensing rule, we still increased operating margin from 6% in Q1 2005 to 21% in Q1 2006. As a result, earnings per ADS came in at a $0.12, $0.03 higher than the top end of our guidance. In April, we announced a business alliance with Recruit, Japan's leading HR services company. Similar to our operations, Recruit provides integrated online and offline solutions to corporate customers. It is also one of the international business models we have looked to in analyzing the potential development of the Chinese market. With annual sales of $3.5 billion and operating profits more than $1 billion, Recruit will have in-depth industry knowledge and expertise gained from over 40 years of operations. Our collaboration is underway and we are exploring greater opportunities to further and better serve corporate customers in China. We are off to a good start for 2006, and aim to build upon this momentum for the year. We believe our Q1 results demonstrate the soundness of our strategies, operations and execution. Now I will turn the call over to Kathleen for a more detailed financial review of Q1.

[Kathleen Chien:]

Thank you, Rick. Q1 of total revenues were RMB 173 million, a 21% increase over Q1 2005. Our print advertising revenues rose 14% YoverY, primarily due to higher average revenue per page. In some of our cities, we've tightened our discount policy and reduced the number of promotions that we offered. We also increased our price list in select cities. As a result, average revenue per page increased 16% YoverY and 10% QoverQ. The estimated number of print advertising pages in Q1 2006 was relatively unchanged for the same period last year. All-in recruitment services revenue grew 53% to RMB 49 million in Q1. That increase is as a result of a higher number of employers using our online services. Unique employers using our online recruitment services were over 38,000 in Q1 compared with 25,600 in Q1 of 2005. Revenues for executive search services were down YoverY for RMB 7 million to RMB 5 million, mostly as a result of fewer case closings in Q1. Revenues for other HR services increased 20% from Q1 2005 to RMB 12 million. Excluding approximately RMB 2 million that were in revenues for Q1 2005 from a stationery business which we have ceased to actively operate, the growth would have been 48% YoverY. Gross margin increased to 55% from 49% for Q1 2005. As Rick mentioned earlier, this was primarily driven by economies of scale, higher prices in the print business and an increase in revenue contribution from online services. Also included in the cost of services was share-based compensation expense of approximately RMB 900,000 compared with RMB 400,000 in Q1 2005. Sales and marketing expenses declined to RMB 29 million from RMB 32 million in Q1 2005. The decrease was primarily due to a TV advertising campaign conducted in Q1 2005 which was partially offset by an increase in staff costs and higher share-based compensation expense. Share-based compensation expense included in sales and marketing expenses were RMB 800,000 compared with RMB 300,000 in Q1 2005. We expect sales and marketing expense for Q2 2006 to be similar to our Q1 levels. G&A expenses for Q1 were RMB 27 million. The increase over Q1 of 2005 was primarily due to higher professional services fees, additional costs related with operating more offices, staff additions and higher share-based compensation expense. Share-based compensation expense included in G&A expenses was approximately RMB 4 million compared with RMB 3 million in Q1 of 2005. We expect G&A expenses to increase in Q2 though, due to greater share-based compensation expenses, new depreciation expense associated with our completed purchase of the new office complex in Zhangjiang and also higher expenses associated with Sarbanes-Oxley compliance. Operating income was RMB 34 million compared with RMB 8 million for Q1 2005. Operating margin was 21% in Q1 2006, up from 6% in Q1 2005. Net income for Q1 was RMB 26.5 million versus RMB 9 million in Q1 2005. Fully diluted earnings were RMB 0.47 per common share, which is equivalent to $0.12 per ADS. Effective January 1, 2006 we have adopted FAS123R which requires companies to measure compensation expense for all share-based payments including employee stock options at fair value. As a result, our share-based compensation expense has increased. In aggregate, we recognize RMB 6 million in share-based compensation expense in Q1 2006, compared with RMB 4 million in Q1 2005. For Q2 2006, we expect aggregate share-based compensation to further increase to a total of approximately RMB 8 million as a result of new grant of share-based awards that we made. Starting with our Q1 2006 results, we are no longer presenting our share-based compensation expense as a separate line item in our P&L and have reclassified the expense to cost of services, sales and marketing expenses and G&A expenses. The amount of share-based compensation reclassified to each category is included in the footnotes to our P&L. Following the PRC's foreign exchange policy change in July 2005, we have recognized non-cash foreign currency translation losses associated with appreciations in the RMB against USD. In Q1 we recognized a foreign currency translation loss of RMB 1.6 million. Excluding share-based compensation expenses and foreign currency translation loss, our non-GAAP adjusted net income for Q1 2006 was RMB 34 million. Our non-GAAP adjusted fully diluted earnings per common share were RMB 0.60. Expressed in US dollars and then reflecting the common shares to ADS ratio, our non-GAAP adjusted fully diluted earnings per ADS were $0.15 for Q1 2006. Our cash balance at March 31, 2006 was RMB 786 million, a decrease from RMB 831 million at the end of 2005. In Q1 we made endowment payments toward the purchase of a new office complex in Zhangjiang high technology park that we'll begin occupying later this year. We took title of the property in April and the associate depreciation expenses have been factored into our Q2 guidance. I'll turn the call back over to Rick for his comments on current market conditions.

[Rick Yan:]

Thank you, Kathleen. In many past calls, we have highlighted that we strongly believe our business model is unique in our industry for its ability to achieve sustainable and profitable growth. We operate to realize and monetize opportunity that exists today, while also planning and investing for future growth. This is a balancing act that requires our continued discipline, focus and execution. Although our businesses have undergone changes and fluctuations, we have successfully grown revenues and improved our profitability every year. Our management team is committed to delivering results and value to our shareholders today, tomorrow and in the long term. Competition in our industry has always been intense since our company's inception in 1998. Nevertheless, over the past 7.5 years we have established a successful track record for extending our operations, overtaking competitors with longer operating histories and building our market position. In the print advertising business, we have the largest geographical footprint in the industry, covering 24 cities in China. In the online recruitment market, we maintain our leadership position in premium pricing, jobseeker traffic and superior results to our recruiting customers. Our (register viewed today?) is more than twice the size of our nearest competitor and we continue to grow our resume database, which is already the largest in China. I mentioned in our last call that we expect competition in the online space to become more heated in 2006. We continue to monitor the landscape closely but thus far this year, we do not believe there has been any material change in the competitive environment. Revenues for our online business grew more than 50% YoverY, accelerating at a faster pace and off a larger base compared to last year. We are very focused on online development efforts this year, combined with technical know-how and sharing from our alliance with recruits. We are working to strengthen our competitive position in the online space. Turning to our guidance for Q2, based on current market and operating conditions, our total revenue target for Q2 is in the range of RMB 170-180 million. Our non-GAAP fully diluted EPS target for Q2 of 2006 is between RMB 0.52-0.62. Please note that this EPS range relates to our business operations. It does not reflect share-based compensation expenses and the impact of any translation losses that may arise from future RMB revaluations. As Kathleen mentioned earlier, we expect share-based compensation expense in Q2 to be approximately RMB 8 million. In summary, we had an excellent Q1 in which we achieved our objectives of top line growth, margin expansion and improved profitability. While our diligent execution continues to deliver solid near-term results, we are also investing resources aimed at strengthening our long-term prospects and unlocking new opportunities. We believe that we are well positioned financially and competitively for a successful 2006 and beyond. That concludes our presentation. We would be happy to take your questions at this time. Operator?

[Operator:]

Thank you. Operator instructions. And we'll take our first question from Jason Brueschke with Citigroup.

[Jason Brueschke, Citigroup:]

Thank you. Good morning, Rick and Kathleen. Congratulations on a fantastic quarter year, especially the earnings you guys have put up. Let me start with a question on competition. Some people out there are worried about China HR because of their Monster investment. By my estimates you had RMB 5.5 million in online revenues in Q4 and China HR had a little bit more than RMB 2 million. Now in Q1 you've grown 53% YoverY to RMB 6.1 million and the rate of your growth is accelerating for the last two quarters. Online, your rate of growth is now on par probably with what China HR is doing, despite you being at a significantly higher absolute level of revenues. Could you help us understand why, when you have a much better… You have to focus on profitability where China HR does not, and the fact that you're actually larger, that you're able to grow at least as fast as them if not faster. Is it your brand? Is it your reach? Is there some benefit of your mixed plant and online model that is offering a better service to your customers out there that's really allowing you guys to keep and probably extend your lead? Thanks.

[Rick Yan:]

Jason, this sounds like a complex strategy question that I can take an hour to answer, but I will try to make it short. I think it's a combination of our strategy and you know, execution. First of all, we have a much bigger sales force compared to our competitors. The reason that we're able to sustain a large sales force is because we have both print and online. As we know, you know, online development in China is accelerating but if you go to many cities in China, online development is still at the early stage. Having the capability to combine online and offline help us to sustain a bigger and higher quantity sales force compared to our competitors. In addition, having both print and online increases our revenue per customer. When you earn more revenue from each customer then you can afford to invest more in the relationship. So I think that's, you know, as you said, the integrated online plus offline strategy is certainly a core to our competitive strategy. In terms of – on the execution front, I might just highlight one point, although there are many factors that kind of contribute to what we do. The most important thing is really about results for recruiting customers. Customers pay for services to recruit talent and fill their recruiting targets. I know that our competitors tend to use more of an advertising on the air approach, we are a different company. We are more on the ground with an effective sales team, doing a lot of customer events, building our brand and building our topics to make sure that we get better results for our customers. I think that is fundamentally a different approach. If you remember Q1 2005, we burned – I shouldn't use the term 'burned' – we invested $6 million on TV advertising and if we look back, I mean that was a good brand-building exercise. But in terms of really getting results for customers and in terms of building customer relationships, that was not as effective as we would have hoped. So I think, on the execution front, there are really two things. We are more of an on the ground sales company, working with customers to improve their results. We are less of a marketing company that pumps a ton of money into TV advertising. I think if you look at our past 7.5 year history, we believe that our approach generates better results for our sales and for our customers, and certainly for our shareholders.

[Jason Brueschke, Citigroup:]

Great. Fantastic. Let me ask you one other question about the job market. The job market in China is clearly tightening. Weekly, there are articles in the press out here about employers not being able to find enough employees. In other words, it seems that companies are now competing for employees, which is a reversal of what was happening out here in China just a couple of years ago, if now last year. My question is twofold

[Rick Yan:]

I remember the last time we heard from customers that they are desperate to get people, it was probably 2003. At that time, many companies were growing. There was a lot of foreign direct investment coming into China and the government was saying that the economy had kind of overheated. I think we had pretty high growth in 2003 and 2004 and we certainly hope that this tightening of the labor market would give us higher growth rate on the top line. We have not seen it yet in our numbers and in our weekly numbers, but we hope that this will be the case. It will be good for us and good for everybody.

[Kathleen Chien:]

Jason, I would just add one things to that. I think there's been a lot of press about the tightening of the job market, but I think that really is at the managerial range, if you will. I think that actually has been a phenomenon in the market for more than six quarters, probably, at least, going back as early as 2004. I don't think that the environment has changed that much in that sector of the market. We also last year talked a little bit about the college graduates coming into the market, and is the demand for them that much stronger. I don't think so, for that. So I think it's still certain segments of the market in which I think we're seeing very, very severe shortages if you will. And I think that will help in certain segments of our markets as well.

[Jason Brueschke, Citigroup:]

So the demand for higher-price online advertising products and services that you saw in the quarter, is that – I'm sure it's not the beginning of a new trend, but does the strength you saw predicted in the quarter, is that more than the Chinese New Year phenomenon as opposed to a change in the underlying dynamics of the market, or are they both going on?

[Rick Yan:]

I think, Jason, there are probably two factors that are playing in tandem. The first one is the fact that we added a lot of new customers last quarter. In past conference calls we explained the fact that when you get a new customer, they tend to buy the more basic, lower-priced packages. However, if you look at our revenue per unique online employer, that has been stable. I think the fact is there would be more – let me call it the 'sophisticated' or longer-term online users. They're actually buying more visibility packages. A simple proxy is that if you go to our homepage, you're seeing bigger banners, bigger buttons. You know, people used to buy the smallest size button. Now you see people buying two buttons and combining them together to make a bigger banner. I think that's happening for the more sophisticated and existing users. That's partially offset by the fact that we entered a lot of new, first time online customers who tend to buy the more basic packages. That's one factor in play. The other factor in play, as you can imagine, is competition. As I mentioned in the conference call, we are priced at a premium, a meaningful, significant premium, versus our competitors. I think competition is one of the reason that limits how much pricing upside we might have today in the online business.

[Jason Brueschke, Citigroup:]

Great. Thank you, guys, and congratulations again.

[Operator:]

We'll move on to Kit Low of Goldman Sachs.

[Kit Low, Goldman Sachs:]

Morning. Thanks for taking my questions. Hi Rick, hi Linda. Two questions, first, both on pricing side. I think, Rick, you touched upon that (online side and ASP?). If my calculation is correct, is the ASP on a QoverQ basis down 2%, which is relatively small? I just want to understand, is it mainly because, as you say, new customers are coming and buying basic packages, so diluting the total ASP coming down? Or are there any other factors affecting it?

[Rick Yan:]

It's cyclically, every time or every quarter when we have a lot of new customers, they would put pressure on the average revenue per unique employer because they tend to buy the more basic, lower-price packages.

[Kit Low, Goldman Sachs:]

OK. On the print side, I understand that you mentioned one of the reasons why you actually increased in the sales of print was because of the lower discount to your customers. Is that driven more buy the demand in your first tier cities, or is that driven by something else that we don't see here?

[Rick Yan:]

I think it's really that our competitive position in each of the cities that we look at, we reduced discount in promotions in certain cities and we actually increased prices in some other cities. That's not really big versus small, it's really our competitive position in those cities. Before we make any pricing decision, the most important consideration we have is to maintain and further strengthen our market position in that market. Because market position, or competitive position, is the most important criteria for long-term growth and long-term profitability. We make pricing decisions based on the fact that we are pretty comfortable with our competitive positions in those cities. It was really a city by city decision that we look at competitors, look at the market environment, and it's not like the big-small cities, you know, we didn't choose to just increase prices in the big cities or small cities. It was really a market-by-market evaluation and decision.

[Kit Low, Goldman Sachs:]

So for this go around, how many of the cities got lower discount? Of the twenty something cities that you have at the moment?

[Rick Yan:]

Several of them. And different levels of price increases too. Because I think, you know, as you can imagine, this is really – we basically went through all the 24 cities and looked at each one. With some of them we make minor price changes and some of them we make major price changes. So it's not like a black and white on-off switch that we decided to increase pricing for X number of cities. It was really an optimization exercise that actually, if you look at our numbers, we started doing it three quarters ago. Our price revenue per page has been increasing consecutively for three quarters. It's an ongoing exercise, it's not something that we just decided a few months ago.

[Kit Low, Goldman Sachs:]

OK. Great. Just a quick last question. What has surprised you on the upside in the cost side? Given that Q1 came up to be right in line with what you thought you would be on the top line, it's really on the cost side there's probably surprises in the upside for you. What has surprised you from this perspective compared to what you had previously guided?

[Kathleen Chien:]

I guess, you know, at the end of the day, the leverage on the scale side helped us on the cost of services. You can see that our cost of services has been relatively flat for the last few quarters, despite us recording a higher revenue level. So that was something that we were able to achieve on the scale benefits. Secondly, I would highlight probably the reduction in the tax rate somewhat. I think that's attributable to the fact that we were able to, at the end of the day, attain some tax relief or tax benefits for a new entity that was formed at the end of last year to early this year, and we were able to attain that this year. So that's a couple of things that were major that would highlight it.

[Kit Low, Goldman Sachs:]

OK. Thanks for bringing that up because I was going to bring up the tax issue. So we should expect the effective tax rate to drop to around 28% right now to be drastically stable from here on? Or will it drop by the end of the year?

[Kathleen Chien:]

I think our Q2 tax rate will be similar to our Q1 levels. As I think we've mentioned on earlier calls as well, because we're actually planning an office move to Pudong at the end of the year, there might be additional changes. But at this point in time, we're not certain of that yet. I think Q2 would be similar to Q1 in terms of the tax rates.

[Kit Low, Goldman Sachs:]

OK. Great. Thank you.

[Operator:]

Operator instructions. And we'll move to Albert Lee with Maxim Group.

[Albert Lee:]

Hey, guys. Last time around I guess, you talked about how the seasonality on a sequential basis from Q3 to Q4 was becoming more and more granular based on your observations over the past couple of years. I was curious as to whether you were able to say the same here in Q1 with the same levels of confidence, particularly as it relates to your print business? And if so, shouldn't this have bolstered your confidence level enough to issue guidance for the full year?

[Kathleen Chien:]

I guess at the end of the day, I think the pattern in Q1 over Q4 is something that we feel comfortable with, because that's something that's been sort of steady, that we've seen the same kind of… over the few years. But whether or not that translates into annual guidance or not, I don't think that's the linkage we're making here. I think at the end of the day we try to give people visibility quarter by quarter and that's a practice we've adopted all along. I think that's what we're sticking with at this point in time.

[Albert Lee:]

OK. The last one then, I guess, your share buyback is about to expire here this month or very soon. I was wondering if a decision has been made to extend that or not?

[Kathleen Chien:]

We have not made a decision yet at this point in time.

[Albert Lee:]

OK. Great. Thanks.

[Kathleen Chien:]

Thanks.

[Operator:]

And we'll move to Jenny Wu with Morgan Stanley.

[Jenny Wu, Morgan Stanley:]

Hi. This question is on behalf of Richard Ji, literally one question. We see gross margin and operating margin are pretty good for this quarter. We want to know whether your marketing trends were going forward like this. Are they sustainable?

[Kathleen Chien:]

I guess – it's a bond question I think, I think we've always talked to the fact that I think we're in a very scaleable business for our recruitment products. Both print and our online business. If you look at the historical information for the company, we've actually been very aggressive in terms of expanding our gross margin year after year. I think that's something that we feel that we have upside on. We (stuck to that?) also in our Q1 results, so that's where we stand on that. In terms of operating margins, I think we've also talked to the fact in the past that we believe if we look at the international comps, that we are not at what we call sort of full potential at this point in time, despite the fact that we are at 21% in this quarter versus 6% for Q1 last year. We believe there are upsides to both, the timing and the pace will bear out depending on market conditions and the competitive environment.

[Jenny Wu, Morgan Stanley:]

OK. Thank you. One other quick question, the DCMDA(?) is an existing shareholder, is it also a shareholder of Recruit?

[Kathleen Chien:]

I am not aware of Recruit's shareholding structure, to answer that question. Sorry.

[Jenny Wu, Morgan Stanley:]

OK. Can you give us a give us a breakdown on sales from the top tier city and the second tier city?

[Kathleen Chien:]

I think we've always looked at the business holistically, I don't think we have ever provided any sort of a regional or city-by-city breakdown. And we do not define our cities by tier at this point.

[Jenny Wu, Morgan Stanley:]

OK. Thank you. That's all my questions.

[Operator:]

Operator instructions. We'll move to Jason Brueschke with Citigroup.

[Jason Brueschke, Citigroup:]

I just want to add a follow up question on the tax rate. First of all, could you maybe explain, when you kind of look at the rest of the Chinese internet space, you guys are paying really a full tax rate. Or you were paying, above 30%. Whereas everybody else in the group for the most part is either certainly sub-15%, most people are around 7.5% and there are even some people that are below 5%. Could you remind us why that is, and second of all, Katherine, you mentioned that you guys are taking effort(?) and this was something that was announced, not today but as announced on a previous call, so it should be well known that you guys are actually actively looking for ways to try to manage your tax rate so that you're not the only one out there who's paying a full tax rate. Could you maybe give some color on what's going on there?

[Kathleen Chien:]

Yes. I think for us, we did actually enjoy a number of tax holidays and exemptions early on in our history. We've been operating the market for about seven years at this point in time. Our first set of tax holidays and exemptions expired in 2004-2005. So subsequent to that, we were actually paying a higher tax rate throughout last year, basically. It's something that we've been looking at and trying to organize and structure our entities accordingly to take advantage of some of that. Unfortunately, there's sometimes time delays in obtaining certain statuses and whatnot, so that's why we ended up paying a higher tax rate. Being a good corporate citizen, I guess, on the taxpayer front is not something that's that desirable I guess sometimes, but you know, again as we said, this year we are obtaining relief or exemption for entities already. We are still working on it for additional benefits as part of the move to Pudong later this year. We hope that that will come through sooner versus later.

[Jason Brueschke, Citigroup:]

Great. Thank you.

[Kathleen Chien:]

Thank you.

[Operator:]

And we'll move to Safa Rashtchy with Piper Jaffray.

[Matt Schindler, Piper Jaffray:]

Hi, this is Matt Schindler calling in for Safa Rashtchy. I just was wondering if you could explain a little bit in more detail, the operational partnership between you and recruits, other than the financial relationship on your main investment?

[Kathleen Chien:]

Yes. I think we mentioned this on the press release that was made in April, which is that we have actually formed a corporate planning unit within the company to actually look at opportunities for us to continue to work together to expand the business. So that's something actually that's very operational in terms of there's actually a specific group that is actually dedicated to the efforts of collaboration, if you will. So that's the first step, if you will.

[Matt Schindler, Piper Jaffray:]

OK. And can you explain the option to purchase more in a little more detail? That's Recruit's option to buy more shares at the current price?

[Kathleen Chien:]

The option that actually is… to be honest, this is an agreement between not the company and Recruit, it's actually between shareholders and Recruit.

[Rick Yan:]

We believe that Recruit have their filings at the SEC that you can refer to. And I understand that the additional documents that you can search and look into from the filings. I would suggest that you take a look at that and I think it will give you a pretty good sense of what's going on.

[Matt Schindler, Piper Jaffray:]

OK. Thank you.

[Operator:]

And that does conclude our question and answer session. I'll turn the call back over to Rick Yan for any closing or additional remarks.

[Rick Yan:]

Thank you. We appreciate you joining us today and we look forward to updating you on our achievements next quarter. Again, thank you for your interest and continued support of 51job.

[Operator:]

And that does conclude today's conference call. We do thank you for your participation.