51job, Inc.
Q2 2008 Earnings Call Transcript

Published: 21 Sep 2008

[Operator:]

Good day, ladies and gentlemen. Welcome to the 51 Incorporated's second quarter 2008 conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (Operator instructions) Now I would like to turn the conference over to your host, Ms. Linda Chien, Investor Relations Director of 51job. Please go ahead.

[Linda Chien:]

Thank you. Thank you all for attending this teleconference of 51job management. With me for today's call are CEO Rick Yan and CFO Kathleen Chien and we will discuss unaudited financial results for the second quarter ended June 30, 2008. A press release containing second quarter 2008 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 2008, future business and operating results constitute forward-looking statements within the meaning of Section 21-E of the Securities Exchange Act of 1934, as amended, and as defined in the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations and actual results could differ materially. Among the factors that could cause actual results to differ are the number of recruitment advertisements placed, sales orders received and customer contracts executed during the remaining weeks of the third quarter of 2008, 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, 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 markets 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, 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 2008 or as a result of new information, future events or otherwise. Now I'll hand the call over to 51job CEO, Rick Yan.

[Rick Yan:]

Thank you, Linda. Thank you for joining us on today's call. I will begin with highlights for the second quarter, followed by Kathleen with a more detailed review of our financial results. Then I will discuss our strategic objectives and provide our guidance for the third quarter of 2008. Finally, we'll open the call to your questions. During the second quarter, the combination of three factors resulted in lower-than-expected revenues. First, following the massive Sichuan earthquake in May, which shocked the country, we experienced a material decrease in recruitment advertisements. While we had anticipated that there would be business disruptions, the impact was more dramatic and widespread. In addition, the government also instituted a three-day national mourning period, during which certain business activities and operations were temporarily prohibited. Second, due to the change in the public observances calendar by the Chinese government, the week-long Labor Day holiday in early May was eliminated in favor of three long weekends in the second quarter of 2008. This schedule change resulted in the loss of the post-Labor Day seasonal recruitment peak we had experienced in past years. Third, we began to see signs of a softening in market demand for recruitment services nationwide during the quarter. In our conversations with customers, we observed a growing sense of concern about business outlook, macroeconomic conditions, rising prices and wage levels, and the impact of the new Labor Law introduced at the beginning of the year. Businesses have become more cautious in their hiring plans, and we are seeing a diminished level of recruitment activity by employers. The combination of these three factors materially slowed customer transactions for our recruitment businesses as the quarter came to a close. In Print, page volumes were relatively flat, compared with the year-ago quarter. And the continuing shift in revenue contribution towards lower-priced cities as well as the transition of print to online resulted in a decrease in overall print revenues. In our Online business, we also saw slower growth in the number of unique employers using our services during the quarter. The magnitude and speed of the moderation exceeded our forecast at the beginning of the quarter. It was also surprising, given our better-than-expected first quarter results and the customer sentiment we observed in the early part of the year. Based on our market analysis, we believe these conditions are impacting the entire HR services industry, which job posting volume growth lower across the country. A bright spot in the second quarter was the solid performance of our Other HR Services segment. Consisting principally of our corporate training and HR outsourcing services, this area focuses on the non-recruitment related part of HR function and as such was less impacted by the hiring slowdown we began to see in the second quarter. Although these services are less mature, we believe in particular that the recurring nature of the HR outsourcing revenues will provide a good complement to the cyclicality of recruitment revenues. This was the key rationale for our decision to build this business back in 2003. And today we have developed one of the largest HR outsourcing catalogs in China. In the second quarter, despite difficult macro conditions, we continued to increase the number of corporations' employees served under our HR outsourcing business. Given the complexity of the infrastructure network, customer service processes, and local regulations involved, we believe that we have established strong competitive advantages in our HR outsourcing business. It's extremely well-positioned for long-term growth. I'll turn the call over now to Kathleen for a more detailed financial review of the second quarter.

[Kathleen Chien:]

Thank you very much, Rick. Total revenues for the second quarter were RMB219 million, an increase of 4% year-over-year. Print advertising comprised 43% of total revenues and revenues from this segment decreased 13%, compared to the second quarter of 2007. As Rick mentioned earlier, the decline was due to a combination of factors, including business disruption from the earthquake, the loss of the seasonal May holiday recruitment peak, and a softening of customer demand. Print advertising pages in the second quarter were 4,263 pages, relatively unchanged from the 4,213 for the same quarter of the prior year. While we maintained similar price levels in each city over the past year, our average revenue per page decreased approximately 14% year-over-year, driven by the higher print revenue contributions from the lower-priced cities. We expect that average revenue per page will further decline as this trend continues. Our Print advertising prices vary considerably between cities. And the range of prices between our highest and lowest-priced cities may be up to seven to eight times due to the differences in local competitive dynamics, purchasing power, and other conditions. Our Online recruitment services comprised 38% of total revenues in the second quarter. And Online revenues grew 17% year-over-year, to RMB83 million, primarily due to a greater number of unique employers using our online recruitment services. During the quarter, unique employers increased to 65,000, compared with 58,000 in the second quarter of 2007. Revenues for the Other HR Services increased 45% year-over-year, to RMB38 million in the second quarter. Comprising about 18% of our revenues, this area's growth has been primarily driven by the increased customer adoption of our training and our outsourcing services, and as Rick said, has been the bright spot of growth in the quarter. Our gross margins were 54.9%, compared with 57.8% in the second quarter of 2007. This decline was primarily due to the higher labor cost and to the change in the business mix. Included in our cost of services was share-based compensation expense of RMB1.2 million. Sales and marketing expenses was RMB52 million in the second quarter, which included approximately RMB1 million in share-based compensation expense. In line with our strategic plan, we remain aggressive with our advertising and promotion efforts and also added new sales and account management staff across the country. We will continue to be very active in our sales and marketing activities throughout 2008. Our G&A expenses for the second quarter were approximately RMB32 million, an increase of 7% year-over-year, mainly due to the higher office expenses, labor costs, and share-based compensation expense, which were partially offset by the lower professional services fees. Share-based compensation expense included in the G&A in the second quarter was approximately RMB5 million. Operating income for the second quarter was RMB30.3 million, compared with RMB43.1 million for the same quarter last year. The year-over-year decline was mainly due to the higher sales and marketing expenses discussed earlier. Our effective tax rate for the second quarter was approximately 36%, compared with about 31% in the second quarter of 2007. This higher rate was driven by the increase in foreign currency translation loss as a result of the appreciating Renminbi against the U.S. dollar during the second quarter of 2008. Losses from foreign exchange, foreign currency translation, as well as share-based compensation expense incurred by our entities incorporated outside of China is non-deductible under PRC tax law. If you were to remove the share-based compensation expense, as well as discount the translation loss occurred as a result of the Renminbi appreciation, our tax rate this year, in the second quarter, was similar to our tax rate last year. Net income for the second quarter was approximately RMB19 million, compared with RMB31 million in the second quarter of 2007. Fully diluted earnings were RMB0.34 per common share, which is equivalent to $0.10 per ADS. Excluding share-based compensation expense and foreign currency translation loss, our non-GAAP adjusted net income was about EMB33 million in the second quarter. Non-GAAP adjusted fully diluted earnings per share for the second quarter were RMB0.58 or $0.17 per ADS. And finally, turning to our balance sheet, our cash position is liquid and strong. We ended the second quarter with cash and short-term investments totaling EMB1.04 billion, or approximately $152 million. Now I'll turn the call back over to Rick.

[Rick Yan:]

Thank you. From what we have observed in the second quarter, we believe the global economic slowdown that began in the U.S. last year is now measurably affecting business decisions and hiring budgets in China. Coupled with the impact from natural disasters and upcoming Olympic Games, we foresee that these difficult market conditions are unlikely to change in the third quarter. While we cannot predict at this point when conditions will improve, we believe that the long-term potential of the industry and our company remains unchanged. Business cycles are inevitable and we are prepared to operate through this current landscape. The Olympic Games that begin in Beijing tomorrow is a once-a-lifetime event for the Chinese people. It will be an exciting period, full of national pride and celebration. Also, it will undoubtedly further raise the profile and stature of the Chinese –- of China on the global stage and be beneficial for the country's ongoing economic development. However, during the Olympics period, I'm sure many of you have heard that the government has imposed various regulations in Beijing to lessen traffic congestion, control pollution, and strengthen security measures. As a result, we expect that many businesses in and near Beijing will be directly affected, and, in some cases, they may be temporarily closed. Outside Beijing, the government has also taken steps to curtail the transportation of certain goods, limit infrastructure build-out, and increase security, all of which impact businesses nationwide. In addition, we expect that high public interest in the Olympics will reduce hiring and jobseeker activities across the country during these months. Taking this into account, and based on current market and operating conditions, our total revenue target for the third quarter of 2008 is in the estimated range of RMB205 million to RMB215 million. Our estimated non-GAAP fully diluted EPS target is between RMB0.38 to RMB0.48 per common share. Please note that this non-GAAP EPS range does not include share-based compensation expense nor foreign currency translation losses. While current macroeconomic conditions and special events are beyond our control, we are confident in our ability to navigate through these challenging times. With our healthy cash flow, strong balance sheet, diversified operations and business scale, we believe this is an opportunity for us to consolidate market share, as we are better positioned than many of our competitors. We run our business for the long term and reducing strategic investments for the short-term results would be a mistake in our belief. Historically, we have made our biggest market share gains during challenging business periods, such as the dot.com bust in 2001 and the SARS saga in 2003. We will remain aggressive in executing our strategic initiatives throughout the remainder of the year. On the sales and marketing front, we are continuing to train and expand our sales force and we also have a number of promotions, events and campaigns planned. In the product development area, we are on track to continue launching online product enhancements, as well as introducing new products and services in the coming months. As the scale of our outsourcing business continues to grow, we are also dedicating greater resources to this area to streamline processes, strengthen customer service, and expand our coverage network. To conclude, we believe that we are making the right investments to strengthen our market leadership position. While we certainly wish the current environment was more favorable, we are not deterred and believe that we can emerge in an even stronger market position when the market improves. We are in business in China to win and continue to pursue our objective with a strong result. That concludes our presentation. We'll be happy to take your questions at this time. Operator?

[Operator:]

(Operator instructions) We'll take our first question from Alicia Yap with Citi.

[Alicia Yap:]

Hi. Good morning. Thank you for taking my questions. I have three questions. Number one, how much of the Q2 weakness and the Q3 guidance is attributed to the one-time events, for example, the earthquake and the Olympics. And how much of it is because of the deteriorating of the underlying demand?

[Kathleen Chien:]

I think, Alicia, it's sometimes difficult for us to break that out specifically, to be very honest, because I think these are a combination of factors affecting both. I think that we will probably have a better sense of what the Olympics account for after we go through Q3 because we are looking at whether or not the business will have a bounce back, if you will, post the Olympics period. But I think right now it's very difficult for us to break that out. However, having said that, I think that we do think that the Beijing Olympics is actually affecting business and not just in Beijing. So I mean even though it's sort of a location specific event, it is actually having an impact nationwide.

[Alicia Yap:]

But then specifically for the Q2 weakness, do you see that is more because of the earthquake or it's just because of the entire economy is slowing down?

[Kathleen Chien:]

We definitely do believe that the economy is actually seeing some softening because I think that – the earthquake happened actually in mid-May, as you recall. We thought that if it was actually just quake-specific, after being settled in a couple weeks that things would actually return to normal. But we did not see that that was the case. We actually thought that there was additional sort of feedback from customers that indicated otherwise. So we believe that the quake contributed. The Olympics upcoming had an impact. But also, we believe that the macro has had some sort of softening in demand.

[Alicia Yap:]

I see. Okay. And then to follow up on that, my second question is that can you give us some color that is what is going on like who is getting hit the most? For example, is it the big companies or the small companies? Or is it involves in – the companies that involve in the domestic business or the international business? And what are the geographic location, particularly, and any vertical – industry vertical that got hit hard the most?

[Kathleen Chien:]

It's a big question. But I think what we're observing is that – actually I think it's actually across the board. I don't think it's just affecting one sector of the market, meaning that there are bigger companies cutting back. There are also small companies that are going out of business, if you will. So I think it's affecting a range of companies in this phase. Industry-specific, I would say that certainly one of the first industries, I think, we're seeing that is having more of an impact is actually real estate and construction-related. And that also relates to the tightening of the money supply meaning the credit crunch and a lot of stuff going on in the financial sector as well. So I think it's actually affecting the whole economy in terms of the different sizes of companies, but certainly certain verticals seem to be feeling that more than others.

[Alicia Yap:]

And then any particular province or location that you can pinpoint to?

[Kathleen Chien:]

Well, I think it is actually a pretty wide based.

[Alicia Yap:]

Okay. Thank you. And then my last question to you is on the competitive landscape. So are you, or will your competitive positions actually will be affected with now Zhaopin getting the new investment? Can you comment on that?

[Rick Yan:]

Yes, we monitor our market position every week. We have not seen any changes in the competitive landscape in terms of the volume market share that we monitor. We do – saw the press release that Zhaopin has written [ph] another round of funding. But it's unclear how much of that funding is actually primary versus secondary, meaning how much is going to the – to buy out the original shareholders and how much is actually new money getting into the company. But so far, we don't think that the competitive trajectory will – we don't believe it will get worse. Last year they lost $16 million. I think even with the new funding, I'm not sure how much they can sustain that kind of losses going forward.

[Alicia Yap:]

Okay.

[Kathleen Chien:]

Yes, and I would just add that that's actually in line with our expectation because I think in the earlier calls, going back a few quarters, we expected that Zhaopin would actually need new funding this year. And actually the timing and everything actually is in line with our expectations. And China HR situation has not changed as far as we understand, meaning that Monster has still not closed the deal or non-deal, whatever the situation is, and that there has been no additional new movement coming out of there.

[Alicia Yap:]

I see. Now then have you seen any increase in term of the spendings in the sales and marketing. And I know that during your closing remark you said that probably you will continue to spend more on the sales and marketing. But would that change your any strategies going forward at all?

[Kathleen Chien:]

I don't think that we would change our sales and marketing strategy overall. But I think certain allocation of resources might be somewhat a real bit different, perhaps. I mean we've talked about the fact that I think what's been more difficult in the last quarter was really all the recruitment businesses. But I think our other services continued to have very, very strong growth and we continue to see very, very positive feedback from customers from those type of activities and those businesses. So I think certainly we'll continue to push forward on that, no doubt. So I think it's just one sector of our business is affected, given this macro slowdown. The recruitment business is more cyclical. But nevertheless, we do believe that there are investments that we need to make for the longer term and that there are businesses within the portfolio that continue to show very nice growth for us.

[Rick Yan:]

Yes. As we mentioned earlier on, on the comments, we – our strategy has not changed. We'll continue to pursue the dominant market leadership position. That is our strategy. We're here to – for the long term, and we're here to win. We have very strong cash flow, a very strong balance sheet. And actually, we mentioned in the comments that the biggest share gain we have in the industry are actually during difficult times. When there's a lot of hot money in China, you tend to see competitor burning money and it's more difficult to consolidate the market in those times. And when we get our first round of venture funding back in 2000, year 2000, we, at that time, we were probably number four, number five. And we leapfrogged to number one in – from 2000 to 2003, in three years' time when the market was more difficult. And at that time, we're competing more on strategy, more on execution, rather than on the financial engineering. So, yes, we are very confident that – we actually feel that this is actually a good time for us to really leverage our strength, our strong cash flow, and balance sheet and consolidate the market in the next couple of years.

[Alicia Yap:]

I see. Thank you. Actually, can I have just one follow-up on the economy? So if we look beyond the third quarter, so there's no more Olympics and no more earthquake and all these one-time events, what is your kind of your kind of qualitative outlook for the fourth quarter this year? Do you think that demand will picking up or do you think that the underlying economy will continue to be weakened?

[Kathleen Chien:]

If you look at the GDP figures coming out, I don't think that China is going to have a major pickup. And that's not what we're hearing in the market, certainly. The fourth quarter, typically, is not a strong quarter, certainly. We hope that there will be certain opportunities that are actually being sort of sacrificed during the Olympic period will come back to us, if you will, during the fourth quarter. But the extent of that I think will be limited.

[Alicia Yap:]

I see. Okay, great. Thank you.

[Operator:]

And next we'll move on to Nate Swanson with ThinkEquity.

[Nate Swanson:]

Well, hi, and I guess just expanding on that last comment, I was wondering if you think it's possible that the Olympics could effectively equate to a holiday week and that you'd see a similarly strong uptick in demand post the Olympics.

[Kathleen Chien:]

Like I said, I think, we think that there may be some opportunities that are going to be lost during Olympics time, which is actually multiple weeks, if you will. But I'm not sure that having a peak week right after that will just make up for the gap, if you will. So I think – I agree that there will be some pickup in activities, but as we are heading toward the fourth quarter here, that typically is not a strong quarter, seasonally speaking. So I think that our expectations are more limited.

[Nate Swanson:]

Okay, fair enough. I guess in terms of your sales and marketing spend, which had been running maybe a little ahead of a more normalized rate, what is your plan for that, given that, if we are heading into maybe a prolonged several-quarter slowdown, how should we think about where your sales and marketing spend might trend over the next few quarters?

[Kathleen Chien:]

I think for the rest of the year, I think if you look at our first quarter and our second quarter, these are at a certain level in sort of the RMB50 million plus range. I expect that it will be similar to that for a similar trend for this year, because I think we believe that there is a certain investment we still continue to want to make and need to make, to grow new businesses, to establish new things, expand our sort of voice in the market, if you will. So I think that our plans for 2008 remain unchanged on that front.

[Nate Swanson:]

Okay. And then, I know in the past, when one area of your business is weak you can reallocate some of those sales resources to sell your other services. I'm wondering, is it possible to take some of your sales and marketing resources and maybe focus them on training or outsourcing or something that's not quite as seasonal as your jobs business, or even potentially going into additional geographies?

[Kathleen Chien:]

I think I would probably not say that we would recruit the – we would reallocate resources from the recruitment to training or outsourcing. I think they are actually a little bit different in nature. But I think that we are still looking at introducing new services offerings, aside from just the more traditional now in our portfolio, which are the Print and the basic Online services. So there are actually new service offerings that we're actually looking at, maybe more project-based work and other things that we can do to help our customers. So I think they will be something that we are looking at in terms of creating new service offerings within that line, if you will, to take us through this more difficult time.

[Nate Swanson:]

Okay. And then I guess just lastly, in terms of the Recruit partnership, is there anything new going on there, or I guess what should we expect from that partnership over the next year or so?

[Rick Yan:]

We continue to work with Recruit on the new coupon magazine. We are working on some training and assessment content partnership, meaning that they have certain training and assessment products that we would like to license to China. We are also looking at other opportunities to work together. We continue to look into technologies and look at how we can leverage some of their technology know-how for our tech team. So, yes, the partnership continues to work in the same direction as before.

[Nate Swanson:]

Do you think that's a revenue-generating partnership in 2009?

[Rick Yan:]

We have a few things that we're working on. For example, we work on a – we have a team, we have a (inaudible) team that focus on Japanese customers, Japanese corporations in China. That's revenue-generating. We are licensing their training and assessment products into China. That will be less revenue-generating. We have formed a joint venture to focus on the coupon magazine, that is we don't recognize revenue because it's a loan [ph] arrangement for now, which we can convert into equity at our choice. So yes, some of these initiatives will be revenue-generating. Some of them will be more just technology-sharing and experience-sharing.

[Nate Swanson:]

Okay. Alright. Thank you.

[Rick Yan:]

Thank you, Nate.

[Operator:]

And next we'll take James Mitchell with Goldman Sachs.

[James Mitchell:]

Great. I've got a couple of questions. The first one is with regards to the gross margins. Since your business mix is skewing from Print toward Online, which should be higher margin, why is the overall gross margin of the business declining? Is the Other category very low gross margin?

[Kathleen Chien:]

I think there's two things going on, James, because I think our business has some fixed cost in our structure, and certainly we actually had a decline in revenues in one of our business sectors. So having that actually hurts us or impacts us on a gross margin level. And I think that it's fair to say that the more sophisticated product lines in our portfolio in the recruitment business would actually have higher margins overall than some of our more developing businesses. So I think some of the change in mix also contributed to a little bit of that.

[James Mitchell:]

Okay. And then if I look at your Print revenue versus – being down versus your page count being flat, and the fact that you're keeping prices unchanged, the only way I can reconcile that is if your publications in the first-tier cities are getting thinner over time, that there's less volume in the first-tier cities in absolute terms and more volume in second-tier cities.

[Kathleen Chien:]

I think it's fair to say that the mix has been changing over time, yes, in terms of contribution.

[James Mitchell:]

I guess my issue – my concern is whether it's the mix or whether the actual number of print advertisements you're carrying in the first-tier cities is shrinking, because otherwise it's hard for me to see why you'd have this extent of revenue decline in the Print business.

[Rick Yan:]

Well if the page count is flat and it makes a shifting to the smaller, secondary cities, yes, lower-priced cities, then certainly, yes, the absolute page count in the larger cities are dropping.

[James Mitchell:]

But then I guess I'm not sure why you're still expanding the Print business because if you can see that the print business in the first-tier cities reaches a certain point and then it shifts Online quickly, wouldn't you assume there would be a similar migration in the second-tier cities?

[Rick Yan:]

I wouldn't say we're expanding on the Print business. I think our sales team sells both Print and Online. Our strategy has always been having an integrated Online and Print offering. And today, if you go to the smaller cities, you will find that selling only Online would not be a viable solution for the customers and would not be a viable economic model for our sales team. So I think our sales team has always been built on selling both products, and we let the customer choose which product we build. So our expansion in sales and marketing is focusing on customers, not focusing on specific products.

[James Mitchell:]

Okay. I mean to ask it another way, has the speed of the migration from Print to Online in the first-tier cities surprised you?

[Rick Yan:]

I think that's a trend that is kind of happening in the past couple of years. I think our Print had a very high growth in 2003, 2004. I think since 2005 we've been talking about customer shifting their budget from Print to Online for the past couple of years. That is a trend that is not new to us. We have been working on – working under this trend for the past two to three years. I don't think that's a surprise. That's a trend that we've seen and we continue to work around it.

[James Mitchell:]

Okay. I guess I'm just – if the trend is – seems to happen so quickly in the big cities then I wonder how quickly it pans out in the second-tier cities, as well.

[Rick Yan:]

I think part of that might depend on the competitive environment, too, because I think you know that our largest competitor ChinaHR, Zhaopin are headquartered in Beijing, so I think most of their sales activity is also in the larger cities. So part of that might be driven by competitor moves, but I think – I don't – I wouldn't say the trend is a surprise. I think we – it's kind of going on the same trend or trajectory that we've observed in the past.

[James Mitchell:]

Okay, great. Thank you very much.

[Rick Yan:]

Thank you, James.

[Operator:]

(Operator instructions) And we'll move to Jenny Wu with Morgan Stanley.

[Jenny Wu:]

Hi Ricky, Kathleen, and Linda, how are you? And I have several questions. First one is regarding your labor cost. You mentioned there is an increase in second quarter '08. And would you please elaborate more how much it is? Thank you.

[Rick Yan:]

Our labor cost, well, normally most of our staff will get a wage increase at the beginning of the year. And we're having more headcount. So I don't think there's a significant wage, individual wage increase from quarter two to – from quarter one to quarter two. So most of that will be headcount-increase related.

[Jenny Wu:]

Okay. What's the change, year-over-year?

[Kathleen Chien:]

I'm sorry. I couldn't hear the question.

[Jenny Wu:]

I mean, what's the change, the annual change for the labor cost?

[Kathleen Chien:]

I think on average if you look at the market this year I think the average wage increase this year has been much higher in the previous – than versus previous for most people. I would say that for us it's probably in sort of the high-single to sort of 10% range overall.

[Jenny Wu:]

Okay, thank you. And another question is regarding your margin trend. As you mentioned at this call you will continue spending sales and marketing and probably where you have the more new products. And clearly, the market, macro market outlook is very murky. So all in all, I would appreciate if you can help us understand more about your margin trend, going forward.

[Kathleen Chien:]

I think we've given guidance for Q3 and that implies certain margin rate, if you will. But I think for us, I think at this point in time I mean Q3 is going to be a little bit, probably more churning, given the Olympics falls right smack in Q3. So there will be a period where activity will be pretty much suspended. So I mean I think that Q3 will look worse than otherwise, if you will. But I think for our sales and marketing, I think as we talked about earlier already on the call, I mean we believe that there are going to be certain investments that we'll continue to have to make in terms of pushing our new services, or introducing new types of services, and that cannot be slowed. And we do actually have services lines in our portfolio, which has grown very nicely, even though our recruitment side has actually suffered, given the macroeconomic condition, combined with the quake and the upcoming Olympics. So I think that our outlook for '08, in terms of our sales and marketing spend, has not changed. So I do believe that they will be in line with what we've done in the first half of the year and that's where we expect to be for the second half of the year.

[Jenny Wu:]

And my final question is regarding your market share. Obviously, first half '08 is very tough for every player in the market. In the meanwhile, your two major competitors, they suffered – they may suffer more than you because they have some financial constraints during that period of time. So have you witnessed any market share gain on your side? Thank you.

[Kathleen Chien:]

We hope to see that soon. And I think that for the first half of the year everyone is watching the others pretty closely. I think we've talked about the fact that I think there is some – there could be more changes coming at ChinaHR given that they still have not clinched the Monster deal. Zhaopin as we expected have had to go and get additional funding. So that has not changed. So I think that so far we're seeing that there's probably a little bit of change in position between the two of them. I would say that right now we haven't made as strong of a stand as we could have. But I hope that additional investments in – sales and marketing investment that we've done so far and going forward will actually help us realize that.

[Jenny Wu:]

Okay, thank you very much. That's all my questions.

[Kathleen Chien:]

Thank you.

[Operator:]

And next we'll move to Ashish Thadhani with Gilford Securities.

[Ashish Thadhani:]

Yes, hi. 51job is a market leader in the fastest growing major economy. But yet the return to shareholders since your IPO four years ago has been disappointing. So my question is, why can't there be a better balance between your sales and marketing investments and intermediate term EPS growth? And when should we expect the major payoffs, specifically in terms of timing? And second is, why is there no repurchase program in place as we wait through this investment cycle? Considering the surplus cash generation, the low return on capital, and the clear actions of the company CEO in his personal capacity, surely the EPS and stock performance should assume greater importance over any float considerations that you might have.

[Rick Yan:]

Hi, Ashish, I think if you look at the return on capital or share price performance, I think – well I'll certainly say that we are disappointed with the performance too. And I think if you looked into what's really happening, I think it's the competitive landscape that limits how much potential upside we have. We've mentioned many times in the past calls that the recruitment pricing is actually very low. It costs $3 to post a job posting in China, where in the U.S. it costs $300 to $400. We're charging less than 1% of what U.S. pricing is. And I think that that is driven by competitive, the competitive situation. And the competitive situation, we mentioned before that our two major online competitors are both incurring heavy losses. This is something that I don't think we can – we don't have a good way to respond. We look into acquisition opportunities. But the valuation, actually, are pretty high. We don't think it's strategically critical, nor financially feasible to pursue an M&A strategy. As a result, we are still in an organic growth or organic competition scenario. How long this will last, I think it depends on how the competitive environment would kind of morph going forward. We do believe that we have – we continue to have very strong cash flow, very strong balance sheet. And our objective – and we know very clearly that the biggest upside we have is when we consolidate a market, we have more reasonable pricing in the market. And that's why we continue to spend heavily on sales and marketing, because we believe that we cannot let our competitors, who have hopes to gain share or overtake us in any way. There's no way we will let this happen. This is not – we are not here for the short term. We're here for the long term, and we're here to win. So we are very determined. We are not deterred. We have very strong resolve that we're going to continue to spend appropriately on sales and marketing, and consolidate the market. We will be the dominating winner, given our cash flow and our strong balance sheet. And I think if there is a softening of the economy in China that actually might provide some interesting catalysts for this to happen. So I think that's the first point. I think we are disappointed with the return on capital and the share price performance, but given the competitive market situation, we've made the choice that we've made. On the second point, you mentioned something about – can you repeat the second part of your question?

[Ashish Thadhani:]

Yes, I'll repeat the second one, and then I'll just come back with something on the first. But on the second one, I was wondering that as we wait through this investment cycle and the stock obviously is – has reflected that, it is an opportunity to put a repurchase program in place because you have got $150 million of surplus cash. Your cash is not doing anything in terms of earnings, any kind of decent return for you. And as an individual, you clearly feel that the stock is undervalued. Clearly, your actions indicate that. So, as a CEO, why don't we put a significant buyback in place while the stock is depressed?

[Rick Yan:]

I think on the buyback, we have done the buyback before. We've done a buyback before, I think three years ago. I think from our discussion with investors during our IR road shows, I think there is a balance between the float we have or the liquidity that we have. Compared to other public companies, we don't have a very large float. Our float is around only 20% of our market cap. And if we have a very significant buyback program, you will – it could further reduce the float. I think these are the considerations that we have. The Board actually considers share buyback from time to time. And I'm sure that in the future Board meetings, we'll continue to have this topic and review. And of course, if we make a decision, we'll let everybody know as soon as we do.

[Ashish Thadhani:]

I certainly think that having a higher stock price is more important than the size of the float. But anyway, to go back to the first question, the concern is that when you had a boom in terms of GDP growth and you've had your clearly undisputed market leadership for some time, and it's still been very difficult to demonstrate bottom line growth, the real issue is that at some point in time one needs to balance the bottom line growth. And waiting for all of your competitors to capitulate could be a very long wait.

[Rick Yan:]

I understand your point. And I think that's why since the beginning of 2007 we have said that we're going to increase our sales and marketing spend and we'll become more aggressive in the – in marketing activities. I think the strategy we take is a choice, and I think we've been very proactive in communicating our intention of what we want to do. And I think we did that. We've communicating our – we have communicated our strategy as early as the beginning of 2007. I think this – we do believe that the biggest upside for the company for the long term it is on the pricing upside. Because $3 a job, there's a limit how much you can make if this is your pricing, and the best way to unlock the pricing potential is really for us to consolidate the market. And if you look at many of the other Chinese coms, media company, Internet company, they do have 10%, 20% of price, pricing upside every year. We've been charging more or less the same price for the past three to four years. So we've made a choice that we will compete and we will consolidate the market. And we will have – we will spend more heavily on sales and marketing until we achieve that goal. And I don't think that's any change in our direction. As I said, this is a choice that we make on a strategic direction. And I hope that we have communicated that clearly and early to our investors.

[Operator:]

And it appears we have no further questions in our queue at this time. I'll turn the conference back over to Mr. Yan for any additional or final comments.

[Rick Yan:]

Thank you for joining us today. We look forward to speaking with you next quarter. We value your continued support of 51job. Thank you.

[Operator:]

This does conclude our conference call for today. And we do thank you for your participation.