51job, Inc.
Q1 2007 Earnings Call Transcript

Published: 11 May 2007

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the 51job Incorporated’s first quarter 2007 conference call. (Operator Instructions) Now, I would like to turn the call over to your host, Ms. Linda Chien, Investor Relations Director of 51job. Please go ahead, Madam.

[Linda Chien:]

Thank you, Erica, and thank you all for attending this teleconference with 51job management. With me on today’s call are CEO Rick Yan and CFO Kathleen Chien and we will discuss unaudited financial results for the first quarter ended March 31, 2007. A press release containing first quarter 2007 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 second quarter of 2007, 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 conference call. I will begin today’s call with highlights of the first quarter and Kathleen will follow by reviewing our financial results in greater detail. Then I will discuss current operating conditions and provide our outlook for the second quarter of 2007. Finally, we will open the call to your questions. We are pleased to report another quarter of steady growth and improved profitability. First quarter revenues came in near the high-end of our guidance range at approximately RMB200 million. It was particularly meaningful given the late arrival of the Chinese New Year in 2007. Healthy customer demand in the post lunar Chinese New Year period resulted in a record volume of offline and online advertisements. We generated almost 4,000 print pages in the quarter, the highest level in our history. We also showed strong traffic to our website, according to third party data sources. From our internal tracking of job postings, both on our website and on competitor websites, our leading market position remains unchanged. Unfortunately, all of our major online competitors are private. There is no reliable public information on their financial performance, other than the fact that they continue to incur heavy losses. Nevertheless, in terms of job postings and website traffic, we remain the clear number one recruitment website in China. Our non-GAAP EPS of RMB0.75 in the first quarter exceeded the top end of our forecast. Supported by stronger demand environment and benefiting from economies of scale, we continue to improve our profitability despite greater marketing spend and sales force additions. As mentioned in the last earnings call, we will continue to step up our sales and marketing effort and turn more aggressive in the competitive battle. We also expanded our investment in technology infrastructure and software development to improve our online services and user experience. In the first quarter, we secured additional bandwidth and network capacity to support the growing volume of information and traffic to our website. We remain extremely focused on the online business with more enhancements and upgrades on the horizon. Although print advertising and online recruitment services comprise the bulk of our business, we are excited about the progress in development of our other HR services, particularly corporate training and outsourcing. While these services are relatively small revenue contributors today, customer acceptance and demand is steadily increasing. In combination with our recruitment advertising businesses, these services uniquely position us as the leading integrative HR solutions provider in China. We believe that we are off to a good start in 2007 and are continuing to focus on day-to-day execution and investing for our longer term growth. Now, I will turn the call over to Kathleen for a detailed financial review.

[Kathleen Chien:]

Thank you, Rick. As many of you are aware, the post Chinese New Year period is a peak season for recruitment activity in the first quarter. Our results this year included about one less month of seasonal strength compared to last year, but despite this significant difference, we achieved solid growth in revenues and profitability for the quarter. Revenues for the first quarter totaled RMB200 million, a 16.2% increase over the same quarter in 2006. Print advertising revenues increased approximately 6.5% year over year due to a higher page volume, which is partially offset by lower average revenue per page. The estimated number of print advertising pages in the first quarter was 3,974 pages, compared with 3,043 pages in the same quarter last year. Our average revenue per page declined 18.5% compared to the first quarter of 2006, driven primarily by the higher revenue contribution from the lower priced cities. However, if you compare the numbers to quarter four of 2006, our average revenue per page actually increased 7% over that time. Please note that the average revenue per page may vary over a wide range each quarter but may not necessarily reflect our overall margin trends. Our online revenues grew 27% year over year to approximately RMB62 million in the first quarter. This increase was primarily due to growth in the customer base as unique employers using the online service increased to 48,000 in the first quarter, compared with 38,000 in Q1 of 2006. Revenues for our executive search business decreased to RMB3.9 million from RMB5 million in Q1 of 2006 due to fewer candidate assignments. Revenues for other HR services increased 75% year over year to RMB21.5 million in the first quarter, driven primarily by greater customer demand for training and outsourcing services. Our gross margin was relatively unchanged year over year at 55.2 for the first quarter compared to 55.3 in the first quarter of 2006. Included in our cost of services were share-based compensation expenses of approximately RMB1.2 million versus RMB950,000 in Q1 of 2006. Sales and marketing expenses increased to RMB34 million from RMB29 million in Q1 of 2006. We added a number of new sales and accountant management staff during the quarter, and we increased our spending on marketing and promotional activities. Additionally, we incurred higher share-based compensation expenses of RMB1 million in the first quarter compared with RMB800,000 in the same quarter of 2006. Our G&A expenses for the first quarter were RMB29 million compared with RMB27 million in the first quarter of 2006. Higher depreciation expenses, employee salaries, and share-based compensation expense were partially offset by the lower office rental expense and professional services fees. Our share-based compensation expenses included in G&A was RMB5.2 million compared with RMB4.1 million in Q1 of 2006. Depreciation expenses included in G&A for the first quarter was approximately RMB3.2 million compared with RMB2 million for Q1 of 2006. Our operating income for the first quarter this year was about RMB42 million, compared with RMB34 million for the same quarter last year. Excluding the share-based compensation expense, our operating margin was 26% compared with [inaudible]. Our effective tax rate for the first quarter was 27.7% compared with 28.2% in the first quarter of 2006. Some of the tax exemptions expired in the first quarter of 2007 and partially offset the new tax exemption we obtained late last year. Overall, our net income for the first quarter was RMB32.2 million versus RMB26.5 million in the first quarter of 2006. Our fully diluted earnings were RMB0.57 per common share, which is equivalent to $0.13 per ADS. Excluding share-based compensation expenses and foreign currency translation loss, our non-GAAP adjusted income for the first quarter of 2007 increased 24.4% year over year to RMB42.3 million. Our non-GAAP adjusted fully diluted earnings per common share for the first quarter was RMB0.75, or $0.19 per ADS. Looking at our balance sheet, our cash position remains very strong and the balance grew to RMB919 million, or approximately $120 million, as of March 31, 2007. This compares with RMB869 million at year end 2006. Now I will turn the call back over to Rick for his comments on current operating conditions.

[Rick Yan:]

Thank you. As I mentioned earlier, we are pleased by our solid start in 2007. Throughout this year, we remain focused on our two key strategic initiatives. One, ramping up sales and marketing activities, and two, product development. We are executing distinct customer acquisition strategies in each of the cities we operate. These customer preferences, as well as Internet penetration rates, vary across and within each city. We continue to focus our effort on addressing and meeting the specific needs of each geography. Unlike mature markets such as the U.S., where the trend is a defined offline to online transition, we observe that the primary challenge in China today remains to be the changing of the behavior of recruiters from using traditional channels such as job fairs and referrals to organized, advertising formats, be it print or online. As a result, we believe that with our powerful brand and unparalleled breadth of services, we can best serve the wide range of HR needs across different cities. Whether it is selling an online package in Shanghai or print ads in Xian, we are uniquely positioned to deliver superior recruitment results. I have been spending a lot of time with our sales team across the various cities and am pleased with our progress so far. We will continue to be aggressive in our sales and marketing activities to further develop these local markets and strengthen our competitive position. Our other key strategic objective is product development. As the HR industry continues to grow, quality and effectiveness are becoming increasingly important and we are staying on the forefront of product innovation. Our ability to generate more and better qualified candidates meaningfully strengthens our value proposition and is a key competitive advantage recognized by HR managers. In the print business, we continue to improve our local distribution network and expand readership. On the online front, we add new technology, new hardware and software to meet the growing traffic and data needs. Additionally, we are making enhancements to our website and improving user experience. In our other HR businesses, we have increased our training content by exclusively licensing new courses and materials. We believe these product development efforts will not only deliver new and exciting solutions for customers but also strengthen our reputation as the leading integrator HR solution provider in China. Turning to our second quarter guidance, based on current market and operating conditions, our total revenue target is an estimated range of RMB200 million to RMB210 million. Our estimated non-GAAP, fully diluted EPS target for the second quarter of 2007 is between RMB0.67 and RMB0.77. Please note that this non-GAAP EPS range does not include share-based compensation expense or the impact of foreign currency translation loss. Since the launch of the first additional 51job Weekly in October, 1998, we have been competing in the China recruitment market for over eight years. For both print and online, we started as a follower, not early movers. But, through a combination of winning strategies and superior execution, we overtook previous incumbents and became market leaders in both the print and online segments. We have lived through the bubble years where competitors were heavily funded with hot money. We have also survived a period of what they call the Internet Winter in China. Despite these ups and downs in the market, we continue to stick to our core strategy of being an integrated online and offline HR solution provider in China. We have continuously faced many different kinds of competition throughout the years, both new entrants and newly funded existing competitors. With our winning strategy and superior execution, not only do we continue to improve our market leadership position -- we also continue to enhance our profitability. Improving market position while enhancing profitability at the same time is not a paradox -- it is what many great companies achieved in their histories. In contrast, it was only during the bubble years that losing money was disguised as making investments and to hide many failed strategies or poor executions. In September, 1998, the month before we launched our first additional 51job Weekly, I wrote my second half of business review article, whose title was Short-term Results

[Operator:]

(Operator Instructions) First we’ll hear from Catherine [Lun] of Citigroup.

[Catherine Lun:]

Good morning. Congratulations on the very strong quarter. I just have two questions. The first is, can you please help me understand the pricing environment for both print and online? For print, there was a pretty significant year on year decline in average revenue per page, and I know you mentioned this is due to the increased contribution from the tier two cities, so considering that you have had now geographic expansion into the new tier two cities the past year, what is driving the increased revenue contribution? Is it become more tier one revenues are shifting to online? And then for online, the demand seems to be very strong this quarter. Can you help me understand if you see any pricing power because of the strong demand, or is the competition keeping the pricing power down. My second question is on the Q2 guidance, which is quite strong relative to the Q1 revenues. Maybe you can help me understand where the revenue growth is coming from, and are we seeing any shift in seasonality in Q2 due to the relatively late Chinese New Year this year? Thank you.

[Kathleen Chien:]

Let me try to answer the first question on the pricing. Essentially, when you look at both the year-over-year quarter and then sequential quarter numbers, the picture that you see is actually very different. As mentioned earlier on the call, I said that while we saw the average revenue per page decrease 18.5% year over year same quarter, we also saw an increase of 7% once that’s compared with last quarter. I think if you look at the page count, if you will, we essentially added about 1,000 pages in terms of a year-over-year situation. A lot of the growth essentially will have to come from A, lower-priced cities and also from the smaller customers who will tend to buy the smaller black-and-white ads. So in terms of the contribution of those types of products, we do expect that the revenue per page to continue to come down over time, and that’s something that we have communicated all along in terms of the trend in the pricing. So again, if you look at the last four quarters, then you will see that the trend is consistent and that’s something in line with the expansion of the lower-end customer group that we continue to work hard to acquire and convert to usage of the product, so that’s the situation on the pricing side. I think we have also said that we are very focused on acquiring customers rather than trying to use price to exclude customers coming in the door, because this is a conversion game, if you will. So that’s why that this is the strategy that we’ve stuck to and we continue to execute against. We do not expect to see that we will be increasing our prices for these cities in the short term, and I think that the trend in terms of the move is in line with what we expected.

[Catherine Lun:]

Thank you. And maybe on online, are you seeing competition limiting your pricing power?

[Operator:]

Ms. Lun, your line is open still. We’ll take our next question from Kit Low of Goldman Sachs.

[Kit Low:]

Good morning. Thanks for taking my question. Just a quick question on the margins, particularly on selling and marketing costs. It looks like the operating leverage is quite hefty this quarter. Is this something we can expect? It’s running about 17% of revenue this quarter versus 25% last quarter. [Trend] has been about 17%, 18%. Should we expect around the mid-teens range, or is that expected to go back up, given the more aggressive spend on marketing?

[Rick Yan:]

I think we mentioned in the last earnings call that we expect to be more aggressive on sales and marketing, and we started doing that towards the second half of quarter one. Yes, sales and marketing in the first quarter was less than 18%. I think at this stage, we expect to continue to increase our sales and marketing expense, but if we are doing the right things, we would expect that to generate additional top line growth too, so as a percentage, I think at this stage, I think we will be probably moving around what we achieved last year at that level, or maybe increasing because we want to get more aggressive on sales and marketing going forward.

[Kit Low:]

Okay, so we should expect back up to around the 20% range, so it will be more realistic?

[Rick Yan:]

As we continue to roll out new sales and marketing initiatives, I would expect our sales and marketing costs to go up as a percentage of our revenue.

[Kit Low:]

Okay, great. Thank you.

[Operator:]

We’ll take our next question from Ashish Thadhani with Gilford Securities.

[Ashish Thadhani:]

Yes, good morning -- terrific quarter. Just had a couple of questions; firstly, on the online growth, it sort of seems to be a little bit below 30% year on year. Do you expect to sustain growth at these levels, or would you expect to move back above 40% over the near term?

[Rick Yan:]

I think if you look at our revenue history, what you normally see is in quarter one, which is a high growth quarter, you see more growth in print. I think as we explained in past earnings calls, when our sales team is very tied up with print advertisements, we tend to see a lower growth on the online segment. So I think if you track our quarterly numbers on print versus online, you normally see a high growth in print revenues in quarter one, but then online can catch up for the rest of the year. So the other factor that might be affecting this is again the late arrival of Chinese New Year in 2007. Although some of the online revenue is kind of membership-based that is spread over different quarters, but they are still part of our online revenue, still advertising driven, and the late arrival of Chinese New Year would have some impact on the growth of our online revenue in the first quarter. So I think it’s a combination of seasonality and then late arrival of Chinese New Year. That’s why we are seeing the online growth at less than 30% in quarter one.

[Ashish Thadhani:]

That’s very helpful. Are you seeing any signs of more rational spending on the part of ChinaHR.com in recent months?

[Rick Yan:]

I think if you look at the P&L, I think they continue to incur heavy losses, so I think they are still pumping a lot of money in ChinaHR, although as we mentioned in the earlier comments, we do monitor our market position very closely. I don’t think that investment has really changed our market position so far, but as of now, what we are seeing is that our competitors continue to invest heavily in China and continue to incur heavy losses.

[Ashish Thadhani:]

Okay, and a final one on the tax rate, which shot up in the quarter. What should we expect over the near future?

[Kathleen Chien:]

I think when we discussed the tax rate issue on the last call, we mentioned that we expect that the tax rate would be somewhere between the -- probably closer to the full year rate for last year, or maybe slightly lower. I think our new expectation is that it would probably be closer to the overall average for the year last year, which is slightly higher than our expectations versus a couple of months ago, and that’s due to some changes in the tax environment here and what the regulatory bodies are telling us. I think we will probably have expectation now of sort of a mid-20s as our target for the tax rate for this year at this point in time.

[Ashish Thadhani:]

So last year was 22%, right?

[Kathleen Chien:]

Last year was a little bit higher than that. I think it was 23% plus for the year, but I think we are expecting that to adjust slightly because we actually had a couple of tax exemptions that expired at the end of last year, which we were not able to renew for this year.

[Ashish Thadhani:]

Okay. Thank you very much and great quarter.

[Operator:]

(Operator Instructions) Next we’ll hear from Jenny Wu of Morgan Stanley.

[Jenny Wu:]

Congratulations on a good quarter. I have several questions. The first one, can you help us understand the revenue contribution from the tier one cities and the non-tier one cities?

[Rick Yan:]

I think we have gone through this many times in the past. We do not disclose revenues by geography because of competitive reasons.

[Jenny Wu:]

Okay, because we see the increase in revenue contribution from the low-priced cities, so we really wanted to know more, or hope you can give us more color on this.

[Rick Yan:]

I think we have been very consistent in terms of what we disclose and what we don’t disclose over the past almost four years.

[Jenny Wu:]

Okay, then the second question is about your customer profile. Could you give us a breakdown about how many large customers you have and how many small and medium enterprises you have?

[Rick Yan:]

I’m not sure how to answer your question because when you say large customers, do you mean --

[Jenny Wu:]

Yes, for example, the top 500 enterprises.

[Rick Yan:]

Well, a large company may not hire a lot of people this quarter. A small company can hire a lot of people this quarter, so I think -- and again, big companies can have like a lot of subsidiaries. This is something that’s very hard to quantify, but I think what Kathleen said in the earnings call is obviously, and we have already covered a lot of the large customers, or the large companies in China, a lot of the new customers that we are acquiring are small and medium sized enterprises in China, so the trend is obviously we are getting more SMEs in our customer portfolio going forward, because most of the large customers are already working with us. I think we have to draw a line to say what is large and what is small, so I don’t think I can give you the same number going forward. There’s going to be more potential in the small or medium sized enterprises.

[Jenny Wu:]

Thank you. And there are several housekeeping questions. Can you update us on the number of valid job postings on 51job.com?

[Kathleen Chien:]

Jenny, that number, as I think I mentioned earlier, that number changes every day but I would say on average, we maintain over 800,000 postings on our site on a regular basis, and I believe that’s more than double our closest competitor.

[Jenny Wu:]

Okay, and the number of registered job seekers?

[Kathleen Chien:]

I’m sorry?

[Jenny Wu:]

Number of registered job seekers?

[Rick Yan:]

You mean graduate job seekers?

[Jenny Wu:]

Yes, we can say that.

[Rick Yan:]

When a job seeker comes to our site, they would look for job postings and apply. It would not be easy for us to figure out whether they are graduates or they are existing people already working for a couple of years. What do you mean by graduate job seekers?

[Kathleen Chien:]

Let me try to answer that question in maybe a slightly different way, Jenny, and I’m not sure if that is what you were trying to ask. Essentially, we have over 70 million registered job seekers on our site, of which we have about 12 million people with posted resumes to our resume bank. I think within that, I don’t expect college graduates or fresh, young people if you were a fresh grad to comprise more than maybe 20%, 30% at any given time. It’s a small percentage. I don’t know if that answers your question though.

[Jenny Wu:]

Yes, very helpful. Thank you, Kathleen, Rick.

[Operator:]

We’ll take our next question from Wendy Huang of Evolution Securities.

[Wendy Huang:]

Good morning, Rick, Kathleen and Linda. Thanks for taking my questions. First, I understood that you started to aggressively push sales and marketing first quarter, and obviously you will spend more money in 2007 than 2006, but looking at it quarter over quarter, no matter if it is an absolute number or a percentage basis, your sales and marketing expense has decreased quarter over quarter. I wonder whether that decrease is more from the advertising promotion or from the personnel payroll. It would be helpful if you can give me a breakdown on that. Also, Rick, you mentioned that you will have two strategies in the future. I wonder, how will you differentiate those strategies in the first tier cities and tier two cities? My third question is in terms of your revenue growth, apart from the organic growth, will you think about acquiring maybe some local recruiting companies, maybe a top one or top two in certain regions, especially in the tier two cities, to help your revenue growth and to do your expansions? Thank you.

[Kathleen Chien:]

Let me try to answer the first question, and maybe I’ll leave Rick to answer the second and third question, Wendy. I think on the sales and marketing front, I think you asked for I believe the breakdown or sort of the understanding of whether or not it was the increase was more due to marketing or sales expansion. I think our cost structure is such that if you look at the current breakdown, I would say that a change quarter over quarter is more driven by sales versus marketing. Actually, in the first quarter, to be very honest, I don’t think we spent as much money in marketing as we did in the fourth quarter, partly because of a lot of year-end activity and events that we held for customers at year-end to thank them for their business during the year and also to continue to educate them for the year ahead, if you will. I think I would say that the sales and marketing costs were more skewed towards sales and marketing for the first quarter. That’s the situation.

[Rick Yan:]

Wendy, I’m not sure I understand your second question, but I think what I heard was you asked about our strategy for first versus second tier cities. Was that the question?

[Wendy Huang:]

Yes, especially in terms of your strategy, sales and marketing strategy. How will you differentiate this in the first tier and the second tier cities?

[Rick Yan:]

I think fundamentally, our customers are looking for help in their recruitment needs. We believe there is only one thing that’s important -- the quantity and quality of resumes customers post, put their job postings on our products. Obviously in the first tier cities, on the larger cities, there is more Internet penetration and there are more customers choosing online versus offline. In the smaller cities, where Internet penetration rates are much lower, in those situations, customers are more choosing print over online. So I think our strategy in the first tier city and the second tier cities are the same -- generate superior recruitment results for our HR customers in terms of quantity and quality of resumes. And it’s really the market characteristic that would drive whether that is a print advertisement or whether it’s an online recruitment services. I think our marketing strategy is also the same because I think Kathleen mentioned in the earlier comments that what we focus on is customer acquisition. We acquire a customer, we lock them in, and we see whether they prefer to use online or offline, depending on the city, depending on the industry, and depending on the job function of the recruitment needs. So I think our strategy has been the same throughout our history and actually has been the same in different cities. In the last one, I think you question is whether we would consider acquiring local recruitment agents in the smaller cities. Honestly speaking, we’ve looked at acquisitions a lot and we’ve been approached by some of these recruitment agents in the secondary cities. We’ve looked at that carefully from a strategic point of view, as well as looking at the financial point of view. In our history, we have not done a single acquisition because we just haven’t found a target that makes sense strategically and financially. So we continue to look at acquisition opportunities, but at this stage, I would not put too much value or hope in terms of acquiring recruitment agents in the secondary cities because that didn’t seem to be strategically helpful to us and didn’t seem to make a lot of financial sense, too.

[Wendy Huang:]

Thanks, that’s very helpful.

[Operator:]

We have no further questions at this time. I’d like to turn things back over to Mr. Rick Yan for any closing or additional comment.

[Rick Yan:]

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

[Operator:]

Again, ladies and gentlemen, we do thank you for your participation. That does conclude today’s conference.