51job, Inc.
Q2 2007 Earnings Call Transcript

Published: 10 Aug 2007

[Operator:]

Good day, ladies and gentlemen. Welcome to the 51job Incorporated second quarter 2007 conference call. (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, Madam.

[Linda Chien:]

Thank you, Kelly and thank you all for attending the teleconference with 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, 2007. A press release containing second quarter 2007 results was issued earlier today and a copy may be obtained through our website at www.51job.com. Before we begin, I would like to remind you that during this call, statements regarding targets for the third quarter of 2007, future business and operating results constitute forward-looking statements within the meaning of Section 27(NYSE

[Rick Yan:]

Thank you, Linda. Thank you for joining us on this conference call. I will begin today’s call with highlights of the second quarter and Kathleen will follow by reviewing our financial results in greater detail. Then I will discuss our current business initiatives and provide our outlook for the third quarter of 2007. Finally, we will open the call for your questions. We are pleased to report another quarter of solid financial results and steady progress in executing our strategic plan. Second quarter revenues came in at the top end of our guidance range at approximately RMB 210 million. Since the beginning of this year, we have communicated that we plan to increase our sales and marketing spend and become more aggressive in new customer acquisitions. You can see that our sales and marketing spend in the second quarter increased by almost RMB 10 million compared with the first quarter of this year. We are also seeing initial results in volume growth in the second quarter. Print advertising volume topped 4,200 pages for the first time in our operating history, implying a 37% year-over-year growth compared with the same period last year. The growth momentum for our online business is also strong, as we successfully acquire new corporate customers. We transacted with a record 58,000 employers during the quarter -- 32% higher than last year’s comparable period. Because of the powerful economy of scale of our business model, we reached a record gross margin of over 57% and achieved operating margin of nearly 22%, despite a significant increase in sales and marketing spend. In line with our aggressive customer acquisition plan, we intend to continue ramping up our sales and promotion efforts to strengthen our market position. Complementing the solid performance of our recruitment-related businesses this year has been the stellar growth of our other HR services segment, particularly our corporate training and outsourcing services. Customer acceptance and demand for these services is steadily increasing. With our superior content and large service network, we are poised to further capitalize on these growth areas. From recruitment ads to HR admin support, we are satisfying the wide range of employer needs and building our position as the leading one-stop HR services provider in China. Now I will turn the call over to Kathleen for a detailed financial review.

[Kathleen Chien:]

Thank you. Revenues for the second quarter totaled RMB 210 million, a 21% increase over the same quarter in 2006, and looking at the first half of 2007, revenues grew about 19% compared to the first half of 2006, despite a late Chinese New Year which actually negatively impacted our business. Print advertising revenues increased about 11% year over year, due primarily to the higher page volumes which were partially offset by the lower average revenue per page. The number of print advertising pages in the second quarter increased 37% to 4,213 pages compared with 3,068 pages in the same quarter last year. Our average revenue per page decreased 19% compared to the second quarter of 2006, driven principally by the higher revenue contribution from the lower priced cities. We have generally maintained similar pricing levels within each city over the last year and we expect that the continued growing contribution from the lower priced cities will continue to reduce the overall average revenue per page. Our online revenues grew 29% year over year to approximately RMB 71 million in the second quarter. The increase was driven primarily by the number of unique employers using our online recruitment services, which increased to almost 58,000 in the second quarter compared with 44,000 in the second quarter of 2006. Our revenues for our executive search service business was relatively unchanged from last year’s second quarter at RMB 4.7 million. The revenues for other HR services increased about 58% year over year to RMB 26.5 million in the second quarter, driven by the greater customer demand for our training and our outsourcing services. Our gross margins reached a record 57.8% for the second quarter compared to 56% in the second quarter of 2006, due to the greater economies of scale and our improved efficiency. Included in the cost of services was share-based compensation expense of approximately RMB 1.2 million, compared with RMB 1.3 million in the second quarter of 2006. Our sales and marketing expenses increased to RMB 42.2 million from RMB 31.4 million in the second quarter of last year. As Rick mentioned earlier, in line with our strategic plan, we added new sales and account management staff during the quarter and we also ramped up our spending on marketing and promotional activities. We intend to further increase expenditures in these areas for the remainder of the year to strengthen our competitive position. Included in our sales and marketing expenses was share-based compensation expense of approximately RMB 1 million compared with RMB 1.1 million in the same quarter last year. Our G&A expenses for the second quarter decreased to RMB 30 million from RMB 31 million in the same quarter last year. Higher employee salaries and staff additions were more than offset by the lower office rent following our move of the headquarter offices to our new Zhangjiang complex and lower share-based compensation expense. Share-based compensation expense included in G&A was RMB 4.6 million compared with RMB 5.6 million in the second quarter of 2006 due to an increase in forfeited options during the period. Our operating income for the second quarter increased 46% to RMB 43 million from RMB 29.4 million for the same quarter last year. Excluding the share-based compensation expense, our operating margin was 25% compared with 22.8% in the second quarter of 2006. Our effective tax rate though increased in the second quarter to 31.2% compared to 21.9% in the second quarter of 2006. We were hit with higher statutory tax rates due to the expiration of certain tax exemptions of some of our entities. In addition, share-based compensation expense and foreign translation loss are not tax deductible items in China, which then will inflate our effective tax rate. We continue to actively engage in tax planning efforts for the certainty and the timing of our tax statuses remain unclear, especially due to the ongoing changes in the Chinese tax system. Net income for the second quarter grew 19.5% to RMB 31 million versus RMB 26 million in the second quarter of 2006. Our fully diluted earnings were RMB 0.55 per common share, which is equivalent to $0.14 per ADS. Excluding the share-based compensation expense and the foreign currency translation loss, our non-GAAP adjusted income for the second quarter of 2007 increased 19.6% year over year to RMB 42 million. Our non-GAAP adjusted fully diluted earnings per common share for the first quarter were RMB 0.74, or $0.20 per ADS. Looking at our balance sheet, our cash position remains strong and the balance grew to RMB 959 million, or approximately $126 million as of the end of June, 2007. This compares with RMB 919 million as of the end of the first quarter and RMB 869 million as of the end of 2006. Now I will turn the call back over to Rick.

[Rick Yan:]

Thank you, Kathleen. We are committed to investing in our business to drive long-term growth and returns to our shareholders. We believe our whole initiative this year of

[Operator:]

(Operator Instructions) We’ll go first to James Mitchell with Goldman Sachs.

[James Mitchell:]

Thank you for taking the question. Just in terms of the corporate training business and the other HR revenue, could you talk about the margins you experience on that business and whether you see that business as kind of accreting to your core objective of being the dominant job listings website? Thank you.

[Kathleen Chien:]

I think for us, definitely we believe that with some of these -- I think, honestly speaking, I think for the HR outsourcing services, we are at the initial stage of the cycle, if you will, so I do not think the margins that we are looking at today are what we believe are the margins that we expect to achieve for that business in the long-term because the scale is relatively small at this time. But I think our businesses -- these businesses are accretive to our earnings at this point in time regardless. They are not losing money and I think that there is actually a big potential for them. So that’s kind of where we stand on those two businesses.

[Rick Yan:]

In terms of whether that helps our core recruitment business, I would say those are complementary businesses. We have to be number one in the print and online recruitment businesses. That is very important, but having the training and outsourcing business will actually help us to further penetrate into the customer organization and become a one-stop shop, HR services provider for the customer. So I don’t think that’s a direct advantage, meaning that if we are not number one in print and online advertising, I don’t think these businesses can help us with the recruitment advertising business. But having those businesses will actually help us to strengthen the customer relationship, increase our brand awareness and help us to further penetrate into customer accounts.

[James Mitchell:]

And how many customers are we talking about hear, hundreds or tens or thousands?

[Kathleen Chien:]

I think for the training businesses, we are talking about hundreds of thousands, because if you talk about individuals also coming to attend public courses and what not, so certainly thousands and tens of thousands during the year. I think we last year and this year I think are running at about 3,000 training days throughout the year, so if you can actually multiply that out by number of attendees per session, if you will, so we are talking about tens of thousands for the training. I think for the HR outsourcing business, I think we are still in a much smaller scale. Also, I think in terms of people under service, we are again in the tens of thousands but it is a very initial stage of the business yet, given how big we believe that market is in the long-term and what we’ve seen in other markets around the world.

[James Mitchell:]

Okay, and then just shifting gear to the guidance, it looks like you are guiding for flat revenue and substantially lower EPS into the third quarter. What is the motive force behind the anticipated margin contraction?

[Kathleen Chien:]

I think Rick already discussed on the call very quickly, which is we want to actually invest for the longer term and we have actually been more aggressive in terms of both our sales and marketing efforts, so if you see the increases in the cost structure for the second quarter, basically all of that cost increase really came in in the sales and marketing line, so that includes obviously hiring additional sales count, to continue to expand and acquire new customers. It also includes targeted marketing effort, online and offline in certain markets and certain product lines. So that is something that we expect to continue to do because we believe that we want to be more aggressive for the rest of this year and this is something that we’ve communicated very early on already since the post Chinese New Year call, because we feel that this is a very good time and a very good year for us to do this, to actually improve our competitive position and gain market share.

[James Mitchell:]

So that’s principally the sales and marketing line rather than any change in the tax line, for example?

[Kathleen Chien:]

Most of the increase is actually in the sales and marketing line in terms of expenses. Obviously our tax from Q1 to Q2 also was actually unfavorable in terms of the tax break --

[James Mitchell:]

Sorry, I was referring more to Q3 guidance, just in terms of why you are envisioning lower margins in Q3.

[Kathleen Chien:]

We expect to continue to invest in the sales and marketing line more than anything else.

[James Mitchell:]

Okay. Thank you very much.

[Operator:]

We’ll go next to Nate Swanson with ThinkEquity.

[Nate Swanson:]

The growth in print pages was pretty impressive. I’m wondering if you think you’ve seen an inflection point in some of the smaller cities and then also how much room do you think you have left in those smaller cities before you would need to add additional cities to continue to grow?

[Rick Yan:]

In terms of the print growth, I think the print business has always been growing in the smaller cities because print is still the primary channel for recruitment in those cities. I think as the smaller cities continue to grow and as the larger cities, the growth will drop to a certain level and it will stabilize, we would expect the print growth to be higher going forward. Not in a meaningful way but slightly edging up going forward.

[Kathleen Chien:]

I think in terms of the inflection point, I think right now, like I said, I think there is a difference between what we are perceiving as the larger cities, the coastal cities, the more penetrated cities in terms of behavior versus smaller cities, which I think again, as Rick already said, the print is still the dominant channel for recruitment and the selection of, you know, as a primary selective media for both recruiters and jobseekers.

[Rick Yan:]

And for the smaller cities, I don’t think we are reaching anywhere close to the full potential in terms of the print market because today in some of the smaller cities, we are only printing 10 pages a week. I mean, that’s a very small volume compared to what the potential could be. And obviously, if we no further down five or ten years maybe, online will become a viable channel in some of those smaller cities. So it is like two dynamics going on, one is the growth of the print business in those smaller cities and the second driving force could be one day in the future, there might be online penetration happening there too.

[Nate Swanson:]

Okay. Yes, I guess that was my real question, was how much growth do you think you have left in the smaller cities and it sounds like you are still just kind of scratching the surface in a lot of them.

[Rick Yan:]

Yes, I mean, we are talking about 10, 20 pages a week for some of these cities that have millions in population. I think we are still at a very early stage of penetration.

[Nate Swanson:]

Okay, and I was wondering, do you think your relationship with Recruit has helped your print business?

[Rick Yan:]

I think we’ve been seeing two things. One is I think they are much more sophisticated in terms of sales force management because they have, you know, they are now a $4 billion company and they have a much bigger sales team than we have. Actually, when we look at the development of the sales team and management structure, we look very much like what they were 10 or 15 years ago. So I think there is a lot we can learn on the sales front. I would not specifically say on the print business, but more on the sales front. And obviously on the online front, we keep looking at the technology, the kind of technology that we might be able to leverage using their technology experience.

[Nate Swanson:]

Okay. I guess another question in terms seasonality, obviously you have the late Chinese New Year. I’m wondering if you thought that helped 2Q results and then also, how should we think about Q3 in terms of seasonality, strength or weakness?

[Rick Yan:]

Well, if you look at quarter two this year, if you look at quarter-over-quarter growth, meaning quarter two versus quarter one, this year we grew 4.7% versus quarter one. Last year quarter two was only 0.5% growth from quarter one, so technically you can say that our business probably spilled over because of the late arrival of Chinese New Year in quarter one. But a few percentage points, I’m not sure that’s conclusive but we are seeing a more healthy quarter two versus quarter one this year versus last year.

[Nate Swanson:]

Okay, and then in terms of Q3, how should we think about that? Is there anything unusual that we should be aware of?

[Rick Yan:]

I don’t think so. I think we communicated that we will be more aggressive this year in sales and marketing and we are beginning to do it. And quarter two, our sales and marketing expense went up by almost RMB 10 million. We expect that trend to continue and if we are successful in acquiring new customers and generating revenues, given the scale of economies in our business model, we will be hit on the earnings but it might not be as much as what we spend.

[Nate Swanson:]

Okay, and just my last question, in terms of the new company with Recruit

[Rick Yan:]

Since our cooperation, since our business alliance with Recruit, we set up a corporate planning group and one of the missions for the corporate planning group is to look at opportunities that Recruit has successfully captured in the Japan market and see whether some of those opportunities can be replicated in China. I think after a series of exercises where we decided that the coupon magazine is an attractive opportunity in China and we are doing it. We are launching a pilot in Shanghai. We are starting just with the city of Shanghai, one edition. Recruit has 49 editions of the coupon magazine called Hot Pepper in Japan, so we try to experiment with Shanghai to see how we might need to adjust or adopt the business model to China. Initially, the Shanghai venture will be pretty much managed by Recruit and we have a localization plan for the business going forward. Whether that will be recruitment locally or they maybe could be transfers from 51job, the business will be localized going forward and will also be expanded beyond Shanghai if we -- after we tune up the model in Shanghai. Are we going to do other things other than the coupon business? That could be. It is certainly something that we keep looking at at the corporate planning group. I think this is one of the leverage we have, pitching successful business models in Japan and using Recruit’s expertise to launch them in China.

[Nate Swanson:]

Thank you.

[Operator:]

We’ll go next to Alicia Yapp with Citigroup.

[Alicia Yapp:]

Good morning. Thank you for taking my questions. I have a couple of quick questions. One is your year-over-year revenue growth is excellent this quarter. What is your major contributor? You mentioned a little bit about your economy of scale. I was just wondering whether the major contributor to the growth, is it coming from a change in the competitive activities or is it just your better execution?

[Rick Yan:]

I think I would say we’ve been on this growth trend for the past couple of quarters. I wouldn’t say that quarter two is a kind of a particularly different quarter compared to the trajectory that we have been on. Again, we have a higher growth online business at 29% year over year. Print growth increased a little bit to 10%, 11%, partly because of the spillover of the late arrival of the Chinese New Year in quarter one that we talked about earlier. And then on the other HR services, training and outsourcing that James Mitchell asked about at the beginning, that is a high growth area. That contributed 59% growth year over year. I would not say there is anything, any dramatic changes in the competitive landscape. I think we are still operating the same environment. We are increasing our sales and marketing. We will become more aggressive on the competitive landscape and I think it will be a gradual evolution as we improve our market position. So I think bottom line, I think we are still on the same trajectory but we are accelerating our growth mainly through sales and marketing investments.

[Alicia Yapp:]

Okay, great. And then to follow up on the previous questions on the competitive landscape, have you seen any change in the activities, because even one of the major holders of one of your competitors, they are going through a restructuring in the U.S. Have you seen any change in their marketing efforts, like them being less aggressive than previous quarters? And if not, do you anticipate any decrease in their marketing spending in the next couple of quarters?

[Kathleen Chien:]

I think our sense is that overall this year, I would say that I feel that the competitor that you are referring to, which I believe is China HR, has actually been less aggressive versus prior year, 2006, that is. But I think based on the information that we have and what we’ve been able to take away from I think some of the Monster filings, they are actually losing more money I think this year, second quarter versus first quarter. We are not really sure what is going on over there but all we know is that they are losing more money in the second quarter versus the first quarter, but we are not really seeing that they are spending that much more money on marketing versus last year. So it is a little bit of an odd trend.

[Alicia Yapp:]

Okay, and then just a final question on the effective tax rate going forward. How should we expect that, for example into 3Q and 4Q?

[Kathleen Chien:]

I think unfortunately, like I said, I think already you saw that our tax rate has increased versus Q1, in Q2, that is. I think unfortunately that for the third and fourth quarter, it is likely that it will remain at the Q2 level, or maybe even slightly higher, given that again I mentioned earlier about some expiration of some exemptions, and also I think with a lot of changes right now going on in the China tax climate because of the tax unification law that will actually be implemented in January of 2008, I don’t think that there will be that much change for us in the last two quarters of the year. I would actually look at the tax rate for Q2 as something that we’ll be probably facing in Q3 and probably even slightly higher, unfortunately.

[Alicia Yapp:]

Okay, and then just a final quick one, if I may; on the sales team, the additional sales team that you hired, usually what is the rampings? Is it taking two quarters for them to actually get effective? And then so should we see more, even more activities going forward?

[Rick Yan:]

Normally we do have a higher turnover rate for our sales team in the first three months after they join the company, and after three or six months, most sales who kind of survive the initial period will stay on for a reasonable length of time. I think one to two quarters is good period, training period for our sales team. Historically, we have been increasing our sales force in quarter three and quarter four so that we have a bigger sales infrastructure in place before the peak season in the Chinese New Year. So quarter three, quarter four are normally historically quarters where we tend to add more sales people than others.

[Alicia Yapp:]

Great. Thank you so much.

[Operator:]

We’ll go next to Ashish Thadhani with Gilford Securities.

[Ashish Thadhani:]

Good morning. I just wanted to talk a little bit about the gross margin in the quarter. It rose quite sharply. Any specific explanation as to why? Were there any unusual items?

[Kathleen Chien:]

No, there were no unusual items, actually. We invested actually in Q1 because of our new data center that we set up in Zhangjiang. I think this quarter we’ve obviously been able to absorb that cost and actually bring down the, or bring up the margin, if you will, because for the same level of technological infrastructure, we have been able to support more revenues even. So I think it is just scale economies and just improved efficiencies as we continue to grow. Our revenues are up 5% quarter over quarter, so some of that is falling directly into our profits and obviously at the gross and at the net line.

[Ashish Thadhani:]

Okay, and the gross margin was I guess somewhat depressed in the first quarter?

[Kathleen Chien:]

Because of the new investments that we talked about when we actually set up the new data center.

[Ashish Thadhani:]

And this has in fact risen about 10 percentage points over the preceding three years. How much room is there for further improvement in gross margin over the next few years?

[Kathleen Chien:]

I think this kind of again goes back to what we believe for the two core businesses for us, where it is going to be ultimately. I think we have always said that we believe for the print business, the margin could be 30% plus and for the -- operating margin that is, of course, and then also the online business is 40% plus, so you know again, we are in the low 20s or mid 20s at this point in time so we expect that we will have to gain that both at the gross and at the operating line level. I think there is more room to go for us and we have exhibited these kinds of trends every year and we are confident that we are able to do so for the future still.

[Ashish Thadhani:]

Okay, and then shifting to the print business, there appears always to be a trade-off between year-on-year volume growth and pricing. Is there any reason why we haven’t seen even moderate but simultaneous gains in both? When can we actually look forward to seeing that?

[Kathleen Chien:]

Unfortunately, we are looking at the average, if you will, so I think again, we’ve said earlier that if you look at city specific pricing for the same product, same thing, our pricing hasn’t changed. But if I look at the expansion of some of the lower priced cities, and unfortunately when we actually then average it out, the average price will continue to go down. This is something that has happened for several quarters in a row and we expect to continue to happen because again we felt that now the print opportunity will be actually bigger in the smaller cities which are just lower price, so the page count will continue to go up but unfortunately, the price on average will continue to decline as well. I don’t think we will see both sides of the equation go up at this point in time in terms of price and volume. I think our growth is going to come at volume and then we’ll have to sacrifice a bit on the average price.

[Rick Yan:]

I think we want to be careful to use the term price. What we are really talking about is revenue per page and the revenue per page in the smaller cities are lower and the smaller cities are growing faster than the larger cities. But if you look at the actual pricing of the same product in the same city, that hasn’t changed. I don’t think we can improve our gross margin as you said by 10 percentage points over the past two or three years if pricing is dropping 19% per annum. I think we are really talking about revenue per page, that it’s a reflection of the city mix more than the actual pricing in different cities.

[Ashish Thadhani:]

Okay, and with regard to the new coupon advertising business, are you anticipating any significant P&L expenses or income over the next couple of years?

[Kathleen Chien:]

At this point in time, again we’ve committed to financing or funding this venture as a convertible bond loan to the new JV, if you will, or I should say to the new company. I do not think that there will be short-term impacts for us because we are not actually a shareholder yet at this point in time. We’ll be providing operating oversight of the entity and trying to share and leverage a lot of our distribution expenses and experiences, but at this point in time I think in the short-term, we do not see a financial impact except for, I guess, foregone interest on that money invested.

[Ashish Thadhani:]

Okay, and finally could the other HR business, the training and BPO services, that certainly appears to be gaining some mass and momentum. Could this become a very significant business? What sort of growth can we expect going forward?

[Rick Yan:]

I think on the training front, we are as Kathleen mentioned earlier, we are doing around 3,000 training days a year. That is steadily growing. On the HR outsourcing, we announced serving tens of thousands of outsource staff for our customers. But if you look at China, we are talking about a workforce that is in the hundreds of millions, so we are at a very early stage of the development of the whole outsourcing market, or you might call it a staffing market. If you look the U.S. or you look at Europe or even Japan, you will see that this temporary staffing is a very, very big market. People like Manpower are major players in those markets. Today you don’t have a temporary staffing market in China yet, partly because of the regulations, partly because of company practices or culture, but we do expect that to evolve. There’s been a new law coming out, a new labor law that came out last month that will be effective beginning of next year that might trigger some new opportunities for the outsourcing business to grow. We certainly believe that the outsourcing business could be a very big business going forward and we are investing a lot of resources and time and energy on that to make sure that we capture that growth opportunity in the future.

[Ashish Thadhani:]

It is a little bit more than 10% of total revenue. It is certainly growing faster than any of the other businesses. In terms of how big it could be for 51job, do we have any idea over a period of years? Could it be 20% or 30%, or not quite?

[Rick Yan:]

If I look at the U.S., if you are really talking about the temporary staffing business, people like Manpower, I mean, I can easily imagine that if we are successful, the outsourcing business could be bigger than advertising.

[Ashish Thadhani:]

Thank you.

[Operator:]

We’ll go next to Jenny Wu with Morgan Stanley.

[Jenny Wu:]

I have two questions; first one is regarding your online business. I noticed that the ESP, average spending per customer declined actually. Can we attribute that to the higher proportions on the smaller customers?

[Rick Yan:]

I don’t think so because if you really look at the revenue per employer, it has been pretty steady between 1200 to 1300 in the past, I don’t know, 12 or even 15 quarters. Last quarter was 1281. This quarter was 1228. I wouldn’t refer that to a decline. I think it is just normal fluctuations over time. In addition, we have said previously when we acquire a lot of new customers, the new customers tend to buy the more basic package, also the basic package of course is a lower price. That might have a slight impact in terms of the revenue per online, unique online employer for us. So normally historically when you see a meaningful jump in terms of unique employers, you will also see that there is some slight downward pressure on the revenue per unique employer on the online front. But as those online customers begin to use, to understand our online products more and they will start buying more sophisticated, higher priced product and over time, the revenue per employer will go up. I don’t think there is any change in trends in the online pricing front.

[Jenny Wu:]

Okay. Thank you. Is there any price increase during this quarter or this first half of the year?

[Rick Yan:]

I don’t think we have made any meaningful changes in price because I think -- first quarter is the peak season. Normally if we make any pricing changes, it will be before the peak season and after the peak season, we’ll probably stick to the same price until we hit - probably until and before we hit another peak season. We haven’t really changed our pricing in any meaningful way in the last quarter.

[Jenny Wu:]

Any plans for the coming quarter?

[Rick Yan:]

We always look for opportunities to increase revenue but I think given the competitive environment that we are operating in, I don’t expect that we will have meaningful pricing upside in the short-term, but that could be something -- that is certainly something we have in our minds when the competitive landscape becomes more stable.

[Jenny Wu:]

Another question is regarding the sales and marketing spending. You guys have been talking about you will become more aggressive. Can you give us more color, a more quantitative number regarding the spending for the rest of the year?

[Rick Yan:]

Well, if you look at quarter two versus quarter one, our sales and marketing spend increased by nine-point-something million, so that has been -- that is a pretty significant increase from RMB 34 million to RMB 42 million. So I mean, we would expect to continue that trend in quarter three and a lot of that is going to be additional sales, expansion of the sales team, also increasing some spend in different marketing initiatives, including online marketing, including even -- what do you call it -- I’m not sure you would call it TV-based but other, more traditional advertising opportunities.

[Jenny Wu:]

Okay, great. Thank you.

[Operator:]

We’ll go next to Albert Lee with Maxim Group.

[Albert Lee:]

Regarding the new initiatives, obviously we can point to your distribution and Recruit’s expertise in the new concept from Japan, but I was wondering if you could elaborate on types of synergies you anticipate from this business with your core recruitment business, if there are any synergies here? Thanks.

[Rick Yan:]

I wouldn’t say there’s a lot of synergies. I think the expertise Recruit has and the partner knowledge that they have, plus the distribution expertise we have will help to launch the business. I would say that the synergy or the benefit really comes in the initial stage of launching the business. Now, we are launching the business in Shanghai. Once we fine-tune the model and make it work in Shanghai, we are going to roll out to other cities and obviously, rolling out to other cities, we have a lot of experience of how to do that. So we will certainly be involved in the strategic planning and also in the sharing, sharing expertise and how to do it. But once that business becomes a big standalone business, I am not sure there will be much synergy between because we are not using the same brand. It is called Hot Pepper in Japan. In Chinese, it is also called something like a pepper, so it is not called 51job. I would not say that we expect a huge amount of synergy of the two businesses after it has gone to a steady state of operations.

[Kathleen Chien:]

The only thing I would add is that I think Rick has clarified that obviously there is not going to be too much direct synergies, but having said that I think that with our customer front, if we are looking at a lot of the small and medium businesses, it could be also some of these similar customers who actually would in the food, entertainment, hospitality business, it would actually be natural customers for the coupon magazine. I think that is something that we’ve looked at. Also as well, because we have such a large database of jobseekers, personal consumers, it is something that we could actually try to maybe use some database mining or other things that we can help to again launch the magazine and make sure that it is on the right track. That’s the only thing I would add to that as well.

[Albert Lee:]

In the other HR services, including I guess executive search, can you just remind us of the margin profile of such services?

[Kathleen Chien:]

We don’t break out the margins for that business and it’s actually a very small business, so I don’t think it’s a meaningful, difference from the core. It’s not really something that again I would say that that actually leads to much change in our business overall.

[Albert Lee:]

Okay, but it is consistent with the blended core, the blended margin?

[Kathleen Chien:]

Like I said, it is a very small business. I don’t think it is a meaningful issue to even discuss too much on.

[Albert Lee:]

Okay, thanks. Bye.

[Operator:]

We’ll take a follow-up from James Mitchell. Mr. Mitchell, your line is open if you have a follow-up question.

[James Mitchell:]

Thank you very much for accepting the follow-up questions. The first one is just when I look at the tax rate for 2008 and beyond, should I just be taking my pretax income and then adding back for-ex loss, adding back stock-based compensation, and applying a 25% charge to that number?

[Kathleen Chien:]

It actually depends on what the grandfathering clause will be applied for some of the tax treatment that we have. Today it is actually unclear because some of our entities in Shanghai, for example, and also Shenzhen actually has a 15% tax rate. So it is unclear right now and this is why I said there is some uncertainty on how the grandfathering of these incentives will be -- right now, honestly speaking, we don’t have a definitive answer on that, even from the tax authority. We are hopeful that they will actually allow a grandfathering for a few year but there is no commitment at this point in time because I think the tax authorities are trying to figure that out themselves. But in terms of the other, adding back the share-based and also the foreign exchange losses, that is actually a correct approach.

[James Mitchell:]

Okay, and just in terms of following up from the previous question on the other human resource revenue, if I look at the -- if I assume the margin on that is similar to your other business, than if there is RMB 26 million in revenue, there ought to be about RMB 20 million in costs. Would that appear all in cost of service or would that be spread out between cost of service and G&A?

[Kathleen Chien:]

It will depend again -- I mean, there will be some in all different lines because there will be different people, personnel performing different parts of the business, including some direct costs to the business. There will be a sales -- a sales related to other businesses as well as supervisional, sort of G&A expenses. They will actually come in all three lines, so it is not just at the direct cost or cost of goods services line.

[James Mitchell:]

Okay, great. Thank you.

[Operator:]

And there appear to be no further questions, Rick. I’ll the conference back to you for closing remarks.

[Rick Yan:]

Thank you for joining us today. We look forward to updating you on our progress next quarter. We value your continued support of 51job. Thank you.

[Operator:]

That concludes today’s conference call. Have a pleasant day.