51job, Inc.
Q4 2007 Earnings Call Transcript

Published: 4 Mar 2008

[Operator:]

Good day and welcome to the 51job Inc. fourth quarter fiscal year 2007 conference call. (Operator Instructions) At this time, I would like to turn the conference over to the Investor Relations Director of 51job, Linda Chien. Please go ahead.

[Linda Chien:]

Thank you, Justin and thank you all for attending this 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 fourth quarter and fiscal year ended December 31, 2007. A press release containing fourth quarter and full year 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 first quarter of 2008, future business, and operating results constitute forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 as amended and 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 first 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 volatilities; introduction by competitors of new or enhanced products or services; price competition in the market for the various human resource services that the company provides in China; acceptance of new products and services developed or introduced by the company outside of the human resources industry 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 these targets prior to announcing final results for the first quarter of 2008 or as a result of new information, future events or otherwise. Now, I will turn the call over to Rick Yan, Chief Executive Officer.

[Rick Yan:]

Thank you for joining us on today’s conference call. I will begin with highlights of the fourth quarter and full year 2007, followed by Kathleen with a more detailed review of our financial results. Then I will discuss current operating conditions and provide our outlook for the first quarter of 2008. Finally, we will open the call to your questions. We are pleased to report solid results for the fourth quarter of 2007. Revenues grew 25% year over year and margins were better than expected, as efficiency gains partially offset our increased spending on sales and marketing activities. Excluding foreign currency translation losses and share-based compensation expenses, non-GAAP fully diluted earnings per common share for the fourth quarter came in at RMB0.63, ahead of our prior forecast of RMB0.47 to RMB0.57. Overall, 2007 was a successful year for us as revenues increased 21% over 2006, topping RMB844 million, or approximately $115 million. Leveraging economies of scale and improved productivity, operating income grew 31% year over year to RMB150 million, despite our significantly higher advertising and promotional expenditures in 2007. Adjusted non-GAAP net income for 2007 increased 15% over the prior year to RMB159 million, or almost $22 million. We saw positive development for our three major business segments in 2007. First, our online business continued to grow at robust rates as we steadily acquired new corporate customers. For 2007, we transacted with almost 95,000 employers who purchased at least one of our online products during the year, a 26% increase compared with 2006. Our registered user base is the largest in China with 23 million jobseeker accounts and over 16 million resumes in our database. We remain confident in our leadership position in the online recruitment services market in China. Second, we were pleased to return to higher growth rates for our print advertising business in the second half of 2007. The print business is an important anchor for our operations and remains mainly the first touch point with new customers, especially in the smaller cities. We believe our integrated offline plus online product strategy continues to be a key competitive advantage that enables us to more fully capture the growing market opportunity and fulfill the wide range of customer needs in China. Third, the growing contributions of the other HR services segment was very encouraging in 2007, primarily the result of increased customer adoption and demand for our training and HR outsourcing services. Revenues for this segment grew 67% year over year. This segment is not only diversifying our revenue sources but also increasing cross-selling opportunities and strengthening our brand and image with employers and users alike. We are optimistic about the continued development and growth of our training and outsourcing businesses. We ended 2007 on a solid note and we believe our business fundamentals are stronger than ever. 2008 is a special year, as it marks a major milestone in 51job's history. This year, we will be celebrating our 10th year in operation. While we have come a long way since our first circular in Beijing in October 1998, I believe that we have just begun to tap the potential of this company and this market in China. We will continue to build on our past successes to enhance shareholder value for the long-term. I will now turn the call over to Kathleen for a detailed financial review.

[Kathleen Chien:]

Thank you, Rick. Revenues for the fourth quarter total RMB214 million, a 25% increase over the same quarter in 2006 and near the high end of our forecast. Our print advertising revenues increased 9% year over year, due primarily to the higher page volumes which was partially offset by the lower average revenue per page. The number of print advertising pages in the fourth quarter increased 21% to about 4,000 pages compared with about 3,300 pages in the same quarter last year. Average revenue per page decreased approximately 10% compared to the fourth quarter of 2006, driven principally by the higher print revenue contribution from the lower priced cities. We have generally maintained similar pricing levels within each city over the past year. As a result, we expect that growing revenue contribution from lower priced cities will continue to reduce the overall average revenue per page. Our online revenues grew 31% year over year to RMB77 million in the fourth quarter, mainly due to a greater number of unique employers using our online recruitment services. During the quarter, our unique employers increased 30% to about 57,000 compared with 45,000 in the fourth quarter of 2006. Revenues for other HR services increased 90% year over year to approximately RMB37 million in the fourth quarter. This growth was primarily driven by the greater customer demand for our training and our outsourcing services. Our gross margins improved to 55.8% compared with 54.2% in the fourth quarter of 2006. Included in the cost of services was share-based compensation expense of RMB1.3 million. Our sales and marketing expenses increased to RMB54.7 million from RMB41.2 million in the fourth quarter of 2006. In line with our strategic plan, we increased our advertising and our brand building activities and also increased sales people in preparation for the post-Chinese New Year period. Included in sales and marketing expenses was share-based compensation expense of approximately RMB1.1 million in the fourth quarter. We will continue to be very active in our sales and marketing activities throughout 2008 as we celebrate our 10-year anniversary. Our G&A expenses for the fourth quarter was RMB28 million compared with RMB26 million in the fourth quarter of 2006, mainly due to higher professional services fees. The share-based compensation expenses included in the G&A for the fourth quarter was RMB5 million. Our operating income for the fourth quarter increased 47% to RMB30 million from approximately RMB20 million for the same quarter last year. Excluding share-based compensation expenses, our operating margin was 18.5% compared with 17% in the fourth quarter of 2006. Our effective tax rate for the fourth quarter increased to 30.3% compared with 16.6% in the fourth quarter of 2006. We were subject to higher statutory rates due to the expiration of certain tax exemptions in early 2007. In addition, share-based compensation expense and foreign currency translation loss are not tax deductible in China, which then leads to higher effective tax rates for the company. On January 1st of this year, a new enterprise income tax, or EIT, regulation went into effect, which then unifies the statutory tax rate for all enterprises in China to 25%. This new law will lower the statutory rates for our entities which were previously subject to a 33% EIT rate. However, we do have some entities under a preferential tax status of 15% EIT rate and it is currently unclear if we will be able to enjoy some or all of these benefits previously granted to us. If these benefits are no longer available to us, we do expect that there will be primarily an offsetting effect on our effective tax rate in 2008 and expect it to be similar to our last year’s level. If we can take advantage of some of these previously granted tax benefits, then our effective tax rate may be lower in 2008. We are monitoring this situation closely and we await the implementation guidelines from the relevant tax bureau. Net income for the fourth quarter was RMB21 million compared with RMB20 million in the fourth quarter of 2006. Our fully diluted earnings were RMB0.37 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 income increased approximately 18% year over year to RMB36 million in the fourth quarter of 2007. Non-GAAP adjusted fully diluted earnings per common share for the fourth quarter were RMB0.63 or $0.17 per ADS. Turning to our full year results, total revenues for 2007 increased 21% to RMB844 million. Our gross margin improved 90 basis points to 56.3% from 55.4% in 2006, driven primarily by the economies of scale and increased productivity. Income from operations increased 31% to RMB150 million and net income increased 12% to RMB111 million in 2007. Excluding share-based compensation expense and foreign currency translation loss, our non-GAAP adjusted income grew 15.6% to RMB159 million in 2007. Non-GAAP adjusted earnings per common share for 2007 was RMB2.80 or $0.70 per ADS. Turning to our balance sheet, our cash position remained very strong. As of December 31, 2007, we had cash holdings of RMB1 billion, or approximately $138 million, compared with RMB869 million at the end of 2006. In January 2008, we identified some irregularities and non-compliance to contract terms by a third party which provided services to us in connection with our human resource outsourcing operations in Beijing. We have terminated our relationship with the contractor without any service disruptions. We are currently investigating the matter with the assistance of local authorities and exploring all legal options available to us. The outcome of this investigation is unknown at this stage but based on our preliminary assessment, we currently estimate that there could be a potential financial impact of up to RMB9 million, or approximately $1.2 million, should we be unable to recover funds from the contractor and be liable for the loss. The period in which the potential loss, if any, that will be recorded related to this matter is currently uncertain and may affect results in 2007 and/or 2008. We are pursuing this investigation very rigorously and we believe that this matter was uncovered at a relatively early stage as a result of the various checks in our control system. With the assistance of local authorities, we expect to employ all means available to us to recover the funds. Now I will turn the call back over to Rick.

[Rick Yan:]

Thank you. Our solid financial results for 2007 mark our fifth consecutive year of revenue and net income growth, while our major competitors have lost a combined $38 million in 2007, according to public reports. We continue to set ourselves apart with our proven business model and sustained profitability. More importantly, this improved profitability is not coming at the expense of the initiatives and investments we are undertaking for the long-term. Over the past year, we have made a number of enhancements to our online products, including the launch of a new proprietary job search engine, as well as upgrades to the website and employer interface platform. We remain highly focused on online product development and are working on several projects to improve functionality and effectiveness. We also plan to remain aggressive with our sales and marketing efforts, including sales force expansion, advertising campaigns, customer events, and promotional activities throughout the year to further strengthen our brand and market position. As we celebrate our 10th anniversary, 2008 will be a year of investments for us -- investments to further strengthen the foundation for dominant market leadership, investments to accelerate our growth trajectory for the next decade, and investments to generate superior economic returns for our shareholders and rewards to our employees. In recent months, there has been increased speculation about an economic recession in the United States and its impact on China. In addition, on January 1st, a new labor law came into effect which provides greater protection and benefits to workers in China. We are closely observing the impact of these two developments on our corporate customers and their hiring plans for 2008. Based on current market and operating conditions, our total revenue target for the first quarter of 2008 is an estimated range of RMB220 million to RMB230 million. Our estimated non-GAAP fully diluted EPS target is between RMB0.42 and RMB0.52 per common share. Please note that this non-GAAP EPS range does not include share-based compensation expense, foreign currency translation losses, nor any financial impact from the ongoing investigation of the third party contractor discussed earlier. We believe that we are well-positioned to take advantage of the dynamic HR services market in China. Through consistent focus on the execution of our business plan and initiatives, we believe that we can achieve further success in 2008 and beyond. That concludes our presentation. We will be happy to take your questions at this time. Operator.

[Operator:]

(Operator Instructions) The first question comes from Jason Brueschke with Citigroup.

[Jason Brueschke:]

Good morning. First of all, congratulations Rick, Kathleen, and Linda on another fine quarter. Maybe I’ll start with a question about the guidance. Rick, the guidance for the first quarter on a sequential basis is pretty strong, especially considering it’s one of your stronger quarters of the year, yet the earnings guidance on a non-GAAP basis seems to be down sequentially. Can you give us some color on maybe what’s going on, whether it’s on the expenses or some of the new initiatives that may be accounting for that? Thanks.

[Rick Yan:]

Yeah, as we mentioned in the call, we believe that 2008 will be a year of investment for us. Since the beginning of 2007, we have stepped up our sales and marketing efforts both in terms of our sales force expansion as well as marketing and promotional activities. We have launched an advertising campaign towards the end of 2007. We are continuing with that campaign at this stage, so we do believe this is the time that we go offensive and go aggressive and we would expect that 2008 will be a year that we actually make a lot of investments, not only on just sales and marketing but also on online product development. And I think that will be the key driver in terms of the increased expenses, which you should already see that in the quarter four results. Obviously 2008 is also our 10th anniversary, which we think is a very meaningful milestone in our development history and we want to make sure that we capitalize on the strong financial results we have and continue to invest for the future.

[Jason Brueschke:]

Great. Maybe I’ll segue into a question about the competition; you know, there’s been an indication that Monster plans to take over -- and they may have already done that -- take over China HR and I would guess that [Jaopin] probably has largely burned through the investment that they got about 15 months ago from Seek. Have you seen on the ground any moderation in competition say the last month or so of last year, and through the first two months of this year? Has there been any change one way or the other, getting stronger or getting weaker? And what would be your expectation, given maybe the change at China HR? What would you expect maybe to happen in 2008?

[Rick Yan:]

In the earlier remarks, we actually commented that if you look at some of the public reports, you know, the two of them probably lost $38 million in 2007. That is a pretty meaningful amount and if you look at it quarter by quarter, the losses in China HR actually reduce a lot in quarter four and if we look at the market, we also see -- let’s put it this way, a more moderate investment in marketing by China HR towards the end of 2007. We have not seen major advertising program that they put out like what they did in 2006 and early 2007, so it looks like they might be slowing down a little bit before they sort out the deal with Monster. In terms of the situation after Monster took over China HR, what would they do -- I guess we have no better information than you do, I guess. I think Monster is a big company, a well-run company, have a lot of resources, also has a lot of challenges in the U.S. market. We need to see what they say in the earnings call in terms of what their plans for China will be but I think last year, a combined loss of $38 million for these two competitors is pretty meaningful and I think we are pretty pleased that we are keeping our market leadership position and we are waiting to see how things evolve and as we said earlier on, since the beginning of 2007, we are stepping up on our investments and go offensive and become more aggressive to consolidate our market position.

[Jason Brueschke:]

Great, and maybe just one last question on taxes, just as a clarification; in light of the expiration of some of your tax benefits and the new tax code that went into effect, am I right -- did I hear in the commentary, is 25% effective rate kind of the worst case scenario for 2008 and there is a possibility that it actually might be lower? Or is there a possibility that depending on how these things work out, that your effective tax rate may look more like the Q4 tax rate?

[Kathleen Chien:]

Jason, when we look at tax rates, actually we have to take out the effect of the share-based compensation and some of the for-ex losses, so if you look at our 2007 overall tax rate if I take out those two factors, it’s just around 23%. I think that, as we said, if the statutory rate is 25 and if some of the entities were able to keep it at a lower level, it is possible we could be slightly better off in 2008. But if we are not, then the maximum we should get to is about the 23%, 25% level, which is similar to what we were at at 2007.

[Jason Brueschke:]

Okay, great. Thanks for that clarification.

[Operator:]

The next question will come from Nate Swanson with ThinkEquity.

[Nate Swanson:]

Thanks for taking my question. First, Rick, I was wondering if you could just talk geographically, your print volume growth has been strong the last few quarters. I wonder, are you seeing these smaller cities an inflection point of growth? And if so, do you see that following through into the online side at some point during 2008, or are we looking further out for that?

[Rick Yan:]

I think the -- well, if you call that an inflection point, that inflection point might have taken place towards the end of 2006. If you look at our print growth, the lowest point was the third quarter 2006 and since then, it has been edging up. And the reason for that is the second, the smaller cities, the growth has been robust. In the larger cities, since the latter part of 2005 and beginning of 2006, our customers shifting their budget from print to online and I think that trend is continuing but probably might have past the steepest part of that S curve. So I think we would probably see a similar trend or trajectory in terms of the online/offline differential growth in 2008. We are not seeing any new inflection points or changes at this stage. We would expect probably 2008 will be similar to the trends that we see in 2007.

[Nate Swanson:]

Okay, that’s helpful. And then I guess just stepping back in terms of Q4, historically that’s been a seasonally slower quarter. Can you comment on was that again the case on the print and on the online side? And also as it relates to the other HR services, that looks to be somewhat counter-cyclical. Are you more comfortable with those trends looking back on the way your business trended this quarter?

[Rick Yan:]

In terms of quarter four for the print and online business, I think this is a similar -- we are seeing similar seasonality compared to what we saw before. If you look at print, it’s a 9% growth quarter -- sorry, year over year; a 30%-something growth for online year over year so that’s actually on a similar trajectory as what we’ve been seeing in the past couple of years, so I don’t think there’s any surprises for us in the advertising business, both in terms of print and online. The out-performer is really the other HR services, which grew, if you look at the last quarter, grew like 90% from a little bit less than $20 million to now $37 million in the last quarter. And a lot of that is driven by increased demand for training and outsourcing services. We mentioned in our remarks earlier that there is a new labor law coming into play since the beginning of the year. That might create interesting opportunities as well as challenges for the outsourcing businesses too, so we expect the other HR services continue to be a higher growth segment because they are still at the earlier stage of development and if we capture the opportunity arising from the new labor law, we might have bigger and faster growth opportunity on the outsourcing services too.

[Nate Swanson:]

Okay, great. And then I know it’s still early in the quarter but any comment as to what impact the Chinese New Year had in terms of your advertising business?

[Rick Yan:]

I think it’s challenging. If you go back to last year, we had our earnings call on March 1st and actually, last year we were not able to give a more definitive range and I think if you look at the March 1st, our earnings release, we gave a range that has like a RMB20 million swing. I think it was from 180 to 200, and then we updated our guidance on March 15th. Today is March 3rd. We are back from the Chinese New Year holiday only two, a little bit more than two weeks so it is still a bit early for us really to tell what will happen for the quarter. We do put up a guidance based on the available information that we have and the trends that we see now, so I think it’s a little bit too early to tell the -- what the quarter will look like or what the indication for the year might look like. I think the Chinese New Year is still kind of late this year compared to the historical norms, so unfortunately I think we are still at the early stage of telling what quarter one or the rest of 2008 might look like.

[Nate Swanson:]

Okay. Thank you.

[Operator:]

Your next question comes from Albert Lee with Maxim Group.

[Albert Lee:]

Actually, all my questions have been answered. Nice quarter. Thank you.

[Operator:]

Your next question comes from Ashish Thadhani with Gilford Securities.

[Ashish Thadhani:]

Yes, my primary question has to do with operating leverage. In the past, management has spoken of a scalable business model offering a 30% plus operating margin before share-based compensation. Is this outcome within your own control or is it heavily dependent on your primary competitor? Basically what I’m asking is when are we going to see consistent margin expansion and also if you had to pick one, would 51job rather be a very profitable number two or a less profitable number one in its industry?

[Rick Yan:]

Thank you for your question. I think if you look at our profitability, our profitability has been increasing for the past five years. I think we mentioned in remarks this is our fifth consecutive year of revenue and net income growth. On an annual basis, our margin has been expanding and if you look at the quarter over quarter, our margins are also expanding. Now, 2008 as we said is a year of investment for us for two reasons. One is we do believe online is becoming a more important product in our portfolio and we are investing more on the product development front. And since last year, we’ve also increased our sales and marketing spending. To get back to your question, do we believe that being a more profitable number two will be more attractive and generate better returns for shareholders, we probably do not think that’s the way to create a superior return to our shareholders or maximize shareholder value. We believe that the way to generate maximum return and superior results for our shareholders is to be a dominant market leader in this space and that’s why we believe 2008 will be a year of investments for us because they will be investments to build a dominant market position in the future. That’s pretty important. I think in past earnings calls, we’ve mentioned that the pricing level in China is actually very low. We, on the most basic online packages, we are charging less than $3 per posting. This is 1% of what Monster is charging in the U.S. and we believe that even if you adjust for wage levels or differential wage levels in China versus the U.S., we are charging a much lower price that it generates value to our customers, put it this way. So we believe that our long-term strategic objective is to consolidate the market and expand our market leadership position. We are not heading towards a profitable number two. We are heading towards a dominant market position, leadership position in this space. And that’s why 2008 will be an important year for us to lay the investments and lay the foundation for us to achieve that goal.

[Ashish Thadhani:]

And do you think that all those objectives will be met in 2008 or do you think there is a possibility that 2009 will also turn out to be a year of investment?

[Rick Yan:]

We have started stepping up our investments in 2007. If you look at the beginning of 2007, you know -- and if you look at 2006, our sales and marketing expenditures were in the $30 million range and last quarter, it was $55 million. So if you look at sales and marketing expenses, we’ve increased it by almost 60%, 70% compared to the end of 2006. Now, we are stepping up our marketing investment but also through that, we are also generating better operating leverage in our gross margin line and we are keeping our G&A pretty flat. So despite this heavy investment, we still improve our margins in 2007 and I think we will hope to continue to do that. How long it takes for us to achieve market leadership probably depends on how efficiently we execute our plans. Of course, as Jason mentioned earlier, it also depends on what the competition will do. We mentioned earlier on that they’ve lost a combined $38 million last year. They might decide to do the same this year. On the other hand, there might not be funding available, which might reduce their spending, which will allow us to achieve our goals earlier. But regardless of what our competitors are doing, our strategic objectives are very clear, whether they will be completed in 2008 or might expand into 2009, we’ll probably see what we do. But we do believe we have the resources to continue to make investments, profitable investments that will generate growth and profitability for us in the future. I think 2008 will be an important year that there will be changes in the ownership in our competitors and I think by the end of 2008, we will probably have a clearer picture what the competitive landscape might look like going forward.

[Ashish Thadhani:]

And in looking at sales and marketing expenses in terms of how the quarters progress beyond quarter one, both in absolute terms and as a percentage of revenue, are there any trends that we should keep in mind as a percentage of revenue or in absolute terms? Does it peak in any given quarter or should we just assume that what you do in the first quarter is representative for the rest of the year?

[Rick Yan:]

Well, I think sales and marketing is an investment that is -- you know, it’s a long-term investment. It’s an investment for the future. It’s an investment that we are building foundations for long-term growth and profitability so I don’t think -- I think we started to become more aggressive in sales and marketing in the beginning of 2007. We are steadily stepping that up. Historically, quarter four is a high spending quarter because we have a lot of year-end customer events. Quarter one is also historically tends to be a higher spending quarter on sales and marketing because it’s the peak season that we want to do more promotional and advertising activities. So I think based on what we do, what we do is going to be steady and sustainable, put it this way. That’s the way we are going to hold on to the way we increase our sales and marketing expenditures.

[Ashish Thadhani:]

Okay and then just moving to a different subject, as you are aware, Monster has placed an implicit valuation on China HR that approximates your current enterprise value. We know that 51job is much more profitable than China HR but can you give us some sense of two things; first, relative size in revenue and second, growth trends?

[Rick Yan:]

We don’t have -- you know, we’d love to know what their revenues are. I think we -- I guess like you, we listen to all the Monster earnings call. We look at all their filings. We know how much they lost and we have no -- there is no indication in terms of growth rates and there is no indication in terms of their size, revenue size. So I guess we have the same data as you have. Our growth and our size is totally public, so I guess it’s really what Monster, what they are willing to disclose in terms of -- I would probably imagine that at the time they closed the deal, they might release more information. I think at the time we might have more information on that. In terms of valuation if you look at the Monster comments, the deal and the price was agreed when they made their first investment in China HR at the beginning of 2005. So I think in terms of the valuation, it was determined probably towards the end of 2004, so I guess this is probably something that they decided a couple of years ago when they made their first investment, so it might not reflect the expected losses today. So I think it is too much for me to speculate what they have, how they see valuations and other stuff. I do believe when they close the deal, they might release more information about China HR and I think at that time, both you and me will know better about the growth and revenue size.

[Ashish Thadhani:]

But rough order of magnitude, are you much larger than them and are they growing faster than you? Is that a fair statement?

[Rick Yan:]

If you look at -- you know, we track job postings. We don’t know their revenue. That’s not a number that is available. We do track their postings in terms of how many jobs they have online. I think throughout the year, there is also some available market research in China. I think we are still around two times in terms of volume market share, two times their size in volume terms.

[Ashish Thadhani:]

Okay, that’s helpful. Thank you very much.

[Operator:]

(Operator Instructions) We have a question from James Mitchell with Goldman Sachs.

[James Mitchell:]

Thank you for taking my two questions; the first one is you mentioned that revenue per print page is fairly flat within cities. Given China is experiencing fairly high inflation, are you deciding not to raise the rates for the print product principally because of the competitive landscape or principally because you want to maximize the affordability and reach of the print product? And then I have a separate question as well.

[Rick Yan:]

In terms of pricing, I think our strategy has always been to grow volume and maintain a very high market share position, so I think we always try to grow through volume increase more than price increase. Now, today a lot of the growth is coming from the smaller cities and I think the affordability in those cities are more limited and some of those markets are less developed compared to Beijing or Shanghai. So what we try to do is to have a more affordable pricing to penetrate the market and grow the volume in those cities so that we are better positioned for the long-term. We always consider price increases when it’s appropriate and we know that the inflation in China, print prices are going up, so we continue to look at that from time to time but our basic strategy is to penetrate those markets, develop those markets, grow our volume rather than to put price at too high a level.

[James Mitchell:]

And for a big, kind of fairly mature city like Beijing or Shanghai, would you be increasing rates within those cities or you’d be keeping them stable?

[Rick Yan:]

We are keeping them stable because I know that customers are shifting their budgets from print to online and in that transition, I think additional price changes might accelerate that shift, that budget shift. As you can see from our online revenues, our pricing has not been -- has not changed actually over the past three or four years. It has been pretty stable if you look at the revenue per employer per quarter. So it has been stable, so online pricing is stable and we are keeping print prices to be stable so that we don’t change the rate in which customers shift their budget from print to online.

[James Mitchell:]

Okay, and then a second question, if I look at your first quarter guidance, it seems like if I just take the top end of the guidance, then you are aiming to grow revenue by about RMB16 million quarter on quarter, and then you are guiding for net income to decline I think about RMB5 million quarter on quarter. Maybe my math is wrong but if the cumulative increase in costs and taxes and so forth is on the order of $20 million, is that principally from sales and marketing or is there something else going on there and there is --

[Rick Yan:]

Yeah, there is, as we mentioned earlier on, 2008 is a year of investment for us on both product development and sales and marketing and we are budgeting increased spending on sales and marketing in the first quarter of 2008, yes.

[James Mitchell:]

But is it just the sales and marketing that is driving that differential between the revenue growth and the earnings, or is it --

[Rick Yan:]

There’s a lot of that and also, you know, salaries are going up. As you said, inflation is high and actually this year the wage inflation is actually higher than previous years, as you can expect. We are also adding more headcount so I would say headcount and salary growth plus sales and marketing are the major reasons, and I think sales and marketing is actually the number one reason.

[James Mitchell:]

Okay, and the first quarter guidance, does that incorporate the RMB9 million potential loss?

[Rick Yan:]

No, it does not. It’s unclear when that would be recorded, so it could be in 2007, it could be in 2008, or both.

[James Mitchell:]

And the entity that generated that loss was some kind of temporary employment agency that supplied you with staff, or --

[Kathleen Chien:]

No, it’s an agent that we work with that actually processes some of the social security benefits that we actually process for our contracting employees.

[James Mitchell:]

Okay, great. Okay, thank you very much.

[Operator:]

Your next question comes from Jenny Wu with Morgan Stanley.

[Jenny Wu:]

I have two questions; the first one, we have heard Rick mention that 2008 would be a year of investment, so we would see the increase in both sales and marketing and R&D. So would you please give some more color on how much sales and marketing expenses might increase in 2008, and also what might be the margin trend? Thank you.

[Rick Yan:]

Jenny, I think at this stage we are giving guidance for one forward quarter. We are not ready to give guidance for the rest of the year. As we mentioned earlier on, quarter one, we are still at the early stage of quarter one. If you look at the last year, we provided a pretty wide revenue forecast range on March 1st and then updated it on March 15th. Today is March 3rd. We are only two weeks back from the Chinese New Year holiday. This will be a year of investment for us but in terms of the level of the investment, part of that might be driven by what the outlook for 2008, revenue and business outlook for 2008 might look like. So I think it’s still probably in a stage -- too early a stage for us to quantify what level of sales and marketing we expect to invest in 2008. And I think we’ll keep people updated over time every quarter and we’ll continue to provide forward quarter guidance.

[Jenny Wu:]

Okay, thank you. And my second question is regarding your other HR services. Obviously they have achieved a [superior] growth in 2007 and my question is what is the company’s major development focus going forward on this business? And does management have any revenue target regarding its revenue contribution? Thank you.

[Rick Yan:]

We do believe that training is an attractive business from a margin perspective. We also believe that outsourcing could be a very big opportunity, if you look at market developments in the U.S. or Japan or Europe, so we do believe that outsourcing will be a long-term growth objective, a very important long-term growth opportunity in our portfolio. We do not have very concrete targets for these business -- concrete numbers at this stage. We are growing as fast as we can. We are still at the early stage of development of those businesses. The new labor law that came into effect on January 1st might create additional opportunities and obviously associated with additional challenges we might have in the outsourcing business, but we know that these businesses, these segments could have very large potential in the future and we are investing a lot of our people, energy, and time to grow this business as fast as we can. As you see, the other HR services grew 90% year over year and I don’t think we set a growth rate. We believe they have huge potential and we are growing them as fast as we can.

[Jenny Wu:]

Okay. Thank you very much.

[Operator:]

Your next question comes from the line of Wendy Huang with Bear Stearns.

[Wendy Huang:]

First of all, you have addressed a lot about the new labor laws impact on your HR outsourcing services. Could you also comment on the new labor laws impact on the employers’ recruiting demand and how will that affect your print advertising and online recruiting business? Especially recently I think there are a lot of local media reported that some enterprises, some companies they are starting to lay off some employees to reduce potential legal responsibilities and potential higher cost.

[Rick Yan:]

We saw media reports that mentioned similar things too. For example, there were reports about a lot of factories being closed in the southern China provinces. There are also people who think that they are much more cautious in terms of hiring. But so far, if you look at our business in the first few months of the year, we really haven’t seen that translated into any changes in our business. We know that employers are now much more cautious in hiring employees and maybe they hire fewer employees but they might be willing -- they might be more willing to spend more money to hire the right person because the cost of hiring the wrong person is much higher this year than in the past. So I think at this stage it’s again, as we said, we know that this is an important development, particularly for our outsourcing business but it might also have an important impact for our advertising business. But at this stage, we have not seen any measurable impact on -- what we saw. And in fact, if you look at [in the south], we haven’t seen any changes. The business is still as robust as before, so I think it is too early to tell. If we have any additional information, we’ll share that with the investment community.

[Wendy Huang:]

I see. Secondly, Rick, you mentioned that in 2008 you will spend more money on the online product development, upgrading platform and search engine, et cetera. Should we include that in the cost of service or other items?

[Rick Yan:]

I think in terms of product development, we are putting -- we have more -- I think a lot of that will go into headcount in sales and marketing and also on G&A because I think product development, a lot of that will be in G&A and also providing additional services to our customers might come in the sales and marketing line. So I think in general, we just have more -- I think you will see an increase in sales and -- the increase in sales and marketing line will be where you will see the most changes, let’s put it this way, as we mentioned before.

[Wendy Huang:]

I see. Could you maybe break down first quarter sales and marketing expenses into advertising and promotion expenses and personnel payroll costs, as you usually do on an annual basis?

[Rick Yan:]

I think at the end of the first quarter when we announce results, we will be able to give you more highlights. I think at this stage, we are right -- we are just moving into the -- we are two weeks after Chinese New Year. There’s a lot of things happening. I think at the time we announce quarter one results, which might happen in two months time, then we will give you additional information.

[Wendy Huang:]

You also mentioned that you added a lot of sales force in the fourth quarter. Could you maybe give some data on how many sales force you added this quarter for the New Year preparation?

[Rick Yan:]

Historically, we tend to add a lot of people in quarter four in preparation for the peak season. We added around 200 sales people.

[Wendy Huang:]

What’s the total sales headcount now?

[Rick Yan:]

Total headcount would be around -- total headcount is approaching 4,000 now, total headcount.

[Wendy Huang:]

I mean total sales persons.

[Rick Yan:]

1,600, around -- I think we were around 1,400 before and we are now around 1,600, yes.

[Wendy Huang:]

I see. Maybe a final housekeeping question -- you just mentioned that your price per job listing was just $3 and that’s just 1% of Monster’s pricing. Could you maybe also give us some industry knowledge about how is current China’s wage level compared with the U.S. wage level?

[Rick Yan:]

I think getting a proper economist might give you more reliable data. Wage levels -- I don’t think U.S. and China wage levels has a hundred times difference, but what I mentioned was the lowest price package, the lowest online product we have is around $3 per posting and we know that Monster charges $300 to $400 per posting in the U.S. That’s why we are charging 1% of what they charge in the U.S. and I don’t know the exact multiples, but U.S. wages are now 100 times China wages, given all the inflation and wage inflation that we are seeing here.

[Wendy Huang:]

I’m just trying to figure out your potential in the longer term.

[Rick Yan:]

I think there’s a lot of good economic sources that you can get more accurate data than from us on the wage level comparison.

[Wendy Huang:]

Okay. Thank you.

[Operator:]

You have a question from Jason Brueschke with Citigroup.

[Jason Brueschke:]

Thank you. Two quick follow-ups; first of all, when I look out into the third quarter, I’m just curious as to how you think the Olympics might affect your business. People could very well be distracted. Should we expect no impact or is there a possibility that there might be a slight slowdown in the month of August, and would that be something that you guys could offset, either by hiring in July, in September, or should we be thinking that that’s something to be aware of for the remainder of the year, or at least for 3Q?

[Kathleen Chien:]

Jason, I don’t think we can say definitively but I think our view is that if someone needs to hire or fill a post, they might have to do it before or after, that they will be distracted in the month of August, especially in Beijing or some of the other cities that actually are holding the events. So I think that’s our view of it, but we’ve never gone through an Olympics in China, so we’ll have to wait and see.

[Jason Brueschke:]

And then one final question on the outsourcing -- is that more of a staffing type model, such that with the costs of actually hiring employees, there could be some advantages to effectively keep them off the books by using or outsourcing to you guys, at least in certain job segments or categories? Or is it some other type of outsourcing service that you are providing?

[Kathleen Chien:]

I think it is a sort of a staffing for certain types of job categories that actually has typically higher turnover and that actually tends to be spread out in more geographies, so a company that would actually, for example, would have promoters in let’s say 60 cities across China finds it very difficult to handle that in-house in their HR function. So that would be an example of the type of company that would actually want to work with us.

[Jason Brueschke:]

Okay, great. Thanks again.

[Operator:]

That does conclude the question-and-answer session. Mr. Yan, I will now turn the conference back over to you.

[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 does conclude today’s conference. Thank you for your participation.