51job, Inc.
Q1 2009 Earnings Call Transcript

Published: 12 May 2009

[Operator:]

Good day, ladies and gentlemen, and welcome to the 51jobs first quarter 2009 conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to your host, Linda Chien, Investor Relations Director at 51jobs. Please go ahead.

[Linda Chien:]

Thank you, Anthony and thank you all for attending this teleconference to discuss unaudited financial results for the first quarter ended March 31, 2009. With me for today’s call are Chief Executive Officer, Rick Yan; Chief Financial Officer, Peter Lui; and Chief Operating Officer, Kathleen Chien. A press release containing first quarter 2009 results was issued earlier today and a copy may be obtained at ir.51jobs.com. Before we begin, I would like to remind you that during this call, statements regarding targets for the second quarter of 2009, future business, and operating results constitute forward-looking statements within the meaning of section 21-E of the Securities Exchange Act of 1934 as amended and as defined in the Private Securities Litigation Reform Act of 1995. These statements are based upon management’s current expectations and actual results could differ materially. Among the factors that could cause actual results to differ are the number of recruitment advertisements placed, sales orders received, and customer contracts executed during the remaining weeks of the second quarter of 2009. Any accounting adjustments that may occur during the quarterly close; fluctuations in the value of the RMB 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. 51jobs undertakes no obligation to update targets prior to announcing final results for the second quarter or as a result of new information, future events, or otherwise. Now I will turn the call over to CEO Rick Yan.

[Rick Yan:]

Thank you, Linda. Thank you for joining us on today’s call. I will begin with an overview of the first quarter, followed by Peter with a more detailed review of our financial results. Then I will discuss our current market conditions and strategic objectives and provide our guidance for the second quarter of 2009. Finally we will open the call to your questions. As anticipated, market demand for recruitment services was significantly affected by the global economic crisis and the slow-down in the Chinese economy during the first quarter. Our first quarter revenues came in within expectations at RMB178 million, or approximately $26 million, which represented a 25% decrease compared to first quarter of 2008. Employers were extremely cautious with hiring in the first quarter and even those HR departments with earmarked funds to spend on recruitment were hesitant to tap those budgets pending further clarity on business outlook. Print advertising volumes decreased 36% as fewer companies placed advertisements and overall spending decreased. In our online services business, we also saw a customer tendency to purchase lower priced products. There remains a high level of uncertainty as to the current outlook of the hiring market in China. While employer demand was reduced, we saw a large increase in job seeker traffic to our website. Despite limited advertising spend in the first quarter, our daily page views doubled in the post-Chinese new year peak period compared to the prior year. We ended the first quarter with 31 million registered users and 23 million resumes, the leading and largest recruitment website in China. Although the recruitment side of our business was challenged in the first quarter, our other HR services area continued to perform well. In particular, demand in revenue growth for our HR outsourcing services remained robust and helped to offset lower revenues in our executive search and training services. We are focused on further developing our network and strengthening our competencies to capture this growth opportunity. Despite the overall lower revenue level in the first quarter, we were pleased that through cost control and financial discipline we maintained our record of consecutive quarterly profits established since the beginning of 2003. Non-GAAP fully diluted earnings per common share was RMB0.30 or $0.09 per ADS for the first quarter. Earnings were better than expected as we took measures to realign our cost structure and streamline processes for greater efficiency. These are ongoing efforts which we believe will not only result in near-term cost savings but also create more leverage in our operating model for greater profitability and growth in the future. Now I would like to turn the call over to Peter Lui for a more detailed financial review. Peter joined 51jobs in March and we are pleased to welcome him to our management team.

[Peter Lui:]

Thank you, Rick. Revenue for the first quarter totaled $178 million from 25% lower compared to the year-ago quarter year-on-year. Print advertising revenue decreased 43% compared to the first quarter of 2008 mainly due to less page volumes resulting from a slow-down in the market demand. Print advertising pages in the first quarter decreased 36% to about 2,900 pages compared with 4,600 pages in the same quarter last year. Although print pricing levels were relatively unchanged compared to the prior year, average revenue per page decreased approximately 9% year over year, driven by higher volume contribution from lower priced cities. Online revenue decreased 13% year over year to RMB68 million in the first quarter, which was mainly attributable to lower average revenue per unique employer. Although our prices were generally unchanged compared to the prior year, average revenue per unique employer decreased 17% year over year as customers decreased their online spend and/or purchased lower priced online services during the quarter. Partially offsetting this effect, the number of unique employers increased 5% to approximately 64,000 compare with 60,000 in the first quarter of 2008. Beginning this quarter, we are including revenues from executive search services into the other HR services line item. Revenues for the other HR services increased 11% year over year to approximately RMB39 million in the first quarter. The growth was driven by an increase in demand and revenues for our HR outsourcing services, which was partially offset by lower revenues from executive search and trained services. Gross margin was [inaudible] 6.1% compared with 55.7% in the first quarter of 2008. Sequentially, gross margin improved more than 500 basis points from the fourth quarter of 2008. During the quarter, we focused on realigning our core structure, decreasing our [inaudible] expenses, and streamlining our processes, which yielded significant cost savings. Included in the cost of services was share-based compensation expense of RMB1.2 million. Sales and marketing expenses decreased to RMB50 million in the first quarter from RMB55 million in the year-ago quarter. The decrease was primarily the result of lower advertising and promotion expenses, which was partially offset by higher labor costs from employing a greater number of staff, as compared to the first quarter of 2008. Through natural attrition, we decreased our sales headcount to approximately 1,800 individuals for the first quarter, about 150 fewer than the end of 2008. Included in the sales and marketing expense was share-based compensation expense of approximately RMB1 million for the first quarter. G&A expenses for the first quarter was approximately RMB33 million, compared with RMB31 million in the first quarter of 2008, mainly due to higher rental expenses, property management fees, and share-based compensation expense. Share-based compensation expense including G&A in the first quarter was RMB5.3 million. Operating income for the first quarter was approximately RMB12 million, compared with RMB39 million for the same quarter last year. Our effective tax rate for the first quarter was 39.5%, compared with 35.9% in the first quarter of 2008. The effective tax rate increased as certain non-tax deductible expenses such as share-based compensation from private grade portion of the taxable income base in the first quarter of 2009. Net income for the first quarter was approximately RMB9 million compared with RMB32 million in Q1 of 2008. Fully diluted earnings was RMB0.17 per common share, which is equivalent to $0.05 per ADS. Excluding share-based compensation expense and foreign currency translations, non-GAAP adjusted net income was $17 million in the first quarter. Non-GAAP adjusted fully diluted earnings per common share for Q1 were RMB0.30 or $0.09 per ADS. Turning to the balance sheet, our cash position remains strong. At the end of the first quarter, we have cash and short-term investment totaling almost RMB1.1 billion, or approximately $159 million. In the first quarter, as part of the share repurchase program approved by our board and shareholders last September, we repurchased approximately 236,000 ADSs from the open market for aggregate consideration of about $1.6 million, including transaction fees. To date under the program, we have repurchased approximately 373,000 ADSs for a total of $2.5 million. We are authorized to repurchase up to $25 million worth of outstanding ADSs. I will now turn the call back to Rick.

[Rick Yan:]

Thank you, Peter. The current outlook for the recruitment market is highly uncertain and we continue to have limited visibility as companies remain hesitant with their spending commitments. However, we are encouraged by the Chinese Government’s recent actions to mitigate the severity of the economic slowdown and instill greater confidence in China’s growth for cash. At this point in time, we are still unable to predict when demand might turn around but we believe we are well-prepared to manage the downturn for however long it may last. With the macroeconomic environment and customer demand largely out of our control, we are focused on taking actions to strengthen our operations and making investments to position ourselves for better days in the future. We are doing an in-depth review of our cost structure, which has already begun to yield results with cost savings at the gross margin level in the first quarter. To us, this exercise is not simply about indiscriminately reducing expenses or eliminating positions. Our goal is to make permanent changes in our processes to increase productivity and efficiency. Most importantly, we are committed to improving our overall allocation of resources within the company. As a result, we believe that we can continue to invest in critical areas of our business while maintaining profitability, even during these challenging times. We anticipate launching new enhancements to our website in the coming months and we are also making further investments in our outsourcing business. Based on current market conditions and operating conditions, our total revenue target for the second quarter of 2009 is in the estimated range of RMB175 million to RMB185 million. Our estimated non-GAAP fully diluted EPS target is between RMB0.22 to RMB0.32 per common share. Please note that this non-GAAP EPS range does not include share-based compensation expense nor foreign currency translation loss or gain. This guidance reflects our current forecast, which is subject to change. We are confident that we are building a leaner, stronger organization. We are laying the groundwork to position our company for solid, sustainable, long-term growth when market conditions improve. That concludes our presentation. We’ll be happy to take your questions at this time. Operator.

[Operator:]

(Operator Instructions) We will take our first question from Jason Brueschke from Citi.

[Jason Brueschke:]

Thank you. Good morning, Rick, Peter, Kathleen, and Linda. Let me maybe start with a couple of questions on the outlook -- Rick, first of all, you have indicated that you don’t know when you are going to necessarily see an up-tick in demand but can you maybe give us your views on whether you think the demand situation has at least bottomed? And as part of this question, could you maybe give some more color on if there are any parts of the economy that you are seeing any pockets of strength? And then, I guess the final part of this question is would you consider your business in China -- are you more of a leading indicator or a lagging indicator of kind of a rebound in the underlying economy? And then I have a follow-up question, please.

[Rick Yan:]

Thank you, Jason. In terms of the kind of business or economic trend, first quarter if you look at -- if we go back in the first quarter, January and February were pretty challenging. I think we have a very early Chinese New Year this year and as a result, January was very, very tough in terms of revenues that we collected. So we had a very tough January and February but March turned out to be okay, probably I would say better than we expected and that’s why quarter one as a result, overall we were doing okay in quarter one. April traditionally is kind of a slow month for us. After the Labor Day holidays, normally this is a small peak season for us in the past but again since last year, the government changed the holiday schedule and the Labor Day holiday week was reduced from seven days to three days, so a good time to really look at what is happening is actually in the next few weeks and May will be a good time to see whether there is a meaningful or measurable change in terms of demand pick-up. But at this stage, it’s probably too early for us to tell but you know, second quarter the guidance we gave reflects what we believe what we see as of today. I would say that we are a lagging indicator for the economy. I think what we saw is that some of our customers have allocated budgets for 2009 and a lot of them have not really spent the budget, even if they have the budget for the year. A lot of them were telling us that they are still in a wait-and-see kind of a holding position so I think what normally happens when economic activities pick up, when there is more demand, when people see their sales growth comes back and then they might become more aggressive in hiring, so I do think that the recruitment business will likely be a lagging indicator of the economy.

[Jason Brueschke:]

Great. And then a question about your cost-cutting and the streamlining -- one of the items I think that helped your gross margin was that your printing related expenses were down and you had indicated I think in your concluding remarks that a lot of the changes that you have made, we should be considering them more kind of permanent then temporary. And so I am just wondering if you could give us a little bit more color about what you have done to decrease your printing costs -- is it mostly the price of newsprint is down or have you taken some other -- I’ll say more permanent, less likely to fluctuate steps with maybe different printers or different distributors or what have you that is enabling you to take the print costs down?

[Rick Yan:]

Thank you, Jason. If you look at our print volume growth, the print volume was growing until the middle of last year, second quarter of last year print volume was still growing. And then really from third quarter onwards, we are seeing a slow-down in terms of print advertising pages. The last quarter, 2008, fourth quarter 2008 it was a 13% decrease and first quarter this year it was a 36% decrease, so -- and if you look at the print revenues, quarter one 2009 we were doing 70 million and if you look at quarter one 2008 we were doing 122 million, so there’s a very meaningful shift or change in the revenue level of our print product. Part of that is the economics -- you know, driven by the economy. Also, I think part of that is also a shift, a constant, ongoing shift for customers to allocate more budget into online away from print. So I think given this change in our print revenue level, we have to realign our print cost structure aggressively. As you mentioned, we have looked into our cost structure, mostly in the gross margin level, and this includes some of our distribution structure. Some of that includes some of our distribution teams -- the equipment and headcount would also relate office space and storage space, and also a number -- the number of pages that we print, the distribution volume. So we take a whole look in terms of the whole print, the kind of print cost structure because we believe that print would -- I think print at this stage would continue to be an important partner for us -- you know, today it represents almost around 40% of our revenue and I think it would continue to be an important part of our revenue but it’s not going to be 70% of our revenue like a couple of years ago. So we do have to align our cost structure to make sure that we are also profitable on the print segment. So a lot of things were done and I would -- as I mentioned in the remarks, a lot of these changes, I would classify them as permanent because we think that we have to realign our cost structure based on the current level of revenue that we are getting for the print product.

[Jason Brueschke:]

Perfect. I appreciate it. I will get back in the queue. Thanks.

[Operator:]

(Operator Instructions) We’ll hear next from Jenny Wu with Morgan Stanley.

[Jenny Wu:]

Hi, everyone -- several questions; first one, we noted that [inaudible] mentioned they were going to cut their sales and marketing in ’09 and we also see your company also did some cutting this quarter, so just wondering, [inaudible] in the market that there is an easing of [marketing overall]? And what’s your -- and cost control [inaudible] employees this quarter, is it going to be the permanent or just the temporary? Thank you.

[Rick Yan:]

Jenny, I think I heard most of your questions. There may be a small part that I didn’t hear but let me try to address what I heard and then you can ask the follow-up question if there’s anything that I missed. We are certainly seeing that our major online competitors are also changing their sales and marketing spend in the marketplace. Other than [inaudible], which you mentioned, I think we also learned from Monster’s earnings call that China HR has reduced headcount by more than 300, plus a large number of temporary staff, so I think the challenging economic environment is making everybody more rational. If you look at our sales and marketing expense in quarter one, yes, we have tightened up our spend on advertising and promotions. As we mentioned in the remarks, we have not made any redundancies. Our headcount decreased a bit because of the natural attrition, so we are still -- we still believe in the long-term potential of the recruitment market in China. Quarter one, because of the kind of demand and supply situation between jobseekers and jobs, we felt that it is probably more prudent to cut back on our spend on advertising and promotions. As we mentioned again in our remarks, our traffic more than doubled in the post-Chinese New Year peak period, so I would probably say this is a more temporary measure that we -- you know, it depends on when we see an up-turn in market demand. We might step up on our sales and marketing engine again. Based on the question that Jason asked earlier, the recruitment business tends to be a lagging indicator of the economy and when we see a major up-turn in demand, we will go back to a more aggressive approach in sales and marketing spend.

[Jenny Wu:]

Sure. Most of my questions were answered and I’ll just follow-up -- how much was all your advertising and promotion expenses in 1Q and what is the change year-over-year and Q-on-Q?

[Rick Yan:]

If you look at the sales -- I think if you look at our sales and marketing -- I think if you compare to -- well, we normally compare on a year-over-year basis because there’s a lot of customer events at the end of the year. Because at the end of the year, we tend to do a lot of customer activities, so a good comparison is really doing it on a year-over-year basis. First quarter last year, we did 55 million and now we are doing around 49 million, so it’s a few million change. We are talking about maybe a 10% change and if you look at the change in terms of sales and marketing, maybe around 50% of the sales and marketing reduction is coming from marketing.

[Jenny Wu:]

Okay. Thank you. And a follow-up on the online -- unique employers. For example, [inaudible] there’s an extension of [inaudible] Q-on-Q and 5% year over year, but meanwhile we see the decline for the print advertising. So is that a general phenomenon for [other players]? Should we consider it like a stronger online migration in a down market or something else? Thank you.

[Rick Yan:]

We’ve seen a migration of customer budget from print to online in the past three years, so this is an ongoing trend that customers are allocating more and more of the budget from print to online, so I think this is -- we’re seeing the trend that we’ve been seeing in the past three years, so we’ll continue to expect that online will be a high growth segment of our business and print will primarily be driven by the smaller cities, which is also lower price and will continue to represent a smaller portion of our total revenue.

[Jenny Wu:]

Sure. For the incremental [inaudible] employers, are these mainly the larger ones or some small companies?

[Rick Yan:]

I think -- we don’t see a meaningful or measurable change in terms of different customer segments. We do know that a lot of large customers, they have budgets that they are still holding on to a lot of their budget. They did release some budget in the first quarter but they are keeping a lot of their -- keeping a disproportional amount of their budget for the latter part of 2009. At this stage, we don’t seem to see a meaningful differentiation between larger and small companies. It seems like quarter one was challenging for all different customer segments.

[Jenny Wu:]

Sure. My last question is on the other HR services -- it looks like the revenue went down this quarter. Would you please help us understand -- first of all, can you give us the breakdown because you -- e-search and other [inaudible]. And secondly, why there is such a big trend down? Thank you.

[Rick Yan:]

Yeah, I think I can give you some color in terms of that -- we did group executive search into other HR revenues. If you look at the other HR revenues, it consists of outsourcing, training, executive search, and also some seasonal products like campus recruitment. Quarter four last year was very high. First of all, if you go back to our press release for quarter four 2008, there was a 5.8 million income related to certain print contracts that was a one-off, so you have to take out 5.8 million before you compare to the quarter one 2008. Secondly, we also have campus recruitment. Campus recruitment normally peak also in quarter four of each year, so that is also a seasonal product. Other than these two seasonal products or one-off our revenue recognition for if you compare the quarter four 2008, training was down compared to -- the training business was slow down and also the executive search business also slowed down compared to the same period last year. But the outsourcing business grew, again at a pretty meaningful rate compared to the first quarter of last year. Also grew kind of sequentially versus quarter four last year. So the outsourcing business continues to grow as we’ve been telling people. It’s a business that we are seeing very strong growth and if you look at first quarter, the other HR revenues were lower than quarter four last year because of some seasonality and one-off revenues.

[Jenny Wu:]

Sure. So even for those outsourcing, you see sequential growth in Q1, right?

[Rick Yan:]

Yes, it was still a meaningful growth year over year and certainly still growing, even on a quarter over quarter basis.

[Jenny Wu:]

Okay, sure. I remember you mentioned it’s not like a seasonal product. Is that still [inaudible]?

[Rick Yan:]

Excuse me? I didn’t get that.

[Jenny Wu:]

I remember we talked before, you mentioned it’s not a very seasonal product.

[Rick Yan:]

Yes, it’s kind of recurring. Yes, it’s not a seasonal product because when a company outsources their staff to us to handle their HR administrative processes, that tends to be an ongoing business that we help our customer to perform those activities every month.

[Jenny Wu:]

So based on your current resource allocation, what should we expect your revenue contributions from other HR sales going forward? Should it be more than 40% or 50% in one year, or something like that?

[Rick Yan:]

Well if you look at last year, our other HR grew at a pretty high rate, like 40% to 50%. I think as the business grows larger, it will still be at a high rate. It will still be higher than our overall growth rate. We do expect the other HR revenues will continue to be a higher -- a pretty high growth portion in our portfolio.

[Jenny Wu:]

Okay, sure. Thank you very much. This is very helpful.

[Operator:]

We do have a follow-up question from Jason Brueschke from Citigroup.

[Jason Brueschke:]

Thank you. So my two follow-up questions would be -- Rick, almost every time we have one of these calls, I ask you about what your views are likely -- or what your views are of what the competitive landscape is likely to be on a going forward basis and I know we’ve been waiting for a couple of years for China HR and [inaudible] to I guess in some ways experience a more rational situation with respect to their unlimited funding they seem to get from their parents and they seem to deploy it for market share. In light of the changes that you talked about earlier, how -- well, I should -- I’ll ask you this question -- are you seeing any kind of -- are you seeing the headcount reductions, the decrease in the sales and marketing, is that translating into, in your view, a loss of market share on the ground or are customers feeling that they are not being as attentive or as competitive in the marketplace with you guys? And then the second question is could you maybe comment on what may be some of your use of cash, since you have a good bit of it. And then maybe finally a third follow-up question -- I think there have been some changes with your relationship with Recruit from Japan recently. Could you maybe comment on those changes and really how they came about and what the implications are for your business going forward? Thanks.

[Rick Yan:]

Thank you, Jason. I love the online competition question, as you know. I would say that they have always been rational. What’s not rational is their parents, which kind of keep giving them almost free money to burn. If I had free money to burn, I would be rational to spend it more too. Anyway, as we mentioned earlier on, we are seeing a change, at least a slow-down in sales and marketing spend, from our online, major online competitors. We also found evidence that they are also having a headcount reduction. But one thing that’s also happening is they are now getting irrational in terms of pricing. I think they have -- because of their fear to lose market share, their pricing has actually dropped meaningfully. So if you look at our revenue per unique online employer, it also went down. Our revenue per unique online employer per quarter has been stable at around RMB1200 to RMB1300 for the past almost five years, and this is the first quarter we are now down to a little bit more than a thousand. So we are seeing pricing pressure in the marketplace, possibly as you mentioned because of their reduced sales and marketing spend, because of their headcount reduction. They now chose to compete on price, which does have an impact in terms of the price that we can realize. So I think this is possibly an evolution that someone will expect and the fundamental question is whether they can sustain the cash losses. My belief is we have not seen any numbers from their parents but our suspicion is that they were continuing to lose money, meaningful money in the first quarter of 2009. So I think eventually they have to go back to the economic reality and it has to be sustainable in terms of how they operate. So I think the online competition situation continues to evolve as we expected, but it keeps kind of going this way longer than we thought they can hold on. So I guess the critical thing is not looking at our online competitors but really look at their parents and how their parents are doing. We do know that their parents are also having challenging times in their home markets. Your second question about use of cash, I think we -- cash is -- I think I saw an article recently saying that cash is actually strategic now, so it’s important that we have a lot of cash in our balance sheet. We are making investments -- although our headcount overall decreased in quarter one of 2009 but we are still hiring, obviously very selectively, including Peter, who joined us in March, so we are continuing to look at important opportunities and make investments in areas that we think are important. So we will continue to use the cash in a smart way for investments for future growth and we still would not rule out any acquisition opportunities. If we see an interesting, attractive M&A opportunities, we will certainly deploy our cash. So the cash is important now for investment and for capturing any interesting M&A opportunities going forward. Your last question about Recruit, I probably would not characterize that as a change in the way we work with Recruit. You know, three years ago, Recruit had a share purchase agreement with some of the shareholders of 51jobs. 51jobs also entered into a business alliance agreement with Recruit and over the past three years, we have worked on different projects and some of them in the form of a joint venture, some of them we are just experience sharing and ideas exchanging. The share purchase agreement had kind of a three-year term and the business alliance agreement also had a three-year term, so it was just natural that the business agreement kind of expires and then we basically let the agreement kind of be terminated. There’s no changes in terms of how the companies manage. We continue to do all -- we think it’s the right thing to do. Recruit continues to give us good ideas and advice from time to time. Recruit continues to be close to a 40% shareholder of the company, so this is where we are. We will continue to execute our strategies and make sure that we continue to grow profitably in the Chinese recruitment market.

[Jason Brueschke:]

Perfect. That’s exactly what I was looking for. Thanks, Rich.

[Rick Yan:]

Thank you, Jason.

[Operator:]

At this time, there are no further questions. I would like to turn the conference over to Rick Yan for any closing remarks.

[Rick Yan:]

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

[Operator:]

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