51job, Inc.
Q4 2014 Earnings Call Transcript

Published: 6 Mar 2015

[Operator:]

Good morning, ladies and gentlemen, thank you for holding. Welcome to the 51job, Inc.’s Fourth Quarter and Fiscal Year 2014 Conference Call. [Operator Instructions] I will now hand the conference over to Ms. Linda Chien, Vice President and Head of Investor Relations. Thank you, madam. Please go ahead.

[Linda Chien:]

Thank you, Jonathan, and thank you all for attending this teleconference to discuss unaudited financial results for the fourth quarter and fiscal year ended December 31, 2014. With me for today's call are Rick Yan, President and Chief Executive Officer, and Kathleen Chien, Chief Operating Officer and Acting Chief Financial Officer. A press release containing fourth quarter fiscal year 2014 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 2015, future business and operating results constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectation 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 2015; any accounting adjustments that may occur during the quarterly close. Fluctuations in the value of the Renminbi against the US dollar and other currencies; behavioural and operational changes of customers in meeting their human resource needs as they respond to evolving social, economic, regulatory and political changes in China as well as stock market volatility; introduction by competitors of new or enhanced products or services; price competition in the 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. Any risks related to investments the company has made or will make in the future and fluctuations in general, economic condition. For additional information on these and other factors that may affect the company's financial results, please refer to the Risk Factors section of the company's filings with the Securities and Exchange Commission. 51job undertakes no obligation to update targets prior to announcing final results for the first quarter of 2015 or as a result of new information, future events or otherwise. Also I would like to remind you that during the course of this call we will discuss non-GAAP measures. Reconciliation to the most directly comparable GAAP financial measures are provided in the tables appended to the press release. This conference call is being broadcast on the internet and is available through our website at ir.51job.com. Now I'll turn the call over to Rick.

[Rick Yan:]

Thank you, Linda and welcome to today's call. I will begin with highlights of the fourth quarter and full year 2014 followed by an assessment of current market conditions and recent developments. Then Kathleen will provide detailed review of our financial results and provide our guidance for the first quarter of 2015. Finally, we'll open the call to your questions. We are pleased to wrap up 2014 with a solid fourth quarter. We achieved total revenue of RMB529 million which was in line with our expectations and non-GAAP EPS of our RMB3.08, which was ahead of our forecast. For the full year total revenues were nearly RMB1.9 billion in 2014 and we achieved non-GAAP net income of RMB6.38 million. While we have been investing in our brand, sales infrastructure and product development efforts. We have also maintained solid financial discipline to deliver consistent profitable returns to our shareholders. Revenues for our online business increased 10% in the fourth quarter. We remained focus on new customer acquisition efforts and while the number of Unique employers increased at 10% to over 278,000 corporates for the quarter. The growth was materially offset by the impact of the 6% VAT policy change that also affected ARPU. On an annual basis, while eliminates any double counting amount quarters of the year. The Unique employers account increased 16% in 2014 to 388,000. Both new and existing customers stay active utilizing our online platform throughout the year. Despite still VAT impact, we are pleased that annual ARPU decreased by only 1% due to improved customer stickiness and repeat usage. On the job seeker side, we continue to engage and increase our individual user base. In line with the pace of previous quarters. We added more than 2 million users in the three months period. We ended 2014 with an accumulated 84 million user accounts, 75 million resumes and over 90 million downloaded activation of our mobile apps. On the other HR services front, revenue growth was 17% in the fourth quarter and also for the full year 2014. Robust cross-selling of our training, campus recruitment and other services lifted results during this past year. In which we have been undergoing operational adjustments to our BPO services. While we continue with the implementation of new system, processes and procedures will remain excited above the long-term prospect of the BPO market and believe that we are well positioned in the market place. Turning now to current market conditions. Based on just a few days of post Chinese New Year data, our preliminary assessment of hiring sentiment for this year is positive. Despite a slower economic growth environment in China. We are relatively optimistic about market demand as employers are reiterating to us their struggles to attract and retain high quality talents. On the salary front our conversations with enterprises point to continue wage inflation for white collar workers. According to our surveys, companies are expecting to raise wages on average around 8% in 2015 which is similar to last year's increase. We will be closely monitoring employer and job seeker activities over the next eight weeks of this post-holiday peak season and provide an update on market demand on our next quarterly call. We believe that the core of 51job's success is our focus and execution of a multi-product strategy addressing the multifaceted needs of customers. The combination of our growing rich, the widening age range of our users and the evolution of the corporate HR departments in China has presented us with new areas to explore. We envision 2015 as a year of product introductions, as we expand our coverage to new demographics and develop specific services using a more fragmented approach. To begin with, we rollout the Beta version of the new website called 51JingYing last month. JingYing targets more experienced workers at the higher end of the recruitment spectrum and is a platform that will connect headhunters and those traditionally passive job seekers. The features of JingYing includes more powerful search capability that better prioritize relevant positions and candidates, a private communication channel and a mobile app with a name card scanning function. Profiles on JingYing may be linked to existing 51job accounts. JingYing will undoubtedly go through many changes in the coming months as we review user feedback. Our immediate goal is to populate the network and build greater engagement with experienced workers who are no longer changing jobs with high frequency and who are also more selective in seeking new career opportunities. As we have stated in past calls, in addition to in-house development. We are open to M&A ideas and we have been actively pursuing a number of acquisition and investment opportunities. Recently, we have entered into definitive agreements with some target companies. These companies include an established recruitment site focused on new college graduates and students in China and providers us professional assessment, training and HR consulting services in China. We believe these investments enhance our overall product offerings, strengthen our leadership position in the campus recruitment segment and assist our corporate customers to be identify develop and allocate talents within their organizations. These transactions will be funded from existing cash resources and total consideration is expected to be up to RMB278 million, subject to closing conditions and adjustments, if any. We expect closing to occur in the second quarter of 2015. We are positioning 51job to expand and deepen its presence across all facets and segments of HR space in China. We are very excited about our product pipeline and the new opportunities that lie ahead. I'll now turn the call over to Kathleen for detail financial discussion of the quarter and the year.

[Kathleen Chien:]

Thank you, Rick. In my following prostration, please be aware that all financial numbers are in a reporting currency of the Chinese Renminbi unless otherwise stated. Also please note that all growth rates are on a year-over-year basis as compared to the corresponding period in 2013, unless otherwise stated. Our total revenues for the fourth quarter of 2014 were RMB529 million within our forecast range and representing a 12% increase. Beginning on June 1, 2014 though we ceased paying a 3% business on gross revenues received in our online business and instead became subject to a VAT rate of 6%. This policy change has reduced the amount of online revenues we recognized and will continue to weigh on year-over-year comparisons until the one-year adoption mark is reached in June, 2015. Including the impact of VAT policy change, our online revenues for the fourth quarter grew 10% to RMB319 million. Unique employers using our online services increased 18% to over 278,000 companies in the fourth quarter of 2014. While pricing has been generally unchanged over past year, our ARPU decreased 7% in the quarter due to the VAT policy change as well as the increase of new customers, who generally purchased introductory lower price service. Revenues for other HR services increased 17% to RMB208 million. The growth was primarily driven by usage of our outsourcing, training and our seasonal campus recruitment services. While the BPO business has been under transition. We are very pleased to note that both our training and campus recruitment areas have delivered record results. Our print revenue continues to decrease and decrease 75% to less than RMB2 million in the fourth quarter. With only one publication remaining in the City of Xian, our exit from the print operations is essentially complete. Gross profit grew 13% to RMB364 million and gross margin was 71%. Included in cost of services in the fourth quarter was higher share-based compensation expense in the amount of RMB3.5 million. Sales and marketing expenses increased 14% to RMB145 million in the fourth quarter primarily due to additional headcount higher employee compensation expenses and greater marketing expenses. Included in sales and marketing expenses was share-based compensation expense of RMB3 million in the fourth quarter. G&A expenses increased 4% to RMB65 million in the fourth quarter. The increase was mainly due to higher employee compensation. Office and depreciation expenses, but was partially offset by a decrease in professional service fee. Share-based compensation expense included in G&A increased to RMB15.6 million in the fourth quarter of 2014 compared with RMB12.8 million in the same quarter of the prior year. Operating income for the fourth quarter increased 15% to RMB154 million and operating margin increased to 29.9% compared with 29.4% in the fourth quarter of 2013. Excluding share-based compensation expense operating margin will be 34.2% compared with 33.5% in the year ago quarter. In April, we completed an offering of convertible senior notes. Under mark-to-market accounting, we recognized a loss of RMB85 million in the fourth quarter associated with the change in the fair value of these notes. Affected by the impact of the fair value loss, our net income for the fourth quarter decreased to RMB81 million compared with RMB155 million in the same quarter of 2013. Fully diluted EPS for the fourth quarter was RMB1.39. the potential conversion of the convertible notes was excluded in the EPS computation because the effect would be anti-dilutive. Excluding share-based compensation expenses gain from foreign currency translation notes issuance cost and changes in the fair value of the notes. In addition to the related tax impact of these items are non-GAAP adjusted net income increased 5% to RMB184 million in the fourth quarter. Under the if-converted method, our non-GAAP adjusted fully diluted EPS was RMB3.08 or $0.50 per share. Now for the full year results, total revenues for 2014 increased 13% to RMB1.9 billion. Although affected by the VAT policy change, our online revenues grew 15% to RMB1.25 billion and comprised 66% of total revenues. We increased the annual count of unique online employer's base by 16% to 388,000 companies. In 2014, our other HR services area grew 17% to RMB635 million and increased this contribution to over one-third of our total revenues. Lastly, our print revenues decreased to only RMB14 million. Gross margin in 2014 increased about 45 basis points to 72.9%. despite the VAT policy change on online revenues and the BPO transition, we capitalized on the economies of scale and improved our efficiency to drive gross margin expansion. Income from operations increased 7% to RMB524 million, but net income decreased to RMB439 million in 2014 due primarily to the accounting impact of the convertible notes offering. Excluding the share-based compensation expense, the gain from foreign currency translation, the notes issuing cost and the change in the fair value of the note and the zero-strike call options as well as their related tax impact, our non-GAAP adjusted net income was RMB638 million in 2014. Under the if-converted method, our non-GAAP adjusted earnings per common share for 2014 were RMB10.57 or $1.70 and the non-GAAP adjusted net income was actually a 12% increase versus the RMB572 million we earned in 2013. Regarding our balance sheet, we ended 2014 with cash and short-term investments totalling RMB4.49 billion equivalent to approximately $724 million. During the fourth quarter, we repurchased about 349,000 ADSs from the open market from an aggregated consideration of approximately $10.6 million. In January 2015, we entered into an agreement to acquire another floor in the same office building that houses our Downtown Shanghai sales office. The purchase price for over 1,600 square meter space was RMB42 million and has been paid to the sellers. We have funded this purchase from our existing cash resources. Now turning to our guidance, our total revenue target for the first quarter of 2015 is in the estimated range of RMB460 million to RMB480 million. Please note that this revenue forecast is based on very limited data collected thus far in the post-Chinese New Year peak season. Also due to the lateness of the holiday on 2015 calendar. We do expect a larger portion of revenues from the peak season to be captured and recognized in the second quarter as opposed to the first quarter. Finally, we have continue to take into account the VAT policy change and reflected its potential impact on our revenues. For the non-GAAP fully diluted EPS target. Our estimated range is between RMB2.1 to RMB2.3 per share under the if-converted method. Please note that this non-GAAP EPS range does not include share-based compensation. The impact of foreign currency translation any mark-to-market adjustments for the convertible notes nor the related tax impact of these items. Total share-based compensation expense is expected to be between RMB22 million and RMB23 million for the first quarter. This guidance reflects our current forecast which is subject to change. That concludes our presentation. We would happy be to take your questions at this time. Operator?

[Operator:]

[Operator Instructions] the first question comes from the line of Alice Yang from Macquarie. Please go ahead with your question.

[Alice Yang:]

Hi, management. Thanks for taking my question and congratulations on a solid quarter. I have two questions about your traditional job listing business. How do you expect the volume growth in 2015? Given your management before the landing on more customers is the key priority and your first batch of newly recruited, sales in 2013 should be more mature in this year at two years of training, so this supposed to land more customers. Especially you digging to SME market. So how you see volume growth? Would it be faster than 2014 or a bit slower than that taking into consideration both higher customer base and your harvest [ph] year 2015? My second question is about the revenue per customer. How do you see the pure decline in this number exclusive for effect of VAT in 2015? Thank you.

[Kathleen Chien:]

Hi, thank you for the questions. I think, we obviously believe that as our sales people continue to mature that's going to hopefully help us on the amount of revenue that they're able to generate, but I think as it's true for previous year's continuity. I think, we expect in order to continue to add meaningful volumes in terms of customer account. We will also have to continue to add sales force because the number of customers, a single sales person can handle is actually to some degree a finite number, if you will. So I think that part of what we do, this year as we continue to get more information about what the market demand level will look like for 2014, as we have more information through more weeks of data after Chinese New Year that will impact on our sales hiring plans, but we do believe thus far even though with very, very limited data after Chinese New Year. We believe that, the market continues to be solid. We have positive feeling, we hope to be able to continue to expand our sales force and that will be a key driver of volume growth. On the second question you raised regarding pricing. I think, we're very pleased to see that we closed 2014 the situation where if you exclude the impact of VAT change on pricing. I think our ARPU did not really change very much versus prior year. So I think, we're kind of holding steady. So we hope that, if we continue to have more mature sales people in our organization that we hope be able to kind of hold our ARPU at a more steady level, rather than see more decreases, which has been more apparent early as we continue to add more sales people.

[Alice Yang:]

Very helpful. Can I add on a little bit - one? Do you see that the skew market consolidation in the traditional job listing business given jobs and your near competitor already take around 60% of market share? Thanks.

[Kathleen Chien:]

I think, we think that the sort of the recruitment business that we've been in that's been operated by 51job is actually a more mature business, maybe I guess versus other stuff out there. Yes, so I do think that consolidation will continue, but having said that this isn't market where we continue and align new customers and so forth. So that will not change.

[Rick Yan:]

Yes, I might add on that. I don't think the competitive landscape is changed. Although, I know that some of our competitors might have been released numbers to say that they're gaining shares, but we found that from what we monitor from the market place and from what we hear from customers. The competitive landscape is pretty much still the same.

[Alice Yang:]

Understand. Thank you very much.

[Operator:]

The next question comes from the line of Juan Lin from 86Research. Please go ahead with your question.

[Juan Lin:]

Hi, good morning. Thank you very much for taking my question. My question is relating your newly acquired business. Could you elaborate a little bit about the geographic focus, business model and service provided by these new business and what is the revenue and margins generated by these new business?

[Kathleen Chien:]

The businesses that we've been looking at, as you can see probably is that it's going to be complementing our existing businesses. So the focus is again continue to expand our product offering to the HR customers, who have been very loyal to us and who have grown with us, for the last 15 years, 16 years of history. As we disclose on the call and also on the press release. There is a company that actually operating businesses in the campus recruitment or campus new graduates, career development kind of a platform, that is one area we continue to have a lot of activity and continue to see a lot of interest in. Second, group services that we are looking at is really in the sort of the assessment the training and the consulting business related to HR. So I think, that's kind of focus that we continue to be looking at. I think, at this point in time to respect the privacy of actually some of these companies as well. We do not feel that it's appropriate to disclose more financial information this time. However, I think as we continue to push ahead on these investments and as the transactions close, we will actually be able to at least share more information as they become part of the family of services 51job actually operates and continue to provide to customers.

[Juan Lin:]

Thank you and for, sorry for the gross margin in Q4. Gross margin declined by 2.1% sequentially which is larger than the historical seasonal pattern, is there any particular reason for this?

[Kathleen Chien:]

We don't look at our margins on a sequential basis because our business some seasonality. So I think we again look at the year-over-year basis, but we do not think there is any meaningful changes in our business structure, if you will.

[Juan Lin:]

Thank you very much to answer my questions. I will get back to the queue.

[Kathleen Chien:]

Thank you.

[Operator:]

[Operator Instructions] the next question comes from the line of Xin Wang from BOCI. Please go ahead with your question.

[Xin Wang:]

Thank you for taking my question. I have two questions. The first one is, what's the monetization model of the JingYing.com currently or in future? And how many new users were added or all from your original user base? And how do you see the user mix on your JingYing platform in terms of active and passive job seekers and I've a second question.

[Kathleen Chien:]

To answer the question on JingYing, we just did the launch last month and as you know, we just went through two weeks [indiscernible] holidays with Chinese New Year. So I think at this time it's too early for us to comment on users and everything else, that's going on because it just went public, it went live. I think we stated that, I think at this point in time. The first priority is certainly to make sure that we have a robust group of users that get attracted and get retained on that platform. So I think monetization will not be our first focus at this time. I think that would be a later stage kind of consideration. So I think that's kind of where we stand on that, but again I think we hopefully will be able to update people with more information as we push ahead on this initiative and we'll certainly be tinkering for the model as we'll at the same time just because again, this is something that was just went live last month and it's been only a couple weeks, since then.

[Xin Wang:]

Thank you. My second question is that, how do you see the competition from professional social network such as LinkedIn and high end talent recruitment with China this year, especially high end passive job seekers. Thank you.

[Kathleen Chien:]

To be honest, I think the high end job seeker market is a tough one to crack for anybody because it is actually traditionally populated and served by headhunter's offline. So I don't think that's something that will change overnight because any professional networks out there and certainly there is been many networks that's been tested and tried in China and just as they have been done I'm sure elsewhere in the world, but I don't think that there is been any meaningful changes in the landscape of service providers in China at this point in time. We don't actually believe that this is something that has been a meaningful competitive that's led to us and that has not been the case for the last few years running if you will, so I don't think our view points on that have changed significantly. However, obviously with introduction of the JingYing network. We do believe that there is an opportunity for us to work with headhunters perhaps to serve this market well and that is something that we're focused on, but again I don't think that has any direct impact on development and professional social network because I don't think these necessarily are kind of the similar. I think social networks require maybe a little bit more activity from users and I think that's difficult when we're again going after passive jobs seekers and I think you need to do a little bit more work than just kind of put up something and hope that everything kind of connected, if you will.

[Xin Wang:]

Thank you, thank you very much.

[Kathleen Chien:]

Thank you.

[Operator:]

The next question comes from the line of Joyce Zhou from Barclays. Please go ahead with your question.

[Joyce Zhou:]

Hi, management. My question is also regarding your JingYing platform just launched. so you could you share more information about how the back end [ph] resources like your sales force will be allocated between your old platform and the new platform? Thank you very much.

[Rick Yan:]

We have always taken a one sales force selling all products approach. Meaning that, we will have separate sales force selling JingYing and the position is JingYing is the higher end passive job seekers. So it’s complimentary to what we are doing at the 51job as a job both for active job seekers. So from a sales force perspective, we'll be fully integrated.

[Joyce Zhou:]

Okay, thank you very much and my second question is about the maybe a little bit big picture on the business model side. I saw that mainly the vertical people [ph] are trying to move their business model to more or less performance based on the transaction based model. So any potential opportunities that 51job seeing earlier, maybe that also linked to JingYing and maybe something about the future like monetization model on the JingYing platform? Thank you very much.

[Rick Yan:]

Well, the way we see this is, for larger customers who have very large recruitment plans. They need more tailored custom made services and we are doing larger projects tailored for the specific needs of certain large customers and in those cases, some of the fee arrangement could be a success fee or contingent basis, but in general we felt that most of the customers will be serving those customer using the traditional posting or advertising model on 51job and will be, we don't see that we're moving into any broad based, success fee based kind of arrangement. I think that only happens for very specific large customers, who have specific tailor-made needs.

[Joyce Zhou:]

Okay, thank you very much, that's very helpful. Thank you.

[Operator:]

[Operator Instructions] we will move onto to our next question from Alvin Jiang from Morgan Stanley. Please go ahead with your question.

[Alvin Jiang:]

Hi, Rick and Kathy and thank you for taking my question. Could you give me, give us some more details on your sales force expansion plan in 2015? Maybe a similar growth rate as in 2014 or maybe even faster? I have a follow-up. Thank you.

[Kathleen Chien:]

Yes, I think we are looking at this closely and obviously that depends on, how we believe sentiment will be, as we kind of look further down in the year, but I think at this point in time. We still believe that the market is positive, we continue to believe that sales force expansion will be a big part of what we do. In terms of percentages if you will, headcount additions it might be slightly less than what it was last year, just given that we have a larger base, but certainly we expect that, we're looking at may be at least for an double-digit kind of growth rate, but again this is something we need to validate as we have more information about, where market demand and market sentiment is this year, but I think that's kind of where we stand at this point in time.

[Alvin Jiang:]

Thank you. My second question is on the revenue breakdown, do you see any meaningful trends of your business like from wanted top tier cities where there is lower tier cities [indiscernible].

[Kathleen Chien:]

No, I think we never felt that recruitment business is sort of a regional business and that varies significantly in sentiment across different cities or region. So we never felt that's the case. So I think, if we fell that things are going well and it's positive we expect to see that across the board. Similarly to the other cases, if things are not going well, we expect them, cities across the board will actually experience similar difficulties, but I don't think that varies any sort of meaningful difference by city or region.

[Alvin Jiang:]

Okay, got it. Thank you.

[Kathleen Chien:]

Thank you.

[Operator:]

Mr. Yan, there are no further questions at this time. Please continue with any comment.

[Rick Yan:]

Thank you for joining us today. We look forward to speaking with you next quarter and we value your continues support at 51job. Thank you, bye.

[Operator:]

Ladies and gentlemen. This concludes the 51 Inc.’s fourth quarter and fiscal year 2014 conference call. Thank you for participating. You may now disconnect.