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51jobs Incorporated (NASDAQ:JOBS)

Q2 2009 Earnings Call

August 7, 2009 9:00 pm ET

Executives

Linda Chien - Investor Relations

Rick Yan - President, Chief Executive Officer, Secretary, Director

Peter Lui - Chief Financial Officer

Kathleen Chien - Chief Operating Officer

Analysts

Jason Brueschke - Citigroup

Jenny Wu - Morgan Stanley

Wendy Huang - RVS

Operator

Good day, ladies and gentlemen, and welcome to the 51jobs Incorporated second quarter 2009 conference call. (Operator Instructions) Now I would like to turn the conference over to your host, Miss Linda Chien, Investor Relations Director at 51jobs. Please go ahead.

Linda Chien

Thank you, Melanie and thank you all for attending this teleconference to discuss unaudited financial results for the second quarter ended June 30, 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 second quarter 2009 results was issued earlier today and a copy may be obtained through our website at ir.51jobs.com.

Before we begin, I would like to remind you that during this call, statements regarding targets for the third 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 third 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 third quarter or as a result of new information, future events, or otherwise.

Now I will turn the call over to Rick.

Rick Yan

Thank you, Linda and welcome to today’s call. I will begin with an overview of the second quarter, followed by Peter with a more detailed review of our financial results. Then I will discuss our current market conditions and our guidance for the third quarter of 2009. Finally we will open the call to your questions.

In light of challenging market conditions and reduced customer demand, we have taken decisive action over the past year to contain expenses, realign our cost structure, and drive efficiency. We are pleased that our second quarter results clearly demonstrate the progress we’ve made to streamline our operations and improve business processes.

Earnings for the second quarter exceeded our expectations, with non-GAAP EPS of RMB0.50, or $0.14 per ADS. More importantly, we achieved meaningful margin expansion at a much lower revenue base with gross margin improving almost 500 basis points over the second quarter of 2008.

Another positive development in the past quarter was our better than expected revenue performance. Second quarter revenues came in at RMB193 million, above our forecasted range of RMB175 million to RMB185 million. From our observations, we believe that the hiring market has stabilized in the last few months. The pace of revenue decline in our recruitment business slowed in the second quarter and we actually saw an acceleration of new customer acquisitions in our online business.

Although spending per customer declined as a result of tighter budgets, the number of unique employers using our online services grew to almost 80,000, our highest quarterly level in history.

Our user traffic was also strong despite limited advertising spend in the second quarter.

Our other HR services area again performed well. Growth of our HR outsourcing services remained robust in the second quarter and helped to offset lower revenues in our executive search and training services.

The resilience of the outsourcing business to economic conditions has been a bright spot over the past year. We are continuing to develop our services to capture this growing and evolving market opportunity.

Leveraging our powerful brand, service platform, and proven recruitment results, we have been efficiently attracting and engaging employers and job seekers alike during this downturn.

We are confident that the steps we have taken to strengthen our business model will position us on a high trajectory for even greater growth and profitability when the market recovers.

Now I would like to turn the call over to Peter for a more detailed financial review.

Peter Lui

Thank you, Rick. Revenue for the second quarter totaled RMB193 million, about 12% lower compared to the year ago quarter.

Print advertising revenues decreased approximately 28% compared to the second quarter of 2008, mainly due to less page volumes resulting from a slow down in market demand.

Print advertising pages in the second quarter decreased 33% to 2,860 pages compared with around 4,260 pages in the same quarter last year. Although print pricing levels were similar compared to the second quarter of 2008, average revenue per page increased approximately 7% year over year, driven by greater volume contribution from higher priced cities.

Online revenues for the second quarter was RMB77 million, a decline of 7% compared to the same quarter in 2008. Spending per unique employer declined 24%, as smaller hiring budgets led employers to reduce overall expenditures and select lower price online products.

Partially offsetting this impact, we regained momentum in customer acquisition. The number of unique employers using our online services increased 22% to approximately 79,200 compared with 64,800 in the second quarter of 2008.

Revenue for other HR services increased 17% year over year to approximately RMB49 million in the second quarter. The growth was driven by an increase in demand as revenues for our HR outsourcing services, which was partially offset by lower revenue from executive search and training services.

Despite the overall revenue decline, gross margin for the second quarter was a record high of 59.8% compared with 54.9% in the second quarter of 2008. During the quarter, we made further adjustments to our cost structure, which decreased our print [inaudible] expenses and drove greater efficiency in our business processes.

While we will continue to focus on productivity and efficiency, we believe the bulk of our cost realignment initiative has been completed and further gross margin improvement will be a function of economies of scale.

Included in the cost of services in the second quarter was share-based compensation expense of RMB1.1 million.

Sales and marketing expenses decreased to about RMB48 million in the second quarter from RMB52 million in the year-ago quarter. The decrease was primarily the result of lower advertising and promotion expenses, as well as a reduction in travel and entertainment expenses, which were partially offset by higher labor costs. Included in the sales and marketing expenses was share-based compensation expense of approximately RMB900,000 in the second quarter.

G&A expenses for the second quarter was approximately RMB34 million compared with RMB32 million in the second quarter of 2008, mainly due to higher rental fees, [inaudible] expenses, and employer related costs.

Share-based compensation expenses included in the G&A in the second quarter was RMB4.8 million.

Operating income for the second quarter of 2009 was approximately RMB27 million compared with RMB30 million in the same quarter last year. Our effective tax rate for the second quarter was 33%, compared with 36% in the second quarter of 2008.

Net income for the second quarter was approximately RMB21 million compared with RMB19 million in Q2 2008.

Fully diluted earnings was RMB0.37 per common share, which is equivalent to $0.11 per ADS.

Excluding share-based compensation expense and foreign currency translation loss, non-GAAP adjusted net income was about RMB28 million in the second quarter. Non-GAAP adjusted fully diluted earnings per share -- earnings per common share for Q2 were RMB0.50 or RMB0.14 per ADS.

Turning to our balance sheet, our cash position remains strong. At the end of the second quarter we have cash and short-term investments totaling RMB1.1 billion, or approximately $163 million. Our short-term investments consists of [inaudible] deposits with maturity of less than one year held in banking institutions in China.

In the second quarter, as part of the share repurchase program approved by the board and shareholders last September, we repurchased approximately 140,000 ADSs from the open market for an aggregate consideration of about $1.2 million, including transaction fees. To date under the program, we have repurchased approximately 520,000 ADSs for a total of $3.8 million. We are authorized to repurchase up to $25 million worth of outstanding ADSs but the amount of repurchases we can make are subject to daily trading volume and other rigorous holding restrictions.

In June, we agreed to purchase nine floors of an office building in a [inaudible] in the city of [Wuhan]. The aggregate purchase price of the premises is RMB22.6 million, of which RMB13.5 million was paid in the second quarter. The remaining balance will be paid upon the transfer of the building deed later this year. We expect to incur additional expenses associated with taxes, renovation, moving, and other related activities for the Wuhan call center.

Now I will turn the call back to Rick.

Rick Yan

Thank you. As I mentioned earlier, we have observed signs of stabilization in the Chinese recruitment market in recent months. The total amount of employers has turned more positive as economic data and business confidence has improved. We believe the most severe contractions in market demand are likely behind us.

The year-over-year declines in our total revenues have abated from 25% in the first quarter to 12% in the second quarter, and we expect the decrease to further moderate in the third quarter. Sequentially, revenue has also rebounded from the first quarter slow point.

That said, the outlook remains uncertain, especially with respect to the pace and magnitude of the turnaround. In addition, it may be the case that the resumption of growth in the hiring market will lag overall economic recovery in China.

But we are encouraged by the more upbeat sentiment we are now seeing and our cautious optimism about market demand is reflected in our third quarter guidance.

During this downturn, we have not stood idly by to allow market conditions to wholly dictate the path of our business. Instead, we have taken a hard look at our cost structure and business processes, instituting a number of impactful changes that not only enable us to maintain profitability but also strengthen our core operations.

Through solid execution of our objectives, we delivered our 25th consecutive quarterly profits, an achievement unmatched in our industry.

Most significantly, due to our improved resource allocation practices, our cost control measures have not come at the expense of strategic investments necessary for our long-term growth. In the second quarter, we upgraded our website with new advertising options for employers and greater functionality for job seekers, including a customizable user home page and revamped resume input process.

We continue to lead the industry with our focus on product innovation and technology. Another strategic investment is our recent purchase of office space in Wuhan for the establishment of a new call center. We chose Wuhan for its cost advantage, as well as an abundance of skilled young workers. The call center is expected to be operational by early next year.

This call center will provide sales support and customer service on a nationwide basis to complement our local city presence, thereby enhancing the scalability of our sales force and service infrastructure.

Turning to our guidance, based on current market and operating conditions, our total revenue target for the third quarter of 2009 is in the estimated range of RMB198 million to RMB208 million.

Our estimated non-GAAP fully diluted EPS target is between RMB0.48 to RMB0.58 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.

With our strong operating model, demonstrated execution capability, ample financial resources, and solid market leadership, we are taking advantage of the downturn to aggressively position ourselves to capture future opportunities.

We are committed to delivering solid progress and results to our shareholders now and over the long-term.

That concludes our presentation and we’d be happy to take your questions at this time. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Jason Brueschke from Citigroup.

Jason Brueschke - Citigroup

Thank you. Good morning, everyone. A couple of questions -- I’m not sure exactly who this is for. Maybe Rick, you can start -- I was wondering maybe to start with, can you discuss for us the dynamics that you are currently seeing, as well as what you expect to see once we see demand really come back between volumes for your services and pricing?

And specifically what I’m interested in is when we return to that period in the future where you will have strong year-over-year growth in your revenues, should we anticipate that that is going to be largely driven by an up-tick in volumes with pricing pretty much remaining stable at the current levels, or do you expect to see some pricing increasing as well as if you could comment on both what you expect to see with respect to this question on the print side as well as online side, that would be great. And then I have one or two quick follow-ups. Thanks.

Rick Yan

Thank you, Jason. The dynamics, I think at the beginning of the year we are seeing that customers are pretty cautious in terms of allocating their budgets to recruitment needs. If you look at the China economic data, the number looks to be -- appears to be improving in the second quarter -- actually in the first quarter stabilize, in the second quarter it improved. We are now actually seeing customers are actually taking actions and actually allocating their budgets to recruitment need, so that’s why we are seeing a better-than-expected second quarter revenues for us and I think third quarter we are also forecasting additional growth, almost getting back to the same revenue level as the same quarter last year.

In terms of how the dynamics might play out, obviously I think the volume, we do expect the volume to come back but also one thing that happened in this downturn is that we are seeing more and more shift from print to online, so we would probably expect that more of the growth will probably come from online rather than print, or we’ll continue to expect that online will be a higher growth segment of our business versus print.

In terms of pricing, we expect that when the market demand comes back and when there are more jobs and the demand for talent, or the competition for talent will become more intense. We believe the customers would increase their budget for advertising. When you have a lot of job advertisements on our website that our employer customers would start thinking about how to get more visibility and we would expect them to spend more and invest more in value-added services and as a result, we do expect pricing to come back on the online front when the market returns and growth accelerates.

Jason Brueschke - Citigroup

Great. Rick, maybe a question about the outsourcing business -- can you maybe remind us, maybe some color on the types of customers, maybe the size, the geographies, that are currently using your outsourcing business? And I’m also interested that -- I mean, you indicated in the prepared remarks that during a weak environment, there’s certainly a value proposition to be had for certain customers to outsource some of their activities to you.

When we get back into more of a robust market, do you think that that business -- does it end up being kind of counter-cyclical or will companies kind of experience the benefits of the value that you provide? Do you think that even in a robust environment, we would continue to see strong demand from this part of your business as well?

Rick Yan

Thank you, Jason. For the outsourcing business, when we started we focused on the large customers who have a lot of staff covering many, many cities in China. And our value proposition to them is to help them to manage the HR administrative processes in many cities. Today we help customers to manage their staff, HR administrative processes in over 50, 60 cities in China. So when we started the business, it was mostly focused on large customers.

Recently we are also helping very small companies -- companies that just started that may have less than 10, 20 people and we are helping them to again handle their HR administrative processes because they might not have the -- they might not have a very big HR department and sometimes they might not even have an HR person in place to handle those administrative processes.

So I think our customer base, I would still characterize that most of our customer base are large companies who have a lot of people scattered around a wide geography within China. We are now starting to look at small companies who doesn’t have the HR capability to handle the relatively complicated HR processes in China.

So that’s the kind of characterization in terms of our customer base.

In terms of our geography, a lot of the large companies would have their headquarters in the large cities like Beijing, Shanghai, and Guangdong. This is where the headquarters are, this is where they make decisions but the people that they outsource to us are scattered around China in over 50, 60 cities.

In terms of whether a more robust recruitment market may reduce the demand for outsourcing, I don’t think so because I think that the outsourcing business is still at a very early kind of embryonic stage of development in China.

Last year we see a very high growth of the business and we are continuing to see growth in the business this year. We do not expect the resumed growth of the recruitment market will have a negative impact in terms of the growth and development of our outsourcing business.

Jason Brueschke - Citigroup

Perfect, and maybe just -- maybe one final question; Rick, could you maybe discuss the call center in -- I would say in a competitive dynamic light? And what I am wondering is, this investment that you are making to provide nationwide sales and customer support, could you maybe comment what relative capabilities you will have once that is up and running relative to your competition? And maybe as we look out how the China recruiting market is likely to evolve the role, the strategic role I would say that having that capability is likely to give you, or the advantages over your two primary competitors as we look out over the next couple of years. Thanks.

Rick Yan

Jason, I think the set-up or the plan to set up the call center are probably driven from two things. One is we’ve been really focusing on the -- improving the productivity and efficiency of our business and I think through the work that was done in the past two quarters, you can see that our operating leverage has actually increased. We are now generating better gross margin at a lower revenue level compared to where we were last year. And in this process, we continue to look for opportunities to improve productivity and increase efficiency and we believe that a good way to increase operating leverage is to centralize certain functions and processes when possible and I think the call center, the first objective of the call center is to help us to have a more streamlined process so that we can actually continue to improve our productivity going forward and hope by doing this we can further increase operating leverage in our model.

And obviously the second component of that is also because of a continuing shift from print -- from the print part up to the online product, as you can see that we are now generating more revenues on the online front than print, and obviously online is a more standardized product and there are more opportunities to standardized and centralize our service processes compared to print.

You know, print is a local product that we have a local edition of 51job Weekly in over 20 cities in China. We’ve always tried to look for productivity improvement opportunities but when you have 20-something editions of 51job Weekly in 20-something cities, there’s a limit to how much you can centralize and streamline.

And now that our business continued to move to online, we are seeing more opportunities to standardize and centralize certain processes so that we can achieve even greater scales of economy.

Jason Brueschke - Citigroup

Okay, so I guess the answer is that it’s -- this call center is much more aimed at what you just described, the efficiencies and productivity, then really providing maybe a level of service that your competitors currently are not providing?

Rick Yan

Yeah, I think -- you know, I think we are really proud that we are able to deliver 25 consecutive quarters of profits, even throughout this downturn earlier in the year. You know, needless to say our competitor has been losing money for the past -- over the past three years or more and if we continue to improve our efficiency and generate better margins and increase the operating leverage in our model, we’ll have more resources to invest and I think this is a key long-term competitive advantage. And I think not only that with a better cost position, the cost structure we’ll have more -- we’ll make more money and we will have more resources to invest and also by standardizing and centralizing the service process, we can also improve customer satisfaction too.

Jason Brueschke - Citigroup

Perfect. That’s what I was looking for and congratulations again, everyone.

Operator

Our next question comes from the line of Jenny Wu of Morgan Stanley.

Jenny Wu - Morgan Stanley

Hi, everyone. Thanks for taking my questions. And first of all, congratulations on a very good quarter. My first question is regarding the operating margin and because of the business structure and cost control you put in place earlier this year, [we see better [inaudible] results] and now you are pretty much going back to the normal levels of 3Q08 but it is still below the peak level you have historically achieved. So with the economic recovery and cost control you consistently take, going forward what should we expect? Should we expect [inaudible] margins will continue to go high? And do you have any target for that?

Rick Yan

Jenny, from our perspective, as we mentioned in the call, we believe that during the last few quarters of stringent cost control and really look at everything that we do business, we think we have achieved where we are today and the overall realignment we believe is already there.

Any further improvement I think it is going to become, as we mentioned, economy of scale. When you use X amount of people doing one path of job, you can only [inaudible] to a certain respect. Despite our cost control, we did not [inaudible] in terms of hiring the right people. All we asked people to do is to, aside from buckling down to be more efficient in what they are doing. So any further improvement in the gross margin, as well as operating margin I think is going to become more a function of revenue because we believe at this stage right now we are probably as lean as we can be. So I don’t know if that answers your question.

Peter Lui

Jenny, one more point I would add is in the past, we have indicated that we believe that the longer term operating margin target for our print business is over 30% and the longer term operating margin target for our online business is over 40%. We continue to believe that so the longer term operating margin target for the business will be something between 30% to 40%, as there’s a blended mix of print and online and we continue to believe that this is our long-term target.

Jenny Wu - Morgan Stanley

Sure. You mean long-term -- how long is this, five years or three years?

Rick Yan

It depends on how fast the market recovers and how fast we gain share from our -- you know, continue to gain share from our competitors. I think as Peter mentioned, it’s going to be a matter of top line growth, so the answer to your question is yes, when growth accelerates further, we will see better margins. I think we have taken this -- we have taken the opportunity of this downturn to improve our efficiency and productivity and we are now able to generate better margins, even at lower revenue levels. So if the revenue level goes back to previous levels, we are going to be making more money compared to what we did before.

Jenny Wu - Morgan Stanley

That’s great. And Peter just mentioned you did not stop hiring [the right person], so can you give us an update on the total employee you have now?

Rick Yan

Our total employee headcount is about flat. Basically it’s been -- it’s around 4,000 now so we continue to look for opportunities to hire the right people and again, you hire some people, you fire some people, some people leave, so this is an ongoing process but we are now at around 4,000 headcount which is slightly below what we were before. We have not done any redundancies in this process so it is all through natural attrition and more selected hirings at the critical positions.

Jenny Wu - Morgan Stanley

Okay, great and for your print business, did you [cut] the business in lower tiered cities? I mean, the lower efficiency cities? And how many cities are you currently operating in now?

Rick Yan

I think it’s actually the same -- you know, we’ve been operating the same number of cities in the past two quarters, so yeah, we have not added any new cities and as our growth is now more coming from online, we can serve more cities using the online products. We don’t need to introduce the local addition of 51job Weekly going forward when we enter into new cities. So the number of cities we serve in terms of sales offices and 51job Weekly editions is the same, has been the same.

Jenny Wu - Morgan Stanley

Okay, sure. And for online, average revenues per employer decreased 24% year over year. You mentioned that the employers are purchasing lower priced products. And beside that, you also said that you actually cut the listing price and how competitive your offering price now in the industry?

Rick Yan

Well first of all in a slow market, customers tend to review their recruitment budget. As we mentioned in the beginning of this year, people were very cautious, even they might have recruitment needs, they were very hesitant to actually put those recruitment needs into advertisements. So there was a very strong kind of wait and see attitude at the beginning of the year. We are now actually seeing that people are actually putting money into recruitment to satisfy their recruitment needs but again, we are seeing that the budgets are still cautious. So they are putting money to work but they are still cautious. So I think that’s the very important factor.

In terms of competition, I don’t think the competitive landscape has changed in any meaningful way. We are continuing to see the same online competitors as we have been seeing in the past three years and our pricing of course is competitive in the marketplace. As you can see that we are now transacting to close to 80,000 unique online employers in a quarter, actually the highest in our history and we are still just kind of coming out from a downturn, so we are certainly competitive in terms of customer acquisition, otherwise we wouldn’t have to make a record high level in online customer transactions last quarter.

Jenny Wu - Morgan Stanley

You mean your competitive offering price or your [inaudible]?

Rick Yan

Excuse me, you said -- I didn’t get your last question.

Jenny Wu - Morgan Stanley

I mean online product pricing. You maintain the similar level or you cut it down or -- what kind of adjustment you did?

Rick Yan

We have not made any major changes to our pricing structure. As we mentioned, people are buying less value-added services because of the caution in spending recruitment budgets, so people were buying more low price and basic products compared to before, and that’s the key factor. It’s not -- yeah. That’s the key factor that is driving the lower revenue per online employer in the last quarter.

Jenny Wu - Morgan Stanley

So compared with your competitors, your offering price is at the high level or lower level?

Rick Yan

We are charging more than our competitors. We know that our competitors always try to undercut us in terms of pricing competition and that has been the case in the past three years. We have always charged a premium versus our competitors.

Jenny Wu - Morgan Stanley

Okay, sure. And you have been beating your own guidance [handedly] in the past two quarters and how conservative you are now while you give us your third quarter guidance?

Rick Yan

I wouldn’t say that we are conservative. I think we always try to give a guidance based on the best knowledge we have on hand and again, the recruitment business is -- you know, people when they decide to hire someone, they will let us know and on the print front, we might know that demand two weeks before the actual placement of the ad. Of course, online we have longer term memberships, annual memberships and the like, so online revenues are more predictable and more -- less cyclical compared to print. But I think the guidance we’ve always given has always been the best belief, the most likely outcome that we believe would happen in the quarter.

In the past two quarters, as you can imagine, we were at a low point in the business cycle in quarter one and it is very hard for anyone to predict whether there is a turnaround and the pace and the magnitude of any turnaround. So I think -- I don’t -- I would not agree that we are always conservative. I think we always try to give the best estimate that we can but as you know, markets sometimes grow faster than you thought and sometimes slow down faster than you thought too.

Jenny Wu - Morgan Stanley

Okay, sure, thanks. And for the guidance, the growth is mainly coming from the recruiting part of HR [outsourcing] [inaudible]?

Rick Yan

Excuse me? Do you mean the guidance? Yes, this is total revenue guidance. We do not give a breakdown on recruitment versus other non-recruitment products. It’s a total revenue guidance that we are giving.

Jenny Wu - Morgan Stanley

Okay, so actually for your HR outsourcing versus recruiting, because the recruiting business is [inaudible] so should we expect a stronger rebounding when the economy is turned around -- I mean more than for your HR [inaudible]?

Rick Yan

Well, Jenny, put it this way -- our recruitment products account for 75% of our total revenue, so any improvement in the -- any outward guidance that we are giving, or more optimistic guidance we are giving has to be based on a better recruitment market outlook. I mean, 75% of our business is still recruitment related.

Jenny Wu - Morgan Stanley

Okay. Thank you very much. That’s all my questions.

Operator

(Operator Instructions) Next we’ll go to Wendy Huang from RVS.

Wendy Huang - RVS

I have a few questions -- first is on your top line Q3 guidance. Should we expect the trend we have seen in Q2, say the [inaudible] see a sequential decline and [inaudible] advertisement see a strong rebound in second quarter to continue into Q3, and what kind of sequential additions you actually implied from the HR outsourcing business for Q3?

Rick Yan

Historically, quarter one is kind of a high season for our recruitment business and particularly for our print product, so if you look at the historical in the past six years, quarter two print revenue is always lower than quarter one print revenue. So the fact that this year quarter two print revenue is lower than quarter one print revenue is expected. This is the seasonality of the business because of peak recruitment season in quarter one after the Chinese New Year. And again, historically you will see that quarter three tends to be more balanced between print and online, so I wouldn’t attribute the decline of print revenue from quarter one to quarter two as necessary, kind of a long-term trend or any change in the long-term trend, put it this way.

In terms of outsourcing, we continue to see a growth in the outsourcing market and as I mentioned in the beginning of the call, it’s still at a very early stage of development. We would expect continued growth in that business as the market is still in the very early stage of development. There should be continued growth going forward.

Wendy Huang - RVS

And for your online business, in Q2 the unique online clients increased by 13% sequentially. This was much higher than the 6% we saw in Q208, so should we see this kind of sequential online customer rebound as sustainable?

Rick Yan

Yeah, I think our online growth has always been -- the customer growth has always been in the 20 or even 30% range, you know, if you took a longer term view on -- in the past three to four years, so this is a trend that we expect to see -- we expect to see this -- continue to see this trend going forward. Yes, we expect online customer and revenue continue to grow faster than print.

Wendy Huang - RVS

Okay. My second question is a follow-up on your call center -- how many of the call center staff you had right now and how do you expect that to extend when the new call center ready next year and how will that affect the G&A in 2010 when you [start hiring], if there is any?

Rick Yan

Thank you. You are really forward-looking. We just purchased some office space in Wuhan in quarter two. We expect the delivery of the premises to us in quarter three and we expect there will be some renovations going on. As mentioned in the call, we expect the call center to be operational in quarter one next year.

I think Peter mentioned that we have purchased nine floors of space, so we do expect a few hundred people there when we get to kind of a steady stage of -- you know, fully utilized, put it this way. And of course the reason we picked Wuhan as the location for the call center is the lower people costs and lower premise cost, or the lower cost of operations, so we do expect to generate more efficiency by having some of our service -- selling some sales supported service infrastructure in the -- in Wuhan. So we do expect that there will be potential cost savings by moving some of the processes to Wuhan and also centralizing them there.

Wendy Huang - RVS

So to clarify the comments you just made, you will hire a few hundred additional call center staff in Wuhan when you move into the new call center?

Rick Yan

This will be a process that we may be moving some of the -- as I mentioned, we’ll be moving some of our sales support and service process there. That might meant that we will be hiring people in Wuhan but at the same time, we may see attrition in terms of the existing team in the different cities.

And of course if we are seeing a continued improvement in the recruitment business and we are seeing growth accelerating, you know, we will be adding more people which will probably mean that some of the additional headcount that we add would -- more of that will be taking place in Wuhan.

Wendy Huang - RVS

And this call center is mainly to serve your online business, if my understanding is correct?

Rick Yan

We believe that because online is a standard product. It will be easier to standardize and centralize.

Wendy Huang - RVS

Okay. My last question is on your operating expenses and operating margin and just try to confirm that 30% for print and 40% for online is non-GAAP operating margin calculated in the long-term?

Rick Yan

Operating margin is always non-GAAP. The GAAP adjustment is only on foreign exchange gain or losses, as well as share-based compensation. Yeah, a bit of share-based compensation in the cost of goods sold and sales and marketing but yeah, we are talking about non-GAAP numbers, yes.

Wendy Huang - RVS

How about long-term operating margin target for the HR outsourcing and others?

Rick Yan

We are still at the early stage of development, as we said that we are still in the high growth stage of the business. I think the regulations are changing. We are adapting our service offerings, as well as our business model, you know, from time to time, so I think it’s too early to talk about the long-term margin target for the outsourcing business at this stage.

Wendy Huang - RVS

And for the near-term operating expenses, we have seen that in the Q109 and Q209, you [inaudible] marketing expense [inaudible]. Should we expect the absolute dollar number to maintain stable in Q3?

Rick Yan

We do not have any changes in the current plan. I think we will probably be operating more or less in the same way, going at least in Q3. That’s reflected in terms of our earnings guidance. You know, we are guiding to RMB0.48 to RMB0.50, so yeah. We expect a similar infrastructure for quarter three and of course if growth picks up, we will adjust accordingly.

Wendy Huang - RVS

Thanks, that’s all I have.

Operator

Those are all the questions that we have at this time. I would like to turn the call back over to Mr. Rick Yan for any additional or closing remarks.

Rick Yan

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

Operator

Ladies and gentlemen, that does conclude today’s call. Thank you all for your participation.

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Source: 51jobs Q2 2009 Earnings Call Transcript
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