51job's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 9.13 | About: 51job, Inc. (JOBS)

51job, Inc. (NASDAQ:JOBS)

Q2 2013 Earnings Conference Call

August 8, 2013 9:00 p.m. ET

Executives

Linda Chien – VP and Head of IR

Rick Yan – President and CEO

Kathleen Chien – COO and Acting CFO

Analysts

Tim McHugh – William Blair

Jose Pun – Macquarie

Gillian Chung – Morgan Stanley

Wendy Huang – Standard Chartered

William Huang – Barclays Capital

Operator

Good morning, ladies and gentlemen. Thank you for holding. Welcome to the 51job, Inc. Second Quarter 2013 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, [Kaye]. And thank you all for attending this teleconference to discuss unaudited financial results for the second quarter ended June 30, 2013.

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 first quarter 2013 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 third quarter of 2013, 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 third quarter of 2013; any accounting adjustments that may occur during the quarterly close; fluctuations in the value of the renminbi against the US dollar and other currencies; behavioral 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 volatilities; introduction by competitors of new or enhanced products or services; price competition in the market for the various human resource services that the company provides in China; acceptance of new products and services developed or introduced by the company outside of the human resources industry; and fluctuations in general economic conditions.

For additional information on these and other factors that may affect the company’s financial results, please refer to the Risk Factors section of the company’s filings with the Securities and Exchange Commission. 51job undertakes no obligation to update targets prior to announcing final results for the third quarter of 2013 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 may 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 a review of the second quarter of 2013, followed by Kathleen with a detailed presentation of our financial results. Then I will discuss current market and operating conditions as well as our guidance for the third quarter. Finally we'll open the call to your questions.

After the seasonality of a late Chinese New Year which affected our first quarter results, we captured, as expected, a solid conclusion to the recruitment period in the second quarter. We also observed, as expected, the return of a healthy growth trajectory to our other HR services area. As a result, total revenues for the second quarter came in at RMB404 million and non-GAAP EPS at RMB2.28, all within our forecast ranges.

Building on the momentum of an active post Chinese New Year period, market demand for our online recruitment services maintained a positive trend during the quarter. Through strengthened sales and marketing efforts, we made further strides in expanding our corporate customer base, transacting with an additional 46,000 unique online employers compared to the year-ago quarter. This marks the fourth consecutive quarter of accelerating growth in this key operating metric as our stepped-up investments in sales accounts and marketing activities are bearing fruit across all geographies.

Customer acquisition remains our primary and foremost strategic initiative. While this recent large influx of online employers does drag down average revenue per customer, we continue to favor volume growth as it drives the network effect of our platform, raises brand awareness, optimizes operating efficiency, and increase future upselling as well as cross-selling opportunities.

In line with expectations, our other HR services area rebound in the second quarter without any lingering effect from the late Chinese New Year. We saw a resumption of solid customer demand as employers increase their adoption and usage of our business process outsourcing, training and other services.

We remain committed to the development, delivery and expansion of these services which we are confident will create substantial long-term revenue growth for the company. We believe one of our strongest competitive advantage in the industry is to close integrated sales and customer service approach for our full suite of end-to-end HR solutions.

Finally, print revenues continue to decline meaningfully as we get closer to completing our transition away from this business. In June we eliminated the edition of 51job Weekly in Guangzhou, leaving just five cities where we currently have print operations. We expect to terminate more publications in the coming quarters.

In general, our business performed well in the second quarter as we pushed ahead and make progress on executing our strategic plan.

I would now turn the call over to Kathleen for a detailed financial discussion.

Kathleen Chien

Thank you, Rick. In my following presentation, please be aware that all financial numbers are in our reporting currency of the Chinese renminbi unless otherwise stated.

Our total revenues for the second quarter of 2013 were approximately RMB404 million, representing a 12% increase over the same quarter in 2012.

Our online revenues for the second quarter grew 14% year over year to nearly RMB270 million, driven by an increase in the volume of employers, which was partially offset by a lower ARPU. The number of unique employers using online services increased 25% year over year to more than 231,000 companies in the second quarter of 2013, a new quarterly high for us. However, due to this meaningful volume growth and the fact that new employers to our platform typically purchase introductory or lower-priced packages, our online ARPU decreased 9% compared to the year-ago quarter as a result of this mix shift.

Our print advertising revenues continued to decline as we manage a transition away from this business. Our revenues decreased 50% from the year-ago quarter to RMB11 million and the number of print advertising pages in the second quarter of 2013 decreased 47% to approximately 350 pages. The print business contributed less than 3% of total revenues in the second quarter and we expect the percentage to further diminish going forward. We forecast that the contraction of print revenues will be steeper in the third quarter in the ballpark of a 70% decrease year over year.

After a slow first quarter affected by the late Chinese New Year, our revenues for other HR services returned to a stronger growth trajectory as we expected in the second quarter. Our other HR revenues increased 21% year over year to RMB124 million, primarily due to the demand for our outsourcing and training services.

Our gross profit grew 14% to RMB286 million and gross margin improved more than 100 basis points to 73.7%. Included in the cost of services in the second quarter was the higher share-based compensation expense in the amount of RMB2.4 million.

Sales and marketing expenses increased 25% year over year to approximately RMB111 million in the second quarter, primarily due to the higher employee compensation expenses, headcount additions and greater advertising and promotion expenses. Included in sales and marketing expenses was share-based compensation expense of RMB2 million in the second quarter.

We plan to continue our stepped-up sales and marketing spend throughout the rest of the year, but we expect these expenses to all stay within the range of the 25% to 30% of revenues, which is in line with our historical practice. Most likely though that we expect to be on the higher end of this range.

G&A expenses for the second quarter were RMB49 million, an increase of 13% from the year-ago quarter due to higher employee compensation, office and depreciation costs. Our share-based compensation expense included in G&A increased to RMB10 million in the second quarter of 2013 compared with RMB8 million in the same quarter of the prior year.

Our operating income for the second quarter of 2013 increased 6% year over year to RMB125 million. Our operating margin was 32.3% compared with 34.3% in the same quarter of the prior year. Excluding share-based compensation expense, operating margin was 36.2% compared with 37.5% in the year-ago quarter.

Net income for the second quarter increased 4% to RMB119 million compared with RMB115 million in the same quarter of 2012. Our fully diluted earnings were RMB1.99 per common share which is equivalent to $0.65 per ADS. Excluding our share-based compensation expense, loss or gain from foreign currency translation and the related tax impact, our non-GAAP adjusted net income increased 9% year over year to RMB136 million in the second quarter. Our non-GAAP adjusted fully diluted earnings per common share were 2.28, which is equivalent to $0.74 per ADS.

And turning to our balance sheet, we maintain a strong cash position and ended the June period with cash and short-term investments totaling RMB2.87 billion, equivalent to approximately $468 million.

In July we completed the acquisition of a new office building in the city of Wuhan to accommodate our growing sales and customer service operation. We entered into the agreement with a seller for this building in 2011 while it was under construction still, and had already made several installment payments toward this purchase in the years 2011 and 2012. The final total purchase price for the 12,900 square meter facility was about RMB70 million, of which a remaining balance of RMB7.6 million was paid this year.

The purchase is completely funded from our existing cash resources. And installment payment paid prior to our taking ownership to the facility had been included under other long-term assets on our balance sheet. Now that the transaction has been fully completed, the entire purchase price of the building has been recategorized under the Property & Equipment line item on our balance sheet. We are currently making plans to outfit and furnish the new Wuhan building with occupancy expected to begin in mid to late 2014.

I'll turn the call back over to Rick now.

Rick Yan

Thank you.

Over the past few months, some weak Chinese economic data including the slowdown in the GDP growth rate [has stirred] renewed concern about the country's economic outlook and the potential impact on the recruitment market. From what we have observed about employer behavior so far this year, our assessment of the market sentiment that we primarily participate in which will be white collar and service sector recruitment has stayed positive. Direct feedback we have received from enterprises continues to be favorable regarding the white collar hiring plan for 2013.

Results from our most recent survey of 22,000 corporates across the various industries and company sizes show that nearly 80% of respondents expected to increase their hiring compared to the year-ago quarter, a higher percentage than a similar study we conducted three months ago. We remain optimistic about market additions and are moving forward with executing our strategic objectives for the year.

More importantly, looking longer term, we believe the Chinese leadership's clear commitment and emphasis on the development of the service sector will drive greater need for white collar talents, which will open up more possibilities for our products and services.

Our number one focus is on expanding our customer base and extending our market leadership position. A very encouraging trend has been the acceleration of the growth rates of unique online employers. Our increased sales and marketing efforts such as greater headcount additions are yielding solid returns as customer count is growing at its fastest pace in two years. And what makes us proud is that we are doing this while maintaining financial discipline. Our margins remained at a healthy level as we balance investments necessary for our long-term growth with consistent near-term profitability.

On the product front, our social function and mobile apps are increasing interconnectivity between the employers and jobseekers. Since we launched the [XEN] function two years ago, more than 5 million users have joined corporate, industry and individual [XEN Cups] of the 51job (inaudible). Also our mobile apps have now been downloaded and activated on the nearly 9 million devices, as well as being recognized as the top app in the recruitment space according to iResearch end-user tracker. We are working on more functions which are focused on raising user engagement and increasing product effectiveness.

On our last conference call we discussed that some upcoming regulatory changes may affect demand for our business process outsourcing services as well as how we deliver those services to customers. The amendment to the PRC labor contract law officially went into effect last month, on July 1. However, as we surmised, there have not yet been any definitive implementation guidelines issued by the local government on how to apply the amendment. As such, our BPO services are operating as normal and usual. We maintain an open dialogue with the relevant governing bodies and monitoring developments closely.

While it is not possible to foresee if, when and how we may be affected by the new regulations, we believe we can work quickly with customers and local authorities to make changes in a timely manner should any be required. We remain confident in the potential of the HR outsourcing market in China as we actively participate in its ongoing evolution and development.

Turning to our guidance, based on current conditions and also factoring in a meaningful decrease in print advertising revenues, our total revenue target for the third quarter of 2013 is in estimated range of RMB405 million to RMB420 million.

Although non-GAAP fully diluted EPS target, our estimated range is between RMB2.1 to RMB2.25 per common share, please note that this non-GAAP EPS range does not include share-based compensation expense, gain or loss from foreign currency translation, nor their related tax impact.

Total share-based compensation expense is expected to be between RMB18 million and RMB19 million for the first quarter. This guidance reflects our current forecast which is subject to change.

Overall our second quarter results demonstrate the continued progress we are making in realizing our strategic growth objectives. We are strengthening our leadership in the online recruitment market while at the same time further building our presence and capabilities to capture the emerging outsourcing opportunity. We believe that we are well-experienced, prepared and positioned to cement ourselves with the core of HR services vertical in China.

That concludes our presentation. We'll be happy to take your questions at this time. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions).

The first question comes from Tim McHugh from William Blair. Please go ahead.

Tim McHugh – William Blair

Yes, thank you. I wanted to first ask you if you could elaborate a little bit more on the sales and marketing spending. I guess what are you accelerating? Is it related to the Wuhan call center or just more broadly? I guess that would be helpful.

Kathleen Chien

Hi, Tim. On the sales and marketing front, I think we're actually accelerating hiring in general across various geographies, so the step-up effort on the sales side is not just related to the Wuhan call center specifically, it is actually just that we've been stepping and actually making more hiring on the sales side.

Tim McHugh – William Blair

Okay. And so it's direct kind of sales people, not marketing or other types of spending that's driving it up?

Kathleen Chien

Led by the hiring of the sales headcount, yes. There are some increases in marketing spending as well, but in terms of the primary driver, it's actually sales headcount.

Tim McHugh – William Blair

Okay. And then the revenue per customer for the online recruitment business, I recognize new customers tend to spend less, but if you look at the new customers coming, are they any different than your typical customer, meaning are they smaller, are they, for some, most likely to spend or do you think it's purely a timing issue of having more new customers come in?

Kathleen Chien

I would say that, in general, that as we continue to penetrate deeper into the addressable market of customers, that we do expect that there will be less and less big customers that we haven't touched, if you will. But certainly we think that a lot of it is the first engagement, first time they're using us, so therefore that, you know, it's driven by the fact that it is a first-hand user rather than there's not -- that there is a smaller budget necessary. So it's really that, again, a first-time engagement, and we expect that they will buy short-term durations, lower-priced items or smaller packages if you will.

Tim McHugh – William Blair

Okay. And is there anything in terms of the timing of the Chinese New Year that drove some of the more short-term kind of new customers into the second quarter such that I guess it was, you know, made that number abnormally large, or I guess did you just see a broad-based kind of continued deceleration in that growth rate for new customers?

Kathleen Chien

I think that we still believe that this year the demand profile is actually more robust than it was in the second half of last year. Certainly that if you look at the difference between the first to second quarter results this year versus the first to second quarter results last year, you'll see a bigger pick-up because of the timing of the Chinese New Year. But overall we will still say that the demand profile is actually looking more robust this year versus the second half of last year.

Tim McHugh – William Blair

Okay, great. Thank you.

Kathleen Chien

Thank you.

Operator

And the next question comes from Jose Pun of Macquarie. Please go ahead.

Jose Pun – Macquarie

Hi. So I got one question on -- in terms of the new labor law. I know that you guys are saying that your outsourcing business is still growing so well, but do you still, like, do you see some old customer cutting orders or like do you still see a slowing flow in terms of the new customer from that side? Any color will be appreciated. Thanks.

Kathleen Chien

I think right now, I think it's been several months since the general guidelines were issued, and then the actual law went into effect actually on July 1. I think that there has been no visible disruption to our business and I think that, you know, obviously people are still watching the development closely, but absent of actual local guidelines being implemented and being issued, I think right now people aren't making decisions on what could be coming down the line. I think that there was a little of a kind of watch-and-observe situation, but at this point we are not seeing disruptions in market behavior or market demand [pull] being affected by it. So I would say -- I wouldn't say that there is a situation we've seen that a customer is trying to all of a sudden cut back just because there is a potential that there could be limitations to what they can do. It's just a situation where everybody is monitoring the developments very closely, but I would say there has been no disruption in the way things are being done.

Jose Pun – Macquarie

So [per the] conversation between you guys and government, like do you get a sense when more clarity can be seen down the road?

Kathleen Chien

I will be honest and say that in our conversations with government bodies, I think there has been some reluctance on their part to really try to figure out -- it's very difficult for them to think about how to implement this because to some degree, one of the key issues that's been watched is that whether or not there will be a ceiling set in terms of the percentage of employees that could be used and hired under a labor dispatch model. But I think that they're finding that there's been a lot of discussions going on and there's no clarity on what the appropriate level could be to be set if any. So I think that right now it's very unclear how that would work out. So I think the guidelines, the general broad guidelines were issued, but in terms of the local implementation guideline, we have not seen that there is a clear timetable on when that would be issued or what that number would be at this point.

Jose Pun – Macquarie

Cool. Thanks very much.

Operator

And the next question --

Kathleen Chien

Thank you.

Operator

And the next question comes from Gillian Chung of Morgan Stanley. Please go ahead.

Gillian Chung – Morgan Stanley

Hi. Thanks for taking my questions. Can you give us more color on the customer demand so far in the third quarter? Which sector do you see a stronger demand and which sector lags behind? And based on the current market conditions, do you have any plans to adjust your price? Thank you.

Kathleen Chien

Hi, Gillian. I think right now, I mean, as we've always said, we feel that, you know, there is -- demand is not sector-specific, if you will. So I would say that what we saw in the second quarter and certainly looking out into the third quarter at this point, we're not pinpointing certain sectors to being, you know, specific out-performance to pull up the average if you will. So I think that we are expecting that in general that there's going to be pretty solid demand across the board. And that's what we saw in the second quarter of this year.

In terms of the pricing, we are still looking at things and we're opportunistically looking at certain products rather than the overall increase at this point. So that's something that (inaudible) will continue to operate on.

Gillian Chung – Morgan Stanley

Thank you. And my second question is about your headcount spend. Can you please share with us your total headcount number and the sales person headcount number? And what -- how many more sales persons are you going to hire by the end of this year? Thank you.

Kathleen Chien

I can tell you the current headcount as of second quarter is about 5,150 people, of which we have over 50% basically in the sales and account management side. We do expect to be hiring more people through the end of the year, but we'll keep that number a little bit under the wraps, but in general, I mean in the better years, we look at hiring let's say 10% to 15% in the sales headcount. So we'll probably come in at a higher point on that front this year.

Gillian Chung – Morgan Stanley

Thank you.

Kathleen Chien

Thank you.

Operator

And the next question comes from Wendy Huang of Standard Chartered. Please go ahead.

Wendy Huang – Standard Chartered

Thank you. My first question is actually a follow-up on your hiring. I wonder what had triggered you to become more aggressive in terms of the hiring the sales people given the macro uncertainties.

Kathleen Chien

Wendy, I think we've actually been fairly positive I think this year so far because I think in terms of the customer that we're facing and the type of positions being recruited normally on our platform, we felt that this year has been actually consistently a fairly positive feedback that we're getting from customers in terms of the demand profile. So I understand that there's certainly different data on a macro side coming out that some people find that maybe somewhat in conflicting situation to what we're seeing as what we think is a good, you know, a fairly solid market, if you will, but we believe that the market opportunity is there for us and we still believe that that's the right investment for us to be making. So -- and certainly this year so far, we continue to believe that it's actually a much more positive environment than was last year. So that is why we are actually stepping up on sales and marketing, because we believe that there's opportunity for us to capture.

Wendy Huang – Standard Chartered

Okay. Secondly, can you maybe give me more color on the regulatory changes on the HR outsourcing business? I noticed that in the latest labor law, there are some detail rules regarding that for those companies who can send the employees to other cities, they have to have the registered capital more than RMB2 million. So that comes to the question, what percentage of your customers are using the BPO service are actually the SMEs and what percentage of your customers are actually those -- the sizable customers already met those requirements?

Kathleen Chien

Two things to clarify, Wendy. One thing is that in terms of the registered capital requirement, that's actually a requirement that's for the service providers, not for the companies using the services. So I think we believe that in terms of that development, that's actually probably a positive for us because obviously we're well-capitalized in the large companies relative to a lot of the small guys that could be operating the space. So we think that's actually a favorable development for us.

In terms of the customers using the services, I mean for us we said that, you know, to date we've been focused on medium to large-size companies in our HR business rather than the small companies because I think we've talked about the fact that we're talking about a few thousand customers using our service at this point and those are certainly the larger customers that we're going after and we want to serve because typically these are customers that would actually have staff in multiple geographies, and that will be natural target for us to go after given the service network that we actually have which is spread out across the country.

So I think in terms of just overall development, again I think the issue that we had been watching more closely is whether or not there would cap set for companies to use employees under that labor dispatch model and whether or not they would set that cap at a low percentage let's say, and that could actually maybe have some effect on our customers using services. But at this point, again, you know, there's been no percentage that's been set and there's been no disruption in how people are using the services at this point. And so, you know, at this point, we can only watch and wait and see, because there's no clear direct impact right now that's been manifested yet.

Wendy Huang – Standard Chartered

I see. It sounds the overall regulatory change is actually positive -- favorable to you guys.

Kathleen Chien

From the registration capital requirement, that's actually favorable to us, yes.

Wendy Huang – Standard Chartered

Okay. And next, I think the BPO services actually looks more volatile than previously expected. So how should I look at this part of business going forward?

Kathleen Chien

Actually I would not characterize this as being more volatile necessarily. It's just that in terms of the first quarter to the second quarter, the Chinese New Year actually had a fairly meaningful impact on how people worked on things. Because in the outsourcing business for example, you know, you start providing service to employees, so employees need to be hired first. So in terms of this year and the first quarter, given such a late Chinese New Year, people didn't really kick off their hiring until after Chinese New Year. So by the time that they got around to it, it was almost getting to the second quarter before they could actually start using our services, if you will. So you'll see that in the first quarter, it seems that's a little bit stagnant on the outsourcing side. But other than that, again, we think that this is not something that necessarily has any sort of great volatility, is something that's fairly stable relative to the fluctuations that we've seen in the past sometimes for recruitment. So I would not actually characterize the outsourcing business as being highly volatile.

Wendy Huang – Standard Chartered

Okay. Lastly, on your sales and marketing expenses and also the headcount increase, I think in the past many years, we usually see the Q4 to be the peak season for the hiring as you were warming up for the next year Q1's business. So given the slight changes in this year's hiring strategy, should we actually view Q3 as the peak season for hiring instead of Q4?

Kathleen Chien

I think we'll be steadily hiring actually throughout. So we expect to be hiring more in Q3 and we expect to be hiring more in Q4 as well I would imagine. So rather than sort of, you know, let's say waiting till the fourth quarter to make all of the hiring, we've been actually steadily hiring throughout the year. So, probably a slight difference in pattern.

Wendy Huang – Standard Chartered

Okay, great. That's very helpful. Thank you.

Kathleen Chien

Thank you, Wendy.

Operator

(Operator Instructions).

And the next question comes from William Huang of Barclays. Please g ahead.

William Huang – Barclays Capital

Hi. Good morning. Thank you for taking my call. I have two questions. My first question is on a general basis, what is the average wage inflation for this year that you see versus last year? So what is the percentage increase roughly from your point of view?

And also my second question is about competition landscape. Can you just comment on the current competition landscape, in particular your major two competitors? And did you your actually market share stable or you saw that actually job is gaining market share recently? Thank you.

Kathleen Chien

Thank you for your questions. In terms of the wage increase, I think we stated earlier in the year also that we believe that this year the wage inflation levels will -- is actually slightly lower than it was last year. We would characterize the overall average in sort of the mid to high single digit, so, but closer to the mid single digit this year. Whereas last year we will say that it's closer to double-digit. So that would be the difference.

In terms of competitive environment, I would say that we do not think that -- in a way I would say that there is really only one major competitor rather than two major competitors in the online space now. We will just say Zhaopin is probably the only one that we look at fairly significantly that has actually presence in multiple geographies, whereas the other so-called rivals, ChinaHR, is really no longer a rival in that sense because I don’t think that their customer mine's share and, you know, is up there anymore. So -- and I think in terms of the market position, we believe that I think there's more consolidation at the top and we continue to maintain if not gain market share in that situation because of the consolidation that continues to happen. And that's how we would see the market at this point.

William Huang – Barclays Capital

Okay. So can we understand that moving forward the major potential market share gain will be kind of from smaller players, right?

Kathleen Chien

Well, certainly I think for us the opportunity in both, you know, gain versus Zhaopin and from other smaller players, so I think those are things that we could potentially gain from certainly. But I think that right now, I think we're down to one major rival at this point versus I would say, you know, if you asked us the same question two, three years ago, it will be closer to, you know, two.

William Huang – Barclays Capital

Okay. Thank you.

Kathleen Chien

Thank you.

Operator, are there more questions in the queue or should we turn the call back to you?

Rick Yan

Yes, it seems like we might have an issue with the operator. But anyway, thank you for joining us today, and we look forward to speaking with you next quarter. And we value your continued support of 51job. Thank you. Bye-bye.

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51job (JOBS): Q2 EPS of $0.74 beats by $0.05. Revenue of $65.9M beats by $2.43M. (PR)