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Executives

Linda Chien - Investor Relations

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

Kathleen Chien - Chief Operating Officer, Acting Chief Financial Officer

Analysts

Jenny Wu - Morgan Stanley

Wendy Huang - RVS

51jobs Incorporated (JOBS) Q3 2009 Earnings Call November 23, 2009 8:00 AM ET

Operator

Ladies and gentlemen, good morning and thank you for holding. Welcome to the 51jobs Inc.'s third quarter 2009 conference call. (Operator Instructions) I will now hand the conference over to Miss Linda Chien, Investor Relations Director at 51jobs. Thank you, Madam and please go ahead.

Linda Chien

Thank you, Mitch and thank you all for attending this teleconference to discuss unaudited financial results for the third quarter ended September 30, 2009. With me for today’s call are Chief Executive Officer, Rick Yan; and Chief Operating Officer and Acting Chief Financial Officer, Kathleen Chien. A press release containing third 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 fourth 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 fourth 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 fourth quarter of 2009 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 third quarter followed by Kathleen with a more detailed review of our financial results. Then I will discuss current market conditions and our guidance for the fourth quarter of 2009. Finally, we will open the call to your questions.

Driven by a rebound in market demand and more positive economic sentiments in China, third quarter results exceeded our expectations and we returned to overall revenue growth on a year-over-year basis. Revenues came in at RMB220 million, above our forecasted range of RMB198 million to RMB208 million. We saw sequential improvement in our businesses across the board in the third quarter as more employers reengaged the hiring market and tapped their budgets to purchase various account services.

Volumes for our recruitment businesses, as mentioned by the number of print advertising pages and unique employers using online services, increased to their highest level this year. In fact, more than 91,000 employers utilized some form of our online services in the third quarter, which was our largest quarterly total ever.

Although spending per online employer has yet to return to prior averages, we are encouraged by the acceleration in customer adoption and view it as an indicator of market recovery.

The combination of these small favourable market conditions with the cost realignment measures we implemented earlier this year enable us to expand margins meaningfully in the third quarter. We believe this effect of the decisive actions we took to drive efficiency and productivity has strengthened the leverage potential of our operations.

This is becoming increasingly apparent in our results as gross margin reached 62.4%, more than 250 basis points higher than the second quarter of 2009.

We also had record profit in the third quarter with non-GAAP EPS of RMB0.77 per common share, which is equivalent to $0.22 per ADS.

Innovation remains a key initiative and competitive advantage for our online business. In the third quarter, we again made solid progress with the introduction of several new online functions, including resume enhancement services, personal assessment tools, and [inaudible] benchmarking reports for job seekers. We continue to invest in product development and are exploring new monetization opportunities.

With our strong brand, focus on innovation, proven execution capability, and results driven strategy, we believe that our third quarter performance again demonstrates our commitment to achieving sustainable and profitable growth for all stakeholders.

Before I turn the call over to Kathleen, we announced today that Peter Lui has resigned as CFO due to personal reasons. Kathleen will assume responsibility for our finance and accounting operations in the interim as we search for a successor. Here's Kathleen with a more detailed financial review of the third quarter.

Kathleen Chien

Thank you, Rick. Revenues for the third quarter totalled RMB220, an increase of 5% compared to the year-ago quarter. Print advertising revenues in the third quarter were RMB77 million, a 7% decreased compared to the third quarter of 2008 but a sequential improvement from the preceding quarter. The pace of revenue decline for our print business has moderated in each subsequent quarter this year.

Print advertising pages in the third quarter were about 3,200, compared with around 4,200 pages in the same quarter last year. Although print pricing levels were similar compared to the third quarter of 2008, our average revenue per page increased approximately 21% year over year driven by the greater volume contribution from the higher price cities.

Our online revenues for the third quarter were RMB90 million, an increase of 16% compared to the same quarter in 2008. Growth in the number of unique employers using our online services accelerated in the third quarter and the figure topped 91,000 companies, increasing by 47% year over year and by 15% from the second quarter of 2009. Partially offsetting the effect of the customer growth, our average revenue per unique employer declined 21% as more companies chose lower priced products and remained conservative with their overall expenditure levels.

Revenues for other HR services increased 9% year over year to approximately RMB52 million in the third quarter. The growth was driven by an increase in demand and revenues for our HR outsourcing services, which was partially offset by the lower revenues from our executive search and training services.

Gross margin for the third quarter was a record high 62.4% compared with 52.7% in the third quarter of 2008, and 59.8% in the second quarter of 2009. Our margin expansion was primarily due to improved economies of scale and operating leverage resulting from the cost controls and efficiency measures we implemented earlier this year. Included in cost of services in the third quarter was share-based compensation expense of RMB1 million.

Sales and marketing expenses grew approximately 7% to RMB53 million in the third quarter, due primarily to an increasing commissions resulting from higher sales levels as well as greater advertising expenses. Please note that due to the Beijing Olympics last year, we intentionally reduced advertising activities in the year-ago quarter and thus third quarter 2009 advertising spending was similar to second quarter 2009 levels.

Included in sales and marketing expenses was share-based compensation expense of approximately RMB900,000 in the third quarter, For the fourth quarter though, we expect sales and marketing expenses will increase as we host year-end customer events, conduct marketing activities, and begin preparations for the Chinese New Year period. This spending is in line with our historical practices for the fourth quarter in past years.

Our G&A expenses for the third quarter was approximately RMB36 million, compared with RMB33 million in the third quarter of 2008, mainly due to higher employee compensation, rental fees, and also depreciation expenses. Share-based compensation expense included in G&A in the third quarter was RMB4.5 million.

Operating income for the third quarter of 2009 increased 82% over the year-ago quarter to RMB40 million. Other income in the third quarter included tax subsidies in the amount of RMB7.4 million compared to RMB2.9 million in the same quarter of 2008.

Our effective tax rate for the third quarter was 30% compared with 7% in the third quarter of 2008, which was lower last year due to an adjustment for the cumulative impact of certain tax changes for some of our Shanghai based subsidies in 2008.

Net income for the third quarter was approximately RMB36 million compared with RMB28 million in the year-ago quarter. Our fully diluted earnings were RMB0.65 per common share, which is equivalent to $0.19 per ADS.

Excluding share-based compensation expenses and foreign currency translation loss, our non-GAAP adjusted net income was RMB42.5 million in the third quarter. Non-GAAP adjusted fully diluted earnings per common share for the third quarter were RMB0.77 or $0.22 per ADS.

And turning to our balance sheet, our cash position remained very strong as we increased our cash and short-term investments to RMB1.2 billion, or approximately $172 million. Our short-term investments also consists of certain certificate of deposits with maturities of less than one year held in banking institutions in China.

In the third quarter, as part of the share repurchase program approved by our board of directors and shareholders in September of 2008, we repurchased approximately 274,000 ADSs from the open market for an aggregate consideration of $3.3 million, including transaction fees. To date under the program, we have repurchased approximately 795,000 ADSs for a total of $7 million. We are authorized to repurchase up to $25 million worth of outstanding ADSs but the amount of repurchase we can make are subject to daily trading volume and other regulatory restriction.

Now I will turn the call back over to Rick.

Rick Yan

Thank you. From our observations, we believe that the hiring market in China has begun to show signs of a recovery. Over the past few months, we have seen an improving up-tick in recruitment activity with more employers hiring and an increase in the volume of job postings. While it is difficult to assess whether this greater activity comes from the release of pent up demand or the fulfillment of new hiring needs, the indicators have been positive and we are highly encouraged by this trend.

Our customers are increasingly echoing a sentiment of back to business, or back to normal. However, as the fourth quarter is traditionally a seasonally weak quarter for recruitment, we will be closely monitoring the period leading up to and immediately following the Chinese New Year holidays next February for an important gauge of market demand. As many of you know, the tone and level of recruitment activity during the Chinese New Year period provide us with the first key indicators for future demand and annual outlook. This data will be especially critical in 2010 as we assess the strength and speed of market recovery.

The road ahead may still prove to be bumpy but we are confident that our businesses are well positioned competitively to capture revenue opportunities as market conditions improve. During the downturn, we have continued to invest in technology and product development and we have a pipeline of new online services for rollout and monetization next year.

In addition, the establishment of our new [Wuhan] call center is on track and expected to be operational by early next year to provide additional customer service and support.

We not only lead the industry in terms of the quality of recruitment information but also more importantly in the quality and effectiveness of our services.

Turning to our guidance, our total revenue target for the fourth quarter of 2009 is in the estimated range of RMB215 million to RMB225 million. Our estimated non-GAAP fully diluted EPS target is between RMB0.58 to RMB0.68 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 focus, determination, and execution, we believe we have strengthened our business fundamentals and meaningfully improved our operating leverage during this year of challenges. As we emerge from this period, we are more confident than ever in the long-term potential of the company.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Jenny Wu with Morgan Stanley.

Jenny Wu - Morgan Stanley

My first question is regarding your margins and the way your margin is steadily improving in the past three quarters. You mentioned it is mainly due to the strengthening in operations and results and location, plus the cost to control. I'm just wondering, anything new on this front in 3Q? Meanwhile, how sustainable this matter could be, especially for the cost control because I remember, your cut-off like 5% of employee in the first half of '09, so how many employees you are having now? And when the economy recovers, are you going to add back more? And so related to this, what kind of margin trend should we expect? Sorry for such a long question.

Rick Yan

Thank you for your question. In terms of the cost control, I think the way we should look at that is this is happening in two ways -- one is the business slow down at the fourth quarter of 2008 and also at the beginning of 2009, at the same time there was also an accelerated transition from our print business to the online business. So we were -- at the beginning of the year, we were facing two challenges -- one is the slowdown in the market demand and also an accelerated shift from print to online. So a lot of the costs realignment measures that we took not only relate to the slowing of market demand but also related to realigning our cost structure to the business mix that we have.

In other words, we -- the online revenues are still growing but the print revenue in the first quarter of 2009 was dropping more than 40% compared to the first quarter of 2008, so a lot of the cost alignment measures were also taken on the print cost structure, put it this way. So the efficiency measure, so those measures has two impacts -- one is because we are more efficient now, our margin improved but also because we now have a higher product mix in '09, we are also having a higher gross margin. So that's the background in terms of why our margin improved -- again, two reasons, one is the '04 efficiency improvement that we took and also a product mix shift into more online business for our total revenue.

You also -- the second question you have is about employees. If you look at the employee count, we have now more than 3,800 something employees. There is a -- we have not done any redundancies at the company. We have attritions over time and over the past few quarters, our employee count will reduce gradually.

If you look at the mix, I think there were more reductions in terms of the marketing merchandising functions because a lot of our headcount relates to merchandising were print driven -- many of the merchandisers were dealing with the newsstands and were helping us to distribute the 51jobs Weekly into the newsstands. So we would expect that to realign the cost structure of our print business, there were more reductions in terms of the merchandising people that we have.

Our customer service, you know, customer service people didn’t change that much compared to the other functions so overall headcount we are down. The biggest jobs were mostly in the merchandising front. Sales people were dropping a little bit because we need to maintain certain productivity levels and this is actually a good time to kind of wipe out the underperformers, put it this way. So yeah, we have some -- we had a gradual decrease in employee headcount and in terms of whether the headcount would expand going forward, I would say that as we are building the call center in Wuhan, we would expect that there would be additional headcount at the call center when the call center starts operations beginning of next year. So yes, we would look at our cost structure continually and we will align our cost structure as needed, either for efficiency measure improvement or to capture additional growth opportunities.

Jenny Wu - Morgan Stanley

Okay, very well. So net net, what kind of margin trend should we expect going forward?

Rick Yan

If you look at our margin trends, I think 2008 was a very interesting year. Our gross margin as you can see has been improving steadily from the mid 50% to this quarter, we are now at over 62%. And if you look at our operating margin, again our operating margin is now running at close to 20%. That has actually has a very big improvement, so I think if you look at the margin trends, it will be -- I think it would follow -- we are still heading in the same direction we expect the margin trend to -- we maintain the current margin trend, the margin profile and we would look for additional margin improvement opportunities as the operating leverage in the business has increased because of some of the actions we took earlier in the year.

Jenny Wu - Morgan Stanley

Okay, very well. And a related question, where the economy is recovering, what is your expansion plan, especially on print business and other HR services?

Rick Yan

What is our plan -- I think our plan is to satisfy customer needs as we -- as competitive and as cost efficient as we can. If the market recovers, we are now seeing more recruitment demand. As you can see for online, we now transact with over 91,000 employers, unique employers in the quarter. And I am sure some of those employers with other needs, like other HR services, so we will continue to satisfy customer needs by cross-selling and develop additional product and services that are competitive in the marketplace.

So for print, I think if you look at our print revenue, again it grew sequentially although year over year it is still down 7% but sequentially it grew from last quarter's RMB67 million -- it grew by more than RMB10 million. So I think the adjustment in the print -- a major step has been taken to adjust the cost structure we have in the print business and I think at this stage, we see that the print business is probably stable at this level, so yeah, there are still markets and there are still customers who would prefer the print product and we will continue to serve them and we will continue to look for opportunities to cross-sell other HR services to our existing customer base.

Jenny Wu - Morgan Stanley

So in other words, so the print business, you mean the geographic expansion in the coming years, right?

Rick Yan

I think given the -- at the beginning of the year because of the financial crisis, we were seeing an accelerated shift from print to online, so at this stage, I don’t think we have plans to expand our print products to additional cities, and we are going to be focused more and more on the online products, as you can tell from our financial results in quarter three.

Jenny Wu - Morgan Stanley

Okay. Thank you. And then my last question is on competition -- we saw many new players entering into this online recruiting sector. Would you please update us your observations for the competitive landscape, such as any change on your market share and who would be your key rivals and what type of challenge does the sector face going forward?

Rick Yan

I am not sure there's a lot of new entrants into the online recruitment market recently because we are recovering from a financial crisis and also the market is already very competitive, as you know, other than 51jobs -- there is China Job, there is [Job Ping] in the marketplace. As we know, the other two players are still losing quite a lot of money so I am -- I wouldn’t characterize the market that there are a lot of new entrants into the marketplace because the competitive landscape is already pretty severe, put it this way.

The competitive environment hasn’t really changed. We are still competing with the same players, China Job, Job Ping from available third party reports and also their parent companies, public financials. They continue to lose a lot of money, so I don’t think the competitive situation has changed that much and I think our competitive position probably has strengthened a little bit because of our focused execution. Now we have -- now we are making more money, we have more resources to invest, and we will continue to execute and it will maintain and improve our market position.

Jenny Wu - Morgan Stanley

Okay. Thank you very much. That's very helpful.

Operator

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

Wendy Huang - RVS

Good evening. Thanks for taking my questions. My first question is regarding your 4Q [inaudible] guidance, if we [exclude the tax subsidy] that you achieved in Q309, so just try to clarify that your 4Q09 guidance implies a continuing margin improvement in the fourth quarter. Is that -- is my understanding correct?

Rick Yan

Yes, we had a tax subsidy of RMB7.4 million in the third quarter and when we -- well, if you translate that into EPS, it's roughly around RMB0.10 per common share, so in the third quarter, we made -- non-GAAP we made RMB0.77 so yes, that has been taken out when we gave the guidance for the fourth quarter, as you can -- as we said earlier, the guidance, the earnings guidance for the fourth quarter was RMB0.58 to RMB0.68 per common share, so yes, the 7.4 million subsidy has been taken out, which has roughly an impact of around RMB0.10 per common share and normally as Kathleen explained in the remarks, we would have higher marketing and promotional spend in the fourth quarter because there is a lot of customer events towards the end of the year, so we expect also a bit of a higher marketing spending in the fourth quarter and that is why the guidance is RMB0.58 to RMB0.68 per common share, compared to what we make in the third quarter, which was RMB0.77 per common share.

Wendy Huang - RVS

So taking the higher dollar expenditure in marketing activity in the fourth quarter, you still expect a sequential margin expansion in Q4?

Rick Yan

I'm sorry, you -- the line was not very clear. I didn’t hear your question.

Wendy Huang - RVS

Taking the higher dollar expenditure in marketing activities, you still expect Q4 operating margin to improve sequentially?

Rick Yan

The operating -- well, no, if you look at --

Wendy Huang - RVS

You just mentioned you --

Kathleen Chien

We expect higher operating expenses.

Wendy Huang - RVS

I'm sorry? You just mentioned that you will increase the sales and marketing expenditure in Q4.

Kathleen Chien

Traditionally fourth quarter is a high marketing quarter, so I don’t think it is comparable to look at third quarter versus fourth quarter in that sense, so I think if you look at our historical spend, usually in the fourth quarter actually -- it is actually a lower margin quarter if you will, because comparatively speaking historically the fourth quarter tends to be a little bit slower than the third quarter while expenses are higher, so therefore you will see some margin compression from quarter to quarter but I think we are really looking at year-over-year comparisons to be more fair, rather than think about it as third quarter to fourth quarter because seasonalities in this quarter in terms of spending and also revenue patterns.

Wendy Huang - RVS

Okay, and then my second question, if we look at fourth quarter 09 it is clearly a weak seasonality, so for which segment do you expect to see stronger seasonality and which do you think is [inaudible]?

Kathleen Chien

I'm sorry, Wendy, I couldn’t hear you at all.

Wendy Huang - RVS

Can you hear me better?

Kathleen Chien

Can you repeat your question?

Wendy Huang - RVS

My question is for Q4, you should see the weak seasonality so could you give some color maybe on difference segments performance in Q4 and what kind of elements you have taken into this kind of guidance?

Kathleen Chien

I think actually in terms of the overall picture from a top line perspective, that should be similar trends as Q3 because I think you see that usually in the fourth quarter, everything kind of slows down, if you will. I think that is kind of across the board just because a lot of people do kind of close shop, if you will, toward the end of the year because they have actually made their hiring, they are kind of closing their books and what not. So I do think that is across the board. I don’t think that certain sectors will be overly affected versus others.

I think if you look at the business so far this year, print still continues to experience the deepest cut, if you will, and that's really the business that suffers the most but that's consistent throughout each quarter of this year, even though the gap has narrowed, if you will. And if you look at the online performance, it was actually also down earlier in the year but it has kind of steadily moved up. So I think there is sort of differential growth rate between the different segments, if you will, as usual. So I think that in terms of looking at the different businesses contribution, I think that the composition should be similar to Q3, although I think overall marketing expenditure or overall operating expenses will be higher in the fourth quarter because there are certain elements and activities and other things that will be done in the fourth quarter that will actually be done in preparation to welcome in the new year.

Wendy Huang - RVS

My final question, in Q3 you have seen a strong growth in the number of online customers. Is it new customers, new online customers mainly from the existing offline customers or is it from the fresh new customers?

Kathleen Chien

I think it is actually a combination. I do think that we are now seeing more people coming directly into online as well, so they are not necessarily print customer transition to online but they are just customers that are new in the market place that have just come directly into the online product.

Wendy Huang - RVS

Okay, great. Thank you.

Operator

(Operator Instructions) Ladies and gentlemen, we have no more questions at this time. I would now like to turn the conference back over to management for any final comments.

Rick Yan

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

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