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51job Incorporated (NASDAQ:JOBS)

Q4 2009 Earnings Call

March 4, 2010 7:00 pm ET

Executives

Linda Chien – IR

Rick Yan – President, CEO and Co-Founder

Kathleen Chien – COO, Acting CFO and Co-Founder

Analysts

Catherine Leung – Citigroup

Wendy Huang – RBS

Philip Wan – Morgan Stanley

Operator

Good morning and good afternoon, good evening, ladies and gentlemen. Thank you for holding. Welcome to the 51job Incorporated fourth quarter and fiscal year 2009 conference call. At this time, all participants are in a listen-only mode. After the presentation, there will be an opportunity to ask the questions. (Operator Instructions)

I will now hand the conference over to Ms. Linda Chien, the Investor Relations Director of 51job. Thank you, madam. Please go ahead.

Linda Chien

Thank you, Ming and thank you all for attending this teleconference to discuss unaudited financial results for the fourth quarter and fiscal year ended December 31st, 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 fourth quarter and full year 2009 results was issued earlier today and a copy may be obtained through our website at ir.51job.com.

Before we begin, I would like to remind you that during this call, statements regarding targets for the first quarter of 2010, 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 first quarter of 2010; any accounting adjustments that may occur during the quarterly close; fluctuations in the value of the renminbi against the U.S. dollar and other currencies; behavioral and operational changes of customers in meeting their human resource needs as they respond to the 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. 51job undertakes no obligation to update targets prior to announcing final results for the first quarter of 2010 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. Welcome to today's call. I will begin with an overview of our performance in the fourth quarter, then full year 2009, followed by Kathleen with a more detailed review of our financial results. Then I will discuss current market conditions, as well as our prospects and guidance for the first quarter of 2010. Finally, we will open the call to your questions.

Despite a challenging start to 2009, the year ended extremely well as our performance improved with each subsequent quarter. Although the fourth quarter is traditionally our weakest quarter due to seasonality, we had our best results of the year with revenue exceeding expectations at RMB226 million or approximately $33 million.

We continue to observe a strengthening trend in market demand in the fourth quarter. The level of recruitments actively increased amid growing business confidence in the Chinese economy, which revitalized corporations in their hiring plans. Assisted by decreased tax rate, we generated record profits for the quarter with non-GAAP net income of RMB53 million or approximately $8 million.

Gross margin improved to almost 63%, also another record for the company as our efforts to control costs, streamline processes, and increase the efficiency have created quicker economies of scale in our operating model.

The highlight of the fourth quarter was clearly the performance of our online business. Online revenues totaled RMB97 million for the quarter, a 34% year-over-year increase and comparable to the growth rate we saw prior to the global financial crisis. We are also seeing very robust growth in the number of employers using our online services. 95,000 companies purchased at least one type of online service in the fourth quarter, an increase of 66% year-over-year.

Customer adoption for online services has accelerated coming out of the crisis and with our realigned and improved service infrastructure, we are extremely well positioned to capitalize on this trend and extend our leadership position in the online recruitment market in China.

Looking at the full year's results, although our revenue decreased 5% over 2008 due to the impact of the global financial crisis, the decisive steps we took to actively steer our businesses during the downturn enabled us to grow operating income by 24%. More importantly, we did not allow unfavorable market conditions to deter us from making critical investments in our business in 2009.

We purchased office space for a new call center in Wuhan last June and we are excited to announce that the facility is already up and running. Over the past 12 years, we believe we have established the strongest brand in our industry and we are proud to announce that the 51job brand was recently recognized as a well-known trademark by the PRC State Administration for Industry and Commerce. Now in the ranks of Yahoo, Apple and Baidu, we now have quicker protections and more recourse over trademark infringement in China. We are the only brand in the HR industry to have received this recognition.

We ended 2009 on a high note both financially and operationally, carrying solid momentum into the New Year. Our confidence is high for greater return to our shareholders in a successful 2010.

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

Kathleen Chien

Thank you very much, Rick. Revenues for the fourth quarter totaled RMB226 million, an increase of 15% compared to the year-ago quarter. Our print advertising revenues in the fourth quarter were about RMB65 million. Although print volume decreased year-over-year, our higher average revenue per page offset the impact and print revenues increased 8% compared with the fourth quarter of 2008.

We believe that print revenue levels have now largely stabilized after significant declines we saw in late 2008 and early 2009. Strategically, we continue to take actions to optimize our print operations, which may include a termination of publication contracts in certain cities. We seized the production of the local edition of 51job Weekly in Tianjin in January of this year and in Hefei this month, but we are maintaining our sales offices and staff in both of these cities for sales of online and other services, as well as offering local customer service support.

Online revenues for the fourth quarter were RMB97 million, an increase of 34% compared to the same quarter in 2008. The number of unique employers using our online services grew to 95,000 in the fourth quarter, representing a very, very strong 66% year-over-year growth. However, our average revenue per unique employer declined in the fourth quarter of 2009 by nearly 20% compared to the year-ago quarter, as most of the first-time customers typically choose lower-priced products and companies in general remained very conservative with their overall expenditure level in 2009.

Revenues for other HR services were relatively unchanged compared with the fourth quarter of 2008 at RMB64 million. However, excluding service fees that we received from newspaper contractors, other HR revenues increased approximately 8% year-over-year, driven by the growth in our outsourcing business, which was partially offset by the lower training and other revenues.

Gross margin for the fourth quarter was 63% compared with 51% in the fourth quarter of 2008 and 62% in the third quarter of 2009. The continued margin expansion was primarily due to the improved economies of scale and operating leverage, resulting from the cost control and efficiency measures that we implemented in early 2009. Included in the cost of services in the fourth quarter was share-based compensation expense of approximately RMB1 million.

Our sales and marketing expenses increased approximately 8% to RMB63 million in the fourth quarter, due principally to an increase in commissions resulting from higher sales levels, which then was partially offset by lower travel and entertainment expenses. Included in sales and marketing expenses was a share-based compensation expense of approximately RMB900,000 in the fourth quarter.

Our G&A expenses for the fourth quarter were approximately RMB29 million, a slight decrease compared to the RMB30 million in the fourth quarter of 2008. This is mainly due to lower office expenses and professional fees, which were partially offset by higher rental and depreciation expenses. Share-based compensation expense included in G&A for the fourth quarter was RMB4.3 million.

Operating income for the fourth quarter of 2009 increased to RMB42 million compared with RMB6 million in the same quarter in 2008. During the fourth quarter of 2009, we received notification from the relevant tax authorities that one of our main subsidiaries had qualified and that was approved as a High Technology Enterprise under the PRC Tax Law.

Consequently, the tax rate for this entity in 2009 for the full year was reduced from 20% to 15% in Shanghai and from 25% to 15% in other localities in which it operated. The cumulative impact of this tax rate change was reflected in the fourth quarter, which resulted in an effective tax rate of only 1% for the fourth quarter overall.

In 2010, we expect our effective tax rate in the low-20s range on our non-GAAP results for our consolidated operations. The effective tax rate for our reported GAAP results will be higher than this range as certain items such as share-based compensation expense and foreign currency translation incurred by our non-Chinese entities are not deductible under the PRC Tax Law.

Net income for the fourth quarter was approximately RMB46 million compared with RMB7 million in the same quarter of 2008. Fully diluted earnings were RMB0.84 per common share, which is equivalent to $0.24 per ADS. Excluding share-based compensation expense and foreign currency translation loss, our non-GAAP adjusted net income was RMB53 million in the fourth quarter. Non-GAAP adjusted fully diluted earnings per common share for the fourth quarter were RMB0.95 or $0.28 per ADS.

Now, turning to our full year results, our total revenues for 2009 decreased 5% to RMB817 million. Despite the revenue decline though, our gross margins for 2009 expanded to over 60% compared with 54% in 2008, driven primarily by cost control and efficiency measures.

Our income from operations increased 24% to RMB120 million and net income increased 47% to about RMB113 million in 2009. Excluding share-based compensation expense and foreign currency translation loss, our non-GAAP adjusted income increased 15% to RMB140 million in 2009. Non-GAAP adjusted earning per common share for 2009 was RMB2.51 or $0.73 per ADS.

Turning to our balance sheet, our cash position remains strong as we can increase our cash and short-term investments to RMB1.2 million or approximately $178 million at current exchange rate. Our short-term investments consist of certificate of deposits with maturities of less than one year held in banking institutions in China.

In the fourth quarter, as part of the share repurchase program approved by our Board of Directors and shareholders in September of 2008, we repurchased approximately 51,000 ADS from the open market for an aggregate consideration of about $700,000 including transaction fees. To date, under the program, we have repurchased approximately 846,000 ADS for a total of $7.8 million. We are authorized to repurchase up to $25 million worth of outstanding ADS, but the amount of repurchases we can make is subject to daily trading volume and other regular – regulatory restrictions.

Now, I'll turn the call back over to Rick.

Rick Yan

Thank you, Kathleen. We believe the adjustment we've made to our operations over the past year uniquely position us for success as customer demand improves. From our observations, the current tone of the market is favorable as our daily new job listing volumes are returning to pre-crisis early 2008 levels.

In our opinion, employers are looking to hire again and we also estimated that salaries and wages in general will also increase this year. These signs are pointing to a market recovery and greater competition for talent among companies, both of which bodes well for our prospect in 2010.

We enter the New Year as a leaner organization, more focused than ever on high growth areas in our portfolio, especially our online business. We reached a key inflection point in 2009 when the online business became our largest revenue generator. Customer acceptance and usage of online recruitment services has increased rapidly.

With our vast local sales network, complemented by our new national call center, we believe that we have the best infrastructure in the industry to capture this growing opportunity. The call center became operational before Chinese New Year holiday and currently has a staff of about 50, which we expect to increase as the year progresses according to market conditions.

Strategically, the call center enables us to tap new geographies and widen our customer base of employers in China. In addition, we believe the call center will increase our efficiency and margin profile over time by centralizing customer service and handling lower-priced transactions, thereby freeing up our local sales people to pursue quicker up-selling and cross-selling opportunities.

We are also optimistic about our HR outsourcing business this year, which exhibited solid growth throughout 2009. We continue to expand the number of companies and employees served by our network and recently strengthened our management team overseeing the development of this business.

Now, turning to our guidance, due to a late Chinese New Year holiday in 2010, we expect that the seasonal recruitment peak would not be fully captured in the first quarter and there will be a greater spillover effect on the second quarter this year. Therefore, our total revenue target for the first quarter of 2010 is in the estimated range of RMB230 million to RMB240 million.

Our estimated non-GAAP fully diluted EPS target is between RMB0.68 to RMB0.78 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.

In light of the challenges we faced and overcame in 2009, we are very pleased to have wrapped up the year with strong profitability. We believe that we are off to a good start in 2010 and we are committed to delivering another year of successful results to our shareholders.

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

Question-and-Answer Session

Operator

Thank you, Mr. Yan. (Operator Instructions) The first question comes from Ms. Catherine Leung from the Citigroup Company. Please go ahead with your question. Thank you.

Catherine Leung – Citigroup

Thanks. Good morning and congratulations on the strong quarter. I've got two questions. Firstly is of course on the demand environment. I understand that as usual, the post Chinese New Year holiday period is a particularly important quarter for you to gauge the tone for the rest of the year. Just wondering, any more details you could share with us there.

And so far, I mean, the volumes have recovered very strongly as you say, but some of the companies seem to be a little bit more price-sensitive. When would you expect some of these companies to start buying some of the higher-price packages? And I have some other follow-up. Thanks.

Kathleen Chien

I guess, in terms of just – first we focus on volume and then we look at price, because I think it's always sort of a balance between employers and jobseeker to grow. Once, I think, employers realize that the market demand is very significant and that there may be less job applicants per position, I think that would be the trigger for them to start looking at actually adding on additional service to enhance their visibility, if you will, to jobseekers on site and that's where I think we will see some more uptick in terms of the price points that people buying at.

But I think at this point in time, a week-and-a-half after Chinese New Year, I think we are really focused on looking at volume rather than price. So we will be monitoring that pretty closely and I think that we will have a better sense of that in the subsequent quarter when we actually report Q1 results.

Rick Yan

And in terms of the tone for the rest of the year, the signs we are seeing after the Chinese New Year holiday suggest that we are going back to a trend that – that's in the pre-crisis level back in the kind of early 2008. So we are seeing a return to the long-term trend that we've been enjoying before the financial crisis.

Catherine Leung – Citigroup

And do you have a sense of when – for the new job listings and when you talk with the companies, is it more kind of replacement hiring and pent-up demand or is it – are these companies actually expanding their business scope or scale and that's why they are hiring? Any sense of the drivers of demand?

Kathleen Chien

I would say that last year, end of the year, people were sort of replenishing. I think this year, we expect to see that – there are people that are going to begin some new hires.

Rick Yan

A replacement normally comes late after the first wave of recruitment. Then, there will be a lot of replacement demand coming up.

Catherine Leung – Citigroup

Okay, all right. And my second question is on your print strategy. I mean, we've discussed, I think, for awhile now the relative performance. Just wondering if you could share with us your decision-making kind of process in deciding to close down the two cities and how will this affect your first quarter guidance. Do you kind of decide to close down these cities when the revenue contribution is very minimal any way?

Rick Yan

Yes. I think the way we look at each city is we look at the number of employers and also look at the choice of recruitment channels. I think if you look at our portfolio of cities, some cities have more Internet penetration and online recruitment service is a very effective recruitment channel. But there are also cities that print remains to be an effective recruitment channel locally.

So when we look at each city, we are not exiting the city in that sense, we are just moving our services to online. And if our print publication is no longer an effective channel for recruitment services in that city, we would choose to close that.

So I think that – as Kathleen mentioned in the – in her comments, we are seeing a stabilization of our print revenues. We do not expect the same kind of decline that we saw in the past two years. So we felt that the print revenue or the print business will be more stable going forward and then – yes, there will be continued online penetration, but it would be – will be kind of analyzed and determined on a city-by-city basis. So there has been no change to our print strategy in that sense.

Catherine Leung – Citigroup

All right. The – I mean, the stabilization of the print revenues, does that indicate that the company is not actively looking to close down some other print operations in the – in some of the cities or it's still kind of – you are still continuously evaluating that?

Kathleen Chien

I think the evaluation is sort of a city-by-city decision, if you will. So I think the guidance that we gave actually reflects sort of the – takes into consideration all the changes that have been made or will be made. So that's actually inclusive – but I think that it's a city-by-city decision and I think it really – looking at what are – sort of longer term, what are the better products for us to be focusing on in a particular city and at certain cities where we don't see that – if A, there is limited upside and then secondly that there actually maybe downside, that – those are the situations where we will prompt a harder look at and we may make decisions to exit certain cities based on that.

Catherine Leung – Citigroup

All right. And last question, I was just wondering if you – since the focus will – is now, I mean, even more on the online platform, whether you have any particular initiatives to enhance your platform considering some of the moves made by your overseas competitors?

Rick Yan

Well, online has always been our key focus in terms of growth because the online business is consistently growing faster than our print business. And so – I mean, the focus on online has been something we've been doing for the past more than five years.

We mentioned in the – we mentioned that we are setting up a new call center in Wuhan, which will – would help us to expand into certain new geographies and also serve certain lower-cost segments – lower-priced segments. Also there will be an infrastructure to provide certain customer supporting services. So yes, we continue growing on the operational front, because the volume grew a lot as you can see that the number of customer – we grew the number of customer more than 60% year-over-year in the fourth quarter.

So we need to continue to strengthen our infrastructure, we need to continue to be a more selling [ph] infrastructure and we will continue to develop products and invest in technology to make sure that we continue to expand our lead in the online market segment.

Catherine Leung – Citigroup

Okay. Thank you. I'll get back in the queue.

Rick Yan

Thank you, Catherine.

Kathleen Chien

Thank you.

Operator

Thank you, Ms. Leung. The next question comes from Ms. Wendy Huang from the company of RBS. Please go ahead with your question. Thank you.

Wendy Huang – RBS

Good morning, Rick, Kathleen, and Linda. I have a few questions. First, over the past two quarters, we have seen the increasing revenue contribution from the online business. Meanwhile, we are seeing the strong margin expansion as well. I just wonder how sensitive is your gross margin or operating margin to the online revenue shift. And could you help us maybe quantify this a little bit?

Kathleen Chien

We've always said I think that we believe that the online actually has a better margin structure longer term because it is actually a national scalable platform versus print, where some of the scale is actually more on the city level. So I do think that having more online revenues does help our margin structure. But I think that 2009 – additional to that is that we took a lot of measures early in 2009 to look at our cost structure across the board, which is not just for certain businesses, which is really response to – at the time, a downturn in the market, if you will.

So I think that some of the expansion we saw in 2009 in the second half is a combination of both, but certainly I think that having more online revenues is a positive, we believe, for the long term for us in terms of the margin profile we can enjoy. And I think that – now that it looks like online will be – for the first time will be a big contributor that this is going to be a positive trend for us to enjoy.

Wendy Huang – RBS

Okay. So what will be the margin level for the other recruitments at this rate? Will it be kind of between the online and the offline business?

Kathleen Chien

I think – for now, I think others is actually something that is actually still much smaller, because within the other HR services, there are a lot of different business, if you will. So it's hard to kind of generalize, but I think certainly that they were smaller in size and smaller in scale. So each one need to continue to grow and reach its potential, if you will.

Wendy Huang – RBS

Okay. So my second question is with your revenue coming back to the high growth check [ph] and there is a strong demand from the – you are seeing a strong demand from the employee market, do you have any plan to increase your sales and marketing expenditure in 2010 in order to expand – further expand your market share?

Kathleen Chien

I think we've – Rick has already mentioned that we have actually got our new national service center in Wuhan that has already gone into operation. So that's an indication of that – our commitment to make some investments this year to capture, I think, a return of the market, if you will. So – and I think that sales and marketing actually go hand in hand. So we do expect that we will be making investment, but I hope that with the revenue uptick that the percentages won't look too bad.

Wendy Huang – RBS

Okay. Thank you.

Kathleen Chien

Thank you.

Operator

Thank you, Ms. Huang. And our next question comes from Mr. Philip Wan from the company of Morgan Stanley. Please go ahead with your question. Thank you.

Philip Wan – Morgan Stanley

Good morning, Rick, Kathleen, and Linda. Very good quarter. I have a couple of questions. Number one is the – in – 2009 is the first year that the online business is having a higher revenue contribution overall and the faster recovery in the online business, especially in the second half of '09, was this primarily due to customer shifting from offline to online or it was due to difference of the customer profile between online and offline?

Kathleen Chien

If you look at the relative growth rates in the last three, four years, online always grows faster than print, if you will. If you look at fourth quarter specifically, our online grew in the sort of the 30-plus kind of range and then print was actually in the single digits. That's kind of the relative kind of the size, but it's kind of been on – with a big gap between. But I think that the transition, if you will, when you talk about the migration, that's been something, I think, going on for a long time. So I would not characterize last quarter as anything different from the longer-term trend in the last two, three years.

So I wouldn't say that it's because of certain profile of demographics of users that are going online and that's why online seems to grow faster than the print. I think it's just – there is actually a difference in the relative growth rate between the two segments and that the migration is something that's been ongoing. So that's no different.

Philip Wan – Morgan Stanley

Sure. And my next question is, in terms of the recovery, how fast is the top-tier cities growing comparing to the lower-tier cities?

Rick Yan

Philip, one thing that's interesting is during the downturn in early 2009, we saw that all of our cities coming down at more or less the same rate. And now, a year later, we are now seeing a recovery and again funny enough, we are seeing all the cities exhibiting similar recovery of growth rates.

So in the past – we've been in business for 10 years – in the past 10 years, it seems like most of the cities are all going kind of – pretty much kind of synchronize in terms of both growth and decline. So we have not seen any differential growth rates between different cities or different regions.

Philip Wan – Morgan Stanley

Okay, thank you. My last question, let's touch base about the margin size, with the new call center up and running in this first quarter. And then how should we look at the cost impact of the new call center?

Kathleen Chien

Well, at this time I don't think that it's going to be something that's very significant. I mean, we talked about the fact that there is about 50 people working out of this service center at this point. We – out of our nearly 4,000 employees, that's a small percentage.

Overall, I think the – we talked about the cost of the acquiring the space, but depreciation we expect for that facility will actually be in the single – sort of RMB1 million per quarter. So it's actually a small impact overall in that sense. So I don't expect that it will actually dramatically change our cost structure and what the incremental costs are have already been factored into our guidance.

Philip Wan – Morgan Stanley

Okay, thank you. I'll get back to the queue.

Kathleen Chien

Thank you.

Rick Yan

Thank you, Philip.

Operator

Thank you, Mr. Wan. And Mr. Yan, there are no further questions at this time. Please continue with any final comments. Thank you.

Rick Yan

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

Operator

Ladies and gentlemen, this concludes the 51job Incorporated's fourth quarter and fiscal year 2009 conference call. Thank you for your participation. You may now disconnect. Thank you.

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