Good morning and good evening ladies and gentlemen. Thank you for holding. Welcome to the 51job Incorporation's third quarter 2010 conference call. (Operator Instructions)
I will now hand the conference over to Ms. Linda Chien, Assistant Vice President of Investor Relations. Thank you, Madam. Please go ahead.
Thank you, Mimi. And thank you all for attending this teleconference to discuss un-audited financial results for the third quarter ended September 30, 2010. 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 2010 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 these call statements regarding targets for the fourth quarter of 2010, 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 – the number of recruitment advertisements placed, sales orders received and customer contracts executed during the remaining weeks of the fourth quarter of 2010; any accounting adjustments that may occur during the quarterly close; fluctuations in the value of 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 evolving social, economic and political changes in China as well as stock market volatility; introduction by competitors of new or enhanced products or services; price competition in the market for the various human resource services that the company provides in China; acceptance of new products and services developed or introduced by the company outside of the human resources industry 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 factor 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 fourth quarter of 2010 or as a result of new information, future events or otherwise.
Now I'll turn the call over to Rick.
Thank you, Linda. And welcome to today's call. I will begin with highlights of the third quarter, followed by Kathleen with her detailed review of our financial results. Then I will discuss current market conditions, as well as our strategic objectives and guidance for the fourth quarter of 2010. Finally, we will open the call to your questions.
Successfully executing our growth initiatives, we achieved record revenues and profits in the third quarter. Revenues of RMB272 million or approximately $41 million were ahead of our forecasted range of RMB255 million to RMB265 million.
Momentum in our online business remains solid as we continue to acquire new customers during the quarter. We believe the addressable employer market is still highly underpenetrated in China and will further expand driven by economic development. We are seeing significant traction across the Board as we simultaneously add employers from existing cities and new geographies.
The number of employers using our online services in the third quarter exceeded 142,000, a 56% increase compared to the year ago quarter. On the job seeker side, we now have more than 44 million registered accounts up from 37 million at the end of last year.
With our powerful brand, high product effectiveness and unparalleled sales coverage, we are moving forward aggressively to strengthen the largest online platform connecting HR managers and job seekers in China.
We are investing in technology and driving industry innovation with the introduction of new features and functionality and continue to differentiate ourselves from the competition with a proven business model to achieve sustainable and profitable growth. As we realize the potential of the online space, we are at the same time making steady progress in the development of other HR services areas.
Revenues in this area saw another quarter of solid growth, driven by sales of our HR outsourcing services. The outsourcing market in China today remains largely latent but we believe the long term prospects are very exciting.
With the government's initiatives to upgrade the structure of the Chinese economy, new policies and new implementation measures will be introduced to advance human resource management practices and strengthen the social welfare system. It will in turn drive additional customer demand for our outsourcing services.
With our vast customer base and an extensive service network, we are well positioned to capture this great opportunity. Although, the robust rebound in market demand this year resulted in greater sales and marketing expenses, as well as headcount additions, we monitor costs closely.
In capitalizing on the scalability of our operations, we achieved record profitability in the third quarter. We set new heights with gross margin of 68.4% and operating margin of 26.8%. Non-GAAP fully diluted earnings per common share were RMB1.26, which exceeded our guidance range of RMB0.95 to RMB1.05.
One year removed from the financial crisis, our business fundamentals are strong and we are performing better than ever. We have a clear plan for our long term growth and through consistent, diligent execution we aim to extent our market leadership position and create greater shareholder value.
I will turn the call over now to Kathleen for a detailed financial review.
Thank you, Rick. Our revenue for the third quarter totaled RMB272 million, a 24% increase compared the year ago quarter. Our print advertising revenue decreased 20% to RMB62 million, compared with RMB77 million in the third quarter of 2009.
The year-over-year decline was primarily due to the discontinuation of print operations in six cities this year and the resulting decrease in page volume. Our print advertising volume in the third quarter of 2010 was 2100 pages, compared with 3200 pages in the same year ago quarter.
Strategically, we continue to assess market conditions for our print business on a city-by-city basis and may take further action to adjust our operations. This is an ongoing exercise and we have not instituted any specific timeframes or schedules for these decisions. In those cities where we have discontinued print operations, the transition of having our sales team directly focus to online recruitment offerings has been smooth.
Online revenues for the third quarter were RMB143 million, an increase of 58% compared to the same quarter in 2009. The number of unique employers using our online services totaled 142,000 companies in the third quarter, an increase of 56%. Our growth was broad based, as we added customers across all geographies and industries due to robust hiring demands.
Revenues for our other HR services increased 28% compared to the year ago quarter, to RMB67 million. This increase was led by greater demand for our outsourcing business, as well as growth in our training and executive search services.
Gross margins for the third quarter expanded to a record high 68.4% from 62.4% in the third quarter of 2009, due to economies of scale, improved operating efficiencies and a reduction in our print related expenses.
Included in cost of services in the third quarter was share based compensation expense of RMB1 million. Our sales and marketing expenses increased approximately 29% year-over-year to nearly RMB69 million in the third quarter of 2010. We incurred greater commission expenses as a result of higher sales, added headcount and increased spending in our advertising activities.
Included in sales and marketing expenses was share based compensation expense of approximately RMB0.9 million in the third quarter. In line with what we have done in prior years, we will be increasing our sales and marketing expenses in the fourth quarter.
We will be hosting a number of year end customer and promotional events, as well as increasing our headcount in preparation for the Chinese New Year seasonal peak in 2011. These additional expenditures have been reflected in our fourth quarter guidance.
Our G&A expenses for the third quarter was RMB39 million, an increase of 6% from the year ago quarter due to higher employee compensation expenses. Share based compensation expense included in G&A in the third quarter was RMB4.5 million.
Operating income for the third quarter of 2010 increased 72% to RMB69 million, compared with RMB40 million in the same quarter in 2009. Our operating margin expanded to a record high 26.8% compared with 19.3% in the third quarter of 2009.
The reduction in the effective tax rate to 16.1% in the third quarter of 2010 from 30.1% in third quarter of 2009 was primarily due to the qualification of an operating entity as a High and New Technology Enterprise in December of 2009, which will become subject to a preferential tax rate of 15%.
Also, as this entity has made greater contributions through the first three quarters of this year than had been expected in our prior tax calculations, we reflected some catch-up in our tax expense in the third quarter of this year. As a result, our tax expenses in the third quarter is lower than the expected tax rate that was applied for the first half of this year.
Net income for the third quarter increased 75% to RMB63 million, compared with RMB36 million in the same quarter of 2009. Our fully diluted earnings per common share were RMB1.1, which is equivalent to $0.33 per ADS.
Excluding share based compensation expense, foreign currency translation loss and the related tax impacts; our non-GAAP adjusted net income was RMB72 million in the third quarter. Non-GAAP adjusted fully diluted earnings per common share were RMB1.26 or $0.38 per ADS.
And looking at our balance sheet, our cash and short term investments increased to RMB1.5 billion or approximately $226 million.
Now I'll turn the call back over to Rick.
Thank you. The pace of China's economic recovery from the global financial crisis has been impressive. The level of recruitment activity this year has been extremely robust, exceeding our expectations. Based on our conversations with customers, market sentiment remains highly positive, which bodes well for 2011 outlook.
That being said, it is the case every year, the most important gauge of any market demand will come from the data and customer spending we observe in the recruitment peak following the Chinese New Year holidays, which falls in early February in 2011. Therefore we look forward to sharing more market insights with you next quarter.
We believe that one of our greatest strengths is our execution capability. We have made solid progress all year in realizing our strategic objectives. In the online business, customer acquisition has been our number one priority and we have accelerated our efforts this year by complementing our local sales offices with the establishment of the Wuhan Call Centre.
At the same time that we are handling more customer transactions than ever, the measures we have taken to streamline operations are enabling us to work more efficiently, benefiting our bottom line.
We have also entered into new geography through our call centre this year. The new city rollouts have been smooth and feedback from customers and jobseekers has been favorable.
We added two new cities in June launch [ph] Wuxi and Hangzhou in September and started self coverage of the Pearl River Delta region this week. We expect to expand into more cities in the coming quarters.
In the other HR services area, we continue to develop the next tier of services that HR managers will require as their needs or their responsibilities expand and their companies grow.
Talking about our strong sales efforts, our outsourcing business is seeing good customer uptake. Our training business is also performing well. We believe these services will be increasingly important contributors to our overall business as they gain greater customer acceptance and deepen our relationships with employers to improve cost selling opportunities.
In the prints business, we have the connections to discontinue print operations in selected cities this year. In line with changes in employer behavior, we have been managing the shift in customer usage from print to online over the past several years. As Kathleen mentioned earlier, we continue to monitor conditions on a city specific basis.
We expect that there will be a further reduction in the number of print cities, as online services become more widely used. As a result, prints contribution to our overall revenues will accordingly decline.
Now turning to our guidance. Based on current market and operating conditions, our total revenue target for the fourth quarter of 2010 is in the estimated range of RMB275 million to RMB285 million.
Our estimate non-GAAP fully diluted EPS target is between RMB1 to RMB1.1 per common share. Please not that this non-GAAP EPS range does not include share based compensation expense, foreign currency translation loss, nor the related tax impact. This guidance reflects our current forecast which is subject to change.
That concludes our presentation. We will be happy to take your questions at this time. Operator?
Thank you. Ladies and gentlemen, at this time we will now begin a question and answer section. (Operator Instructions)
The first question comes from Miss Jenny Wu from Morgan Stanley. Thank you ma’am and please go ahead with your question.
Jenny Wu – Morgan Stanley
Hi Rick, Linda and Kathleen. Thank you for taking my questions. Congratulations on another good quarter. My first question is regarding your online services. I see starting second quarter this year, the average spending per customer has been stabilized and this quarter it marched up by 2% again.
So my question in that, shouldn't we take it as a sign for the start of the pricing recovery going forward. And if so, how much upside should we expect from here and what kind of level that you're targeted to reach? Thank you.
Jenny. Thank you for the question. I think yes, you see that in the last few quarters we've been actually hovering around the 1000 kind of a mark for the average price. And I think that we've said before that, I think we will be looking at whether or not there are opportunities for us to look at pricing squeezes perhaps actually into 2011.
We think that as we continue to monitor the changes in the competitive environment and we feel that there may be opportunity to do so, but probably not much this year because we're already at the end of the year. But we will be looking at perhaps exploring more opportunities going forward in year 2011.
Jenny Wu – Morgan Stanley
Yeah. What kind of upside could we expect?
I think right now we are doing some reviews, so we'll probably have a better sense of what is going to be the expectation actually when we close the year and when we look at the market demand situation and environment for 2011. Because I think a strong indicator of what the market demand is inherently without considering the competitive situation would be just what the post Chinese New Year situation will look like. So we will be taking account of that when we actually make our decision.
Jenny Wu – Morgan Stanley
Okay. Sure. Another question is about the unique online customers. I see the volume is in the upward trend. And, what's the reason behind that and also what kind of growth you would expect for the coming year?
Well, this year so far you see that versus last year, we've been actually looking at – this quarter was about 56%. I think prior quarter was in about high 60%, 70%. So obviously compared to last year which, as you know, in the first half of the year I think the market was a lot slower. So it feels that we are maybe on a different trajectory. So we are looking at that right now.
I think prior to the financial crisis our online customer growth has actually been around the 30% mark. So we need to get a better sense of what the new trajectory will look like next year. But we think that it will be probably somewhere between the two kind of pictures.
Jenny Wu – Morgan Stanley
Okay. I remember last time you mentioned in 2009 you see the industry reaching an inflection point. And just – would you please help us understand better, what kind of indications you've noticed that makes you feel that way and what are the major drivers behind that?
I think the, sort of, the change in customer behavior has been ongoing actually for several years and I think different cities are at different stages of development.
What we have noticed though in the last year and which is important to us, is that instead of having customers come and work with us to first print and then going online, we were experiencing having more customers coming directly into online, which is part of the reason why we felt that in the markets that we were at an inflection point.
And I think at the end of last year where our total revenues for online was actually higher than print, we felt that we had actually come to a different stage in the market development.
Obviously, we continue to see an acceleration of that because of the very, very robust online market growth in terms of acquisition of new customers. So I think the fact that last year when we saw that a lot more customers were coming directly into online was really the signal that told us that we thought that the market was actually at a different stage and it was moving onto a different phase in maturity.
Jenny Wu – Morgan Stanley
Okay. Thank you very much. I’ll jump back to queue.
Thank you. And the next question comes from Ms. Wendy Huang from Royal Bank of Scotland. Thank you, madam, please go ahead with your question.
Wendy Huang – RBS
Morning and congratulations on a great quarter. My first question, given the significant tax rate drop in Q3, how should we look at tax going forward in Q4 in 2011?
For the three quarters combined cumulatively – in the first half of the year, the tax rate that we were budgeting and looking at was actually just under 23%. I think our revised outlook on that is actually looking at taking down our tax rate for the year cumulatively to about 2% lower than that, so edging close to between 20% and 21% is where we view it.
Next year, again, we'll need to look at that. We hope that we can actually maintain that momentum or even make more inroads on it. But it will really depend on the different business lines and when we actually complete our forecast of the different contributions of the different businesses, we'll have a better sense of that.
But I think right now what we're looking at for the full year 2010 is probably 2% lower than what we had looked at in the first half of the year. So closer to 20%, 21% versus the 22% to 23% we were looking at earlier.
Wendy Huang – RBS
Based on the status of your current subsidiaries, does it mean 2011, if nothing changes; tax rate should remain at 20% to 21% rather than 15%?
We will never be at 15% per se because the different entities are actually subject to different tax rates, so for the enterprises that have qualified for 15%, obviously will enjoy that preferential rate. But there will be others that are actually at the statutory rate of 25%.
So I don't think it will actually be at the 15% mark. It will be somewhere between the two, but again, as I mentioned just now that our expectation earlier was that we would be at the higher end of that range, but it looks like we actually might be at the middle or maybe a little bit under the average, if we will, when we look at the weighted average.
Wendy Huang - RBS
Okay. My second question is on your online recruitment segment. I remember historically whenever you see the number of customers increase; you actually make your dilution in ARPU due to the fact that new customers tend to spend less money initially. However, this quarter we are seeing that ARPU increase in China with the number of customer growth. So how should we actually look at this change going forward?
I think for the rest of the year I wouldn't put too much on that because again, like I said, we will be reviewing prices and we will be looking at opportunities for 2011. But 2% is really not very much in our opinion because a swing of 2% up or down is just a different composition of differing people that bought during a quarter.
So I wouldn't say that we would be looking at price as a major contributor for the fourth quarter certainly, but as I said earlier as well, that we will be looking at 2011 and we are looking at the pricing for every city as we speak and we'll have a better sense of what we would like to look for and making into translation what would happen for 2011, as we explore maybe having some price increases.
Wendy Huang – RBS
If we put aside the potential price increase in 2011, if we look at Q4 historically, Q4 we usually see the ARPU to increase sequentially. So should we expect the same thing for this quarter, for the upcoming Q4?
I think, I mean, again, I don't think that it's been meaningful between quarters. So I wouldn't expect price to be a very big impact on the revenue line, for Q4 that is.
Wendy Huang – RBS
Okay. Thank you. I will go back to the queue, thank you.
Thank you. The next question we have Ms. Alicia Yap from Citigroup. Thank you, madam, please go ahead with your question.
Alicia Yap – Citigroup
Hi, guys. Thanks for taking my question. My first question is just with your guidance, can you please give a bit more color like just – about each business line. Will the Print business continue to experience at year-over-year decline and then offset by your strong growth in your online business – will that be the case for the fourth quarter as well?
I think the picture has been consistent throughout each quarter of this year which is that I think we're seeing basically the growth will be coming through the online services and the other HR services while we continue to make adjustments to the print operations.
And given that we have actually had some discontinuation of print cities this year, we do not – yes, we do expect the same trend to happen in Q4 as has happened in Q3, which is to have the print operation to become a smaller contributor to the whole, while the other two business segments continue to tick up.
Alicia Yap – Citigroup
I see. And then regarding your print business, let's say if we exclude the city that you shut down, did this Print business in the existing cities actually experience some year-over-year growth? And then how should we actually think about the entire print business model term?
I think the Print business is a transitional stage right now for us and I think for this year certainly we have seen that some cities – the cities that actually continued the operation have experienced some growth versus last year. Last year was actually a pretty dismal year in terms of overall market demand, especially in the first half. So I think that that's the case.
I think, again, going forward I think we're managing the situation with print and we're trying to again review city by city, now we would actually take more steps to – whether to discontinue or continue or whatever. So I think that's kind of a fluid situation. So we'll continue to keep people updated as we understand how we decide on our cities but I think we have limited and modest expectations on print going forward.
Alicia Yap – Citigroup
Okay, I see. And then growth through your online business, I think the new customer adds for this quarter actually dropped to about a 5000 – close to 5000 versus like almost 24,000 to the 25,000 last quarter. Is it because just – any specific reason that we should actually know about? Or is it mainly because in the earlier quarters you actually had the faster ramp up and will the 5000 or 6000 new ads be a more normalized number that to think about in the coming quarters?
I guess, we haven't thought about it in quite the same terms that you've thought about it because when you say – to us it's not really a so-called net add because there is just the customer is more active or non. Some of them could be just returning or not returning, to given us a single quarter if you will.
Again I think what we've seen so far this year; we're probably averaging about 60 plus in terms of overall growth in customer’s year-over-year for the first three quarters. We probably expect, as you know, Q4 will not be the strongest quarter in terms of having new customers coming because as we get into the end of the year a lot of customers will have actually decided to probably close out the year and then wait to kind of begin recruitment new next year.
So I would expect that Q4 is actually going to be probably lower in terms of new ads, if you will, in the terms that you've used.
Alicia Yap – Citigroup
I see. And then if I remember correctly, historically typically on the fourth quarter, you tend to spend a little bit more on your sales and marketing because of some of the year-end promotion and more like the function. Will that be also the case and how should we actually we look at the margin for fourth quarter versus like the third quarter you continue to have some improvement in the third quarter, right?
Yes. I think, yes, we definitely expect that, as is typical for our spending patterns, if you will. We will expect to be spending more on traditional year-end marketing and promotional activities for us because that is a very critical time for us to communicate with customers to get a sense of what their outlook is for the year 2011.
And then additionally, because we continue to look at expanding our sales geographic coverage, we will expect to also be adding more staff to the company. So that will be expenses that we will have to incur in Q4 as we prepare for the peak season in 2011.
So the pattern will be the same, which is that we will be increasing our spending. And that's already been reflected into the guidance that we gave for fourth quarter because actually, if you look at the numbers that we put up, it is actually on a quarter-by-quarter sequential basis. The profitability of Q4 is actually not as attractive as Q3 and that’s been the pattern in the past.
Alicia Yap – Citigroup
Okay. All right. Great. Thank you so much. Congratulations.
Thank you. Mr. Yan, there are no further questions at this time. Please continue with any final comments. Thank you.
Thank you for joining us today. We look forward to speaking with you next quarter and we value your continued support of 51job. Thank you and bye-bye.
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