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51job, Inc. (NASDAQ:JOBS)

Q4 2006 Earnings Call

March 1, 2007 8:00 pm ET

Executives

Linda Chien - Investor Relations Director

Rick Yan - Chief Executive Officer

Kathleen Chien - Chief Financial Officer

Analysts

Jason Brueschke - Citigroup

Safa Rashtchy - Piper Jaffray

James Mitchell - Goldman Sachs

Nate Swanson - Think Equity

Richard Ji - Morgan Stanley

Ashish Thadhani - Gilford Securities

Albert Lee - Maxim Group

Wendy Huang - Evolution Securities China

Catherine Leung - Citigroup

Presentation

Operator

Good day, ladies and gentlemen and welcome to the 51job Incorporated fourth quarter 2006 and fiscal year-end conference call. (Operator Instructions)

Now, I would like to turn the conference over to your host, Ms. Linda Chien, Investor Relations Director of 51job. Please go ahead, Madam.

Linda Chien

Thank you, Rebecca, and thank you all for attending this teleconference with 51job management. With me on today’s call are CEO Rick Yan and CFO Kathleen Chien, and we will discuss unaudited financial results for the fourth quarter and fiscal year ended December 31, 2006. A press release containing fourth quarter and 2006 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 2007, future business and operating results, constitute forward-looking statements within the meaning of Section 27(NYSE:A) of the Securities Act of 1933 as amended, and Section 21(NYSE:E) of the Securities Exchange Act of 1934, 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 contact executed during the remaining weeks of the first quarter of 2007; 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; behavioural and operational changes of customers in meeting their human resources needs as we 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 factors section of the company’s filings with the Securities and Exchange Commission.

51job undertakes no obligation to update targets prior to announcing financial results for the first quarter or as a result of new information, future events, or otherwise.

Now I will turn the call over to Rick Yan, Chief Executive Officer.

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Rick Yan

Thanks, Linda. Thank you for joining us on this conference call. I will begin today’s call with highlights of the fourth quarter and the full year 2006. Kathleen will follow by reviewing our financial results in greater detail. Then, I will discuss current operating conditions and provide our outlook for the first quarter of 2007. Finally, we will open the call to your questions.

Fourth quarter revenues were in line with our expectations at RMB171 million. Following a similar seasonal pattern observed it the past two years, quarter four revenues were lower than the preceding quarter. But we are pleased that the sequential decline was a smaller 5.4% compared with 10% in 2005 and 9.4% in 2004.

Although revenues were within guidance, we again exceeded our profitability forecast in quarter four. Despite greater spending on marketing activities, increased headcount, and high employee salaries in the fourth quarter, non-GAAP EPS was RMB0.54, above our guidance range of RMB0.40 to RMB0.50.

For the full year 2006, we successfully achieved profit growth for the fourth consecutive year. As non-GAAP adjusted income grew approximately 58% to RMB137 million through ongoing efforts to achieve greater scale in operating efficiency, we significantly expanded gross margin to 55.4% from 52.1% in 2005.

We believe this improvement is particularly worth highlighting because of the slower market growth and volume we observed throughout 2006. It also demonstrates the strong fundamentals of our business model.

I want to reiterate that our improving profitability is not coming at the expense of growth initiatives and investments to drive the longer term development of the company. In fact, over the past two quarters, we have materially increased spending on marketing and promotional activities, added new headcount and upgraded our technology infrastructure.

We are also investing resources in product development, particularly in our online services.

Our online business continues to be strong with revenues growing 32% over quarter four 2005, and growing 38% for the full year 2006. According to new Alexa statistics, which rank website traffic by country, 51job.com is the clear number one recruitment website in China. With more than 16 million registered users and over 11 million resumes, our website continues to provide the largest volume of up-to-date recruitment information to job seekers.

Now I will turn the call over to Kathleen for a detailed financial review.

Kathleen Chien

Thank you, Rick. Revenues for the fourth quarter totalled RMB171 million, an 18.2% increase over the fourth quarter of 2005.

Print advertising revenues increased approximately 11% year over year due to higher page volumes, which was partially offset by the lower average revenue per page. The estimated number of print advertising pages in the fourth quarter was 3,281 pages compared with 2,471 pages in the same quarter last year. Average revenue per page decreased approximately 17% compared to the fourth quarter of 2005, driven primarily by higher revenue contribution from some of the lower-priced cities as well as certain seasonal promotions and discounting that was offered.

Online recruitment services revenues grew 32% year over year to approximately RMB59 million in the fourth quarter. The increase was primarily due to growth in the number of corporate customers. The unique number of employers using the online recruitment services were approximately 44,000 in the fourth quarter compared with 34,000 in the fourth quarter of 2005.

Revenues for our executive search business were RMB5.5 million compared with RMB6.0 million in the fourth quarter of 2005. Revenues for other HR services increased 28% year over year to approximately RMB20 million in the fourth quarter, driven by customer demand for training and outsourcing services.

Gross margin was 54.2% for the fourth quarter and relatively unchanged compared to the fourth quarter of 2005.

Included in the cost of services were share-based compensation expenses of approximately RMB1.2 million versus RMB330,00 in the fourth quarter of 2005.

Sales and marketing expenses were RMB41 million compared with RMB27 million in the fourth quarter of 2005. As mentioned earlier, we added new sales people and account staff, and increased our spending on marketing and promotion activities in the fourth quarter. Additionally, we incurred higher employee salaries, performance bonuses and share-based compensation expenses in the fourth quarter compared to the same quarter in 2005. Share-based compensation expense included in sales and marketing expenses were RMB1 million compared with RMB340,000 in the fourth quarter of 2005.

G&A expenses for the fourth quarter were RMB26 million and relatively unchanged from the fourth quarter of 2005. Higher share-based compensation expenses and depreciation expenses were principally offset by lower office rental expenses and lower professional services fees.

Our share-based compensation expenses included in G&A were approximately RMB5 million compared with RMB2.9 million in the fourth quarter of 2005. Depreciation expenses included in G&A for the fourth quarter was approximately RMB3.3 million compared with RMB2.4 million for the fourth quarter of 2005.

Operating income was RMB20.4 million compared with RMB20.7 million for the fourth quarter of 2005. Excluding the share-based compensation expenses, our operating margin was 17% in this quarter compared with 17.7% in the fourth quarter of 2005.

Our effective tax rate for the fourth quarter was 16.6% compared with 35.3% in the fourth quarter of 2005, and that decrease was due to tax exemptions we received for certain Chinese operating entities, the terms of which are generally for one or two years. In addition, we obtained approval from the relevant tax authorities which lowered the corporate tax rate for one of our subsidiaries in Shanghai, from 30% down to 15%. This subsidiary principally operates our online services business.

Net income for the fourth quarter was RMB19.8 million versus RMB19.3 million for the fourth quarter of 2005. Fully diluted earnings RMB0.35 per common share, which is equivalent to $0.09 per ADS. Excluding share-based compensation expense and foreign currency translation loss, non-GAAP adjusted income for the fourth quarter of 2006 increased 29% year over year to RMB30.5 million.

Non-GAAP adjusted fully diluted earnings per common share for the fourth quarter were RMB0.54, or $0.14 per ADS.

Now, turning to our full year results, total revenues for 2006 increased 17% to RMB697.9 million. Our gross margin improved 330 basis points to 55.4% from 52.1% in 2005, driven primarily by economies of scale and the increase in revenue contribution from our online services.

Our income from operations increased 49% to RMB115 million and net income increased 62% to RMB99 million in 2006.

Excluding the share-based compensation expense and foreign currency translation loss, our non-GAAP adjusted income grew 57.5% to RMB137.3 million in 2006.

Non-GAAP adjusted earnings per common share for 2006 was RMB4.87, or $0.62 per ADS.

Looking at our balance sheet, our cash position remained very strong. As of December 31, 2006, we had cash or RMB869 million compared with RMB831 million at the same time at year-end 2005.

Now I will turn the call back over to Rick for his comments on current operating conditions.

Rick Yan

Thank you, Kathleen. Through a comprehensive suite of products and superior recruitment results, we continue to deliver meaningful, tangible value to employers of all sizes across China. Over the past two years, we have maintained our market leadership position in both the print and online segments, despite substantial advertising spend by smaller competitors.

We are proud that as we have successfully defended our market leadership position, we have also managed to strengthen our operations, resulting in solid earnings growth.

Some of our competitors have sustained significant losses in the past two years. They may be reaching the peak of their investment cycle and scaling back their expanding going forward, according to some public reports.

In contrast, we are entering 2007 on the offensive and more focused than ever. A number of misleading statements regarding online market leadership position has come to our attention over the past month. I would like to take the time to address them today.

There is no doubt that we are the leading recruitment website in China. First of all, looking at Alexa traffic details as a proxy, our website is currently ranked within the top 80 websites in China, ahead of all other competitors. Secondly, our daily page view volume, which is a better indicator of user quality, is the highest in the industry for the past couple of years.

Some competitors invested their resources to improve their reach statistics, but the increase in reach did not generate a corresponding increase in page views. In fact, in some cases, their page views declined in 2006 compared with 2005, although their reach more than doubled during the same period.

As a result, page view per user dropped to very low levels for these people. Actually, in certain periods, they are only one-third or even one-quarter of our levels. HR customers pay for recruitment results in terms of quantity and quality of resumes received, not reached eyeballs.

If a user surfs only three to four pages in a session, it is just not possible for him or her to find the right job and submit their application. How would this generate results for our HR customers?

We have taken and will continue to take appropriate measures and actions to address these false claims by our competition. As I mentioned earlier, we have been undertaking a number of initiatives to further strengthen our market position. In the fourth quarter, and before Chinese New Year, we stepped up promotional activities and customer events, and also upgraded our technology platform, both in hardware and software. We have also added new sales people targeting certain geographies and customer segments.

With the Chinese New Year holidays falling near the end of February this year, we are just now at the very beginning of the traditional peak season for recruitment services. The Chinese New Year holiday ended last Saturday and we only have a few working days so far after our customers and our sales team are back in action. Furthermore, this year we only have five working weeks between the end of the Chinese New Year holidays and the end of first quarter. In comparison, we had eight working weeks in 2006 between the end of Chinese New Year holiday and the end of the first quarter. In other words, there are three weeks less for almost 40% less of peak season weeks falling in the first quarter in 2007 compared to 2006.

This is the latest arrival of Chinese New Year in our operating history and probably one of the latest in history overall.

Over the coming weeks, we will be closely monitoring market development and customer demand. As a result, we are only providing revenue estimates for the first quarter of 2007 at this time. We are also providing a wider guidance range than usual. We plan to provide an update on revenue and earnings estimates around the middle of March.

Based on currently available information, our total revenue target for quarter one is in the estimated range of RMB180 million to RMB200 million. Going forward, we remain focused on the day-to-day execution of our business plan and to pursue our strategy of profitable growth. We believe that we continue to be well-positioned to capture greater opportunities in 2007.

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 will come from Jason Brueschke with Citigroup.

Jason Brueschke - Citigroup

Let me just hit a couple of specific questions today. One question about print and one question about online. In the print business, it looks like the overall ASPs may have been dragged down by the greater contributions from the smaller cities. Could you give us an indication of how Tier-I pricing has done in the fourth quarter?

My question on the online business, it looks like you are growing, at least in the fourth quarter as your revenue is pretty much in line with your new customer growth, is there any impact that competition is having on your pricing ability in the online business, or is that really just being lost in some of the noise in those other line statistics? Thanks.

Kathleen Chien

Let me quickly answer the online question first. I would say that in the last year or probably for the last six quarters, we have seen our online prices have been pretty steady. If you look at it over the last six quarters, we pretty much have been averaging 1,000-plus to a customer in a given quarter. That is really a reflection of the fact that because of the competitive situation, we are not able to raise our prices as we were able to earlier on in the cycle, if you will.

I would say that online pricing not being able to go up is actually a function of the competitive environment.

Rick Yan

On the print front, what happened was towards the end of 2005, we started to increase prices. I think throughout 2006, we held our pricing pretty steady, both in the major cities as well as in the smaller cities. We have not made any changes to our pricing in quarter four 2006.

Obviously, as you know, we are entering a new -- after the Chinese New Year is a peak season, so we normally hold or slightly increase our pricing prior to the peak season. So we have not really made any changes to our print pricing in quarter four 2006.

Jason Brueschke - Citigroup

Maybe just one quick follow-up. Rick, I thought your comments were very helpful about the current operating conditions and the competitive landscape. If competitors do seem to be reaching a peak period in the spending half of their attempt to gain market share, should we maybe be expecting in ’07 that the sales and marketing spend from your competitors might come back, but is there any risk that they may try to grab revenues by engaging in material price competition in the latter phases of that cycle, or -- since you guys are the high-priced competitor anyway, is that something that we should not necessarily be concerned about?

Rick Yan

I have two reactions to that. First of all, our competitor has always been pricing way below what we charge, so this is not a new phenomenon. This has been happening for the past couple of years.

Secondly, if you look at online pricing, the pricing is actually very low. If you compare it to some of the pricing levels in the U.S., I think we are charging almost just 1% of what U.S. competitors are charging. Even compared to Chinese salary levels, the recruitment cost as a percent of annual compensation is very, very low.

I think the recruitment service itself should not be a very price-sensitive business. Imaging if an HR customer hired the wrong people, they would need to fire the people, redo the recruitment again, and the cost of hiring the wrong person or the delay in the time to hire the right person is much higher than what it cost to put an advertisement on our website.

I think for these two reasons, I would be very skeptical that even our competitor dropped the pricing, I do not think that is going to have any impact on what we are doing. In fact, we know that our competitor gives a lot of free sampling or free usage for customers already, so I do not think they can go lower than zero.

Operator

Moving on, next we will hear from Safa Rashtchy with Piper Jaffray.

Safa Rashtchy - Piper Jaffray

I just want to make sure that I got all your comments correctly about pricing, if you could repeat them. So in the quarter, in Q4, was there any major change in prices in online or offline? Going forward, what are your expectations for either online or offline prices?

Kathleen Chien

I think in the short-term, we expect online prices to remain steady because I think, like I said earlier, I think the competitive situation is such that although we do not see the price discounting by competitors will hurt us, we are not going to actively increase the price gap, if you will, at this point in time.

On the print pricing, quarter four we did give seasonal discounts for the end of the year as people were using up their budget and clearing up their recruitment for the year. But I think we expect that usually Q1 might be a little bit stronger but there is no material change in the set pricing that we have for our product.

Safa Rashtchy - Piper Jaffray

One follow-up question, the growth in the online, while healthy, was a little bit lower than what you were expecting, based on your performance earlier in the year. I am trying to just remember if advertisers that you were adding -- was there any factors that contributed to that, or were you happy with the number of advertisers you were able to get?

Kathleen Chien

I think this is pretty much in line with our expectations. I mean, if you look through the history of the company in the last let’s say eight to 12 quarters, quarter-to-quarter changes are very common. We go anywhere from the 30s to the 50s in terms of the growth rate, so I do not think fourth quarter was or is a seasonally strong quarter, and I think we were happy and pleased with the overall quarter.

Operator

Next from Goldman Sachs, we will hear from James Mitchell.

James Mitchell - Goldman Sachs

A quick question on the margin implications of reducing pricing for the print offering; it looks like your EBIT margins ex stock-based comp were flat to down year on year. Was that principally due to hiring more people, sort of a proactive decision, or was that also a function of you reducing the prices on the --

Kathleen Chien

No, that is a proactive decision, James, because I think last year, toward the end of last year, we actually moved our premises to the Zhangjiang location, so we stepped up the investment in hiring for more people, preparing for the Chinese New Year, both on a sales front and also on the service network front, so that is a conscious decision, I would say.

Rick Yan

If you look at the gross margin, the gross margin was at 54%, so it is flat. So if we had reduced our print pricing, we would not be able to maintain our gross margin. So it was really a city mix issue rather than a pricing issue.

James Mitchell - Goldman Sachs

So if I look at the fourth quarter versus the third quarter, the number of print pages you had was up 2% quarter on quarter. Your print revenue was down 11% quarter on quarter. I guess somewhere along the line there is 2% more newsprint being consumer and ink being consumed and so forth. Is that cost being borne by your newspaper partner solely or do you help subsidize that cost for the newspapers?

Kathleen Chien

It is always a mix of us bearing some and then our partner bearing some, so the 2% is not meaningful in terms of what the contributed to the fourth quarter, in terms of the gross margin.

James Mitchell - Goldman Sachs

Okay, but going forward, big picture, I guess if we look at online businesses, there is infinite inventory and essentially zero cost of inventory because you are not consumer newsprint to carry more advertisements. When you look at your print strategy, is it better for your margins to focus on price rather than volume, because increasing volume brings increasing newsprint costs, or not necessarily?

Kathleen Chien

Honestly speaking, it is always a balancing act and I think we have tried different things through different quarters, if you will. We want to make sure that at the end of the day, there are enough new customers coming into the fold, so for us, holding up prices artificially high just to maximize our margin we do not think is the right thing to do at this point in the China market.

We still believe that this is an early market. We still believe that there are a lot of customers out there that have not tried the product, so I think volume is something that we will weigh a little bit more at this point in time.

Operator

The next question is from Nate Swanson with Think Equity.

Nate Swanson - Think Equity

Rick, you mentioned the controversy or confusion around market share and page views and what not. I was wondering, is that impacting your ability to sell, lengthening sales cycles and what not? And how are you differentiating yourselves in the eye of your customer base in terms of your sales model versus that of your competitors?

Rick Yan

Let me answer the second question first, because that is more important. As I mentioned in the comments, our customers pay for recruitment results, in terms of the quantity and quality of resumes received and whether they are able to fill the positions. So customers are very clear; they pay for results. They do not pay for advertising we or a competitor put on the TV or put on the billboard on the street. So for customers, it is very clear; it is recruitment results and service quality.

How we are able to address those false claims, I think we are doing certain things. We filed a complaint to the government about those false claims. We, through our PR efforts, we try to get our voice, get our message to the public to make sure that people get the facts. I think it is really up to our customers and job seekers to determine who is number one or who has the highest traffic.

I think our response has been to provide the facts to the public and to the relevant customers to make sure that they understand the situation and make the right decision for their recruitment choices.

Nate Swanson - Think Equity

In terms of lengthening sales cycles and impacting your overall ability to sell?

Rick Yan

No, I don’t think so because -- I mean, it does take some -- it does require more training on our front, in terms of giving our sales people the right material to show the facts and the truth to customers, but I do not think customers -- customers are pretty smart. They see through it.

Actually, recruitment advertising, as we talked about this before, has pretty low switching costs. If someone is providing better results, the customer will stick with you. If you turn out not to generate the right results for the customers, the customer, next time they hire somebody they will move to another recruitment channel.

Customers are pretty smart and it is hard to fool them and switching costs is pretty low. That customer can always choose the best recruitment platform or channel based on their own experience.

Nate Swanson - Think Equity

Can you just comment, maybe qualitatively, how Q4 played out relative to your expectations? Also, could you just touch on turnover and wage inflation in terms of --

Rick Yan

Well, when we gave the quarter four guidance, we were -- given the seasonality, the guidance we gave had a lower sequential drop versus the preceding quarter compared to 2005 and 2006, so in other words, we were probably a little bit more optimistic than before in terms of the quarter four situation, and we turn out to be almost right at the midpoint of the guidance range on the top line.

In terms of the bottom line, we increased our spending a lot. If you look at sales and marketing, we have been increasing our sales and marketing spend by almost RMB3 million to RMB5 million per quarter in the past two quarters. So we were able to improve our profitability through tax initiatives, cutting costs on the rental side, paying less to our professional service providers. So we were able to spend more on sales and marketing but keeping our profitability up, so I think we are pretty pleased with what we achieved in quarter four. It pretty much kind of played out according to our expectations and according to our plan.

Operator

The next question is from Richard Ji with Morgan Stanley.

Richard Ji - Morgan Stanley

Just two questions regarding your offline recruiting, to begin with. Can you help us to understand better about the potential revenue split between the Tier-I and Tier-II Cities for your offline recruiting?

The second question is regarding your sales and marketing costs. We do see a significant ramp up in your sales and marketing costs. I am just wondering how much of that will go into your offline recruiting to ramp up the revenue and also to promote your brand among customers?

Rick Yan

Historically, we have never provided any breakdown in terms of geographical information. We need to continue to do that because of competitive reasons, so I cannot answer your first question.

In terms of your second question, we are ramping up sales and marketing because actually we mentioned in the comments that we are going on the offensive in 2007. We are more focused than ever and we want to not only maintain our market position; we want to make meaningful progress in 2007 too. So we would expect to continue to incur higher sales and marketing costs. Most of that is coming in the form of additional sales people and additional promotional activities.

I do not think I would allocate the sales and marketing costs just to print or offline because we have a shared selling infrastructure for both online and print. In the larger cities, you find customers who buy print or online but when you go to the smaller cities, most of the market is still print today. So the mission for our sales force is to go out, get customers, retain the customers, penetrate the customers regardless of whether they want print or online. We will just sell them what is useful for them and what they think would help them to -- what will be most useful to help our customers to meet their needs.

Richard Ji - Morgan Stanley

My next question is regarding online recruiting. Clearly this is one of your bright spots for the year. We do notice that there is a great pick-up in job seeker volume than the job demand, to a certain degree. Is there any chance going forward that you may consider monetizing the demand side rather than the supply side, or vice versa?

Rick Yan

This is something that we have talked about on and off for the past couple of years. I know we have a lot of traffic on the job seeker front. Two things: we look at the situation in the U.S., in Japan and in other countries, and actually we have not found something that is really a proven model that you can monetize the job seeker traffic so far. I think we continue to look for opportunities, but the honest answer is we have not found something that we are convinced that we can monetize that traffic.

Operator

The next question is from Ashish Thadhani with Gilford Securities.

Ashish Thadhani - Gilford Securities

I would just like to open with a couple of line items, specifically the gross margin, which dropped a little bit quarter on quarter, and also the sales and marketing, which has been rising steadily as a percentage of revenue through the year. What might be, in broad terms, the outlook for these line items going forward?

Kathleen Chien

I think for the full year 2006, our gross margin improved over 3% versus 2005, and I think again, as we continue to scale up, we believe that there is still some room for overall improvement, so I think that we do have expectations to continue to let that edge up, if you will.

In terms of what we are looking at for sales and marketing, I think we have already said that in the third and the fourth quarter, we have actually spent money to actually add to our infrastructure in terms of the sales additional headcount and also step up our promotional marketing. I think these are the areas that we will be very focused on for the first-half of this year, certainly to counter the competitive situation. That is where we stand at this point in time.

Ashish Thadhani - Gilford Securities

In the print advertising segment, the volume and pricing have been quite volatile from quarter to quarter. What would you consider to be a sustainable revenue growth trajectory over the next few years, just broadly, nothing specific?

Rick Yan

As you can tell, we are providing guidance only on the forward quarter. Again, this is a pretty early stage market in terms of market development, and also the competitive situation changes very fast because there is a lot of interest in this space, so I do not think we are ready to give any guidance or long-term growth guidance on the print business. We would love to do that when we feel that we are comfortable to do it.

Ashish Thadhani - Gilford Securities

Finally, some year-end housekeeping items, what was D&A and cash flow from operations for 2006?

Rick Yan

You mean the depreciation and amortization?

Ashish Thadhani - Gilford Securities

That is right.

Kathleen Chien

Depreciation in G&A item, we have already mentioned on the call earlier. I’m sorry, I couldn’t hear you. Is that the question you are referring to?

Ashish Thadhani - Gilford Securities

No, the depreciation and amortization.

Kathleen Chien

We mentioned that on the call a little earlier. I think that was in the range of RMB3 million plus for the G&A in the fourth quarter.

Ashish Thadhani - Gilford Securities

Okay, and cash flow from operations for the year?

Kathleen Chien

We have not broken that out and we will be providing that at a later time when we close the books entirely.

Operator

The next question is from Albert Lee with Maxim Group.

Albert Lee - Maxim Group

With respect to the seasonal discounting and promotional activity you had cited, I was wondering if the magnitude of this discounting was about where you had expected it to be, more than you had been expecting based on historical patterns and what not. Is there generally any correlation between the magnitude of promotional activity versus what type of city you are in, whether it is Tier-I, 2, or 3?

Kathleen Chien

I think we actually give discounting more on the sense of whether it is a new customer or it is a long-term customer, sort of the type of the relationship we have rather than by city. That is how our sales people typically approach it. I am not sure about the correlation between that and anything else specifically.

Albert Lee - Maxim Group

Can you give us an idea of the percentage of print revenue that has stemmed from these lower-priced cities, which I imagine our Tier 2 and 3. If you could roughly break down how you are doling out your marketing dollars in terms of these lower tier cities versus Tier-I?

Kathleen Chien

I think Rick answered that a little bit earlier, in that I do not think we are ready to provide that for competitive reasons on the specific of city by city breakout.

Albert Lee - Maxim Group

I guess part of your longer term goal is to upgrade your current pure play print customers and ultimately turn them into online customers, or online business. Can you talk anecdotally about how successful you think you have been in executing on this objective over the past year or two years?

Kathleen Chien

Well, I think if I look at the number of customers that work with us online, I think we are pretty pleased with the overall progress we are making. Last year in 2006, we had a total of about 75,000 online customer transactions for the year versus 57,000 for the previous year, so I think that is a meaningful number of new customers on the online space. But I would say that I think everyone is very focused on moving everybody online, but I think our viewpoint is that there are a number of cities in China in which Internet penetration and Internet population is still not the primary way for us to reach job seekers.

Yes, it is true that for some of the larger customers, for some of the technology industry, the technology-related positions or younger type of job seekers that we are looking for, this is something that we will work more aggressively to migrate online, but there will also be other customers out there, other corporate customers who may not find that online is the best medium to recruit, which actually is why we continue to have an integrated model to recruitment.

I would say that yes, for certain segments of the customer group out there, we will continue to work very hard, but there will be new customers that we bring into the fold that will not be suitable for the online format.

Rick Yan

If you look at even the larger cities like Beijing, Shanghai, Guangzhou, Shenzhen, with the highest Internet penetration, if you go to a newsstand this week when you buy a 51job Weekly, you will still see a lot of pages of print advertisements there. If you look at the U.S., you look at Japan, print advertising is still not a small portion of the overall market. I am not sure it is half or more than half, but it is still a significant portion of the revenue of the overall recruitment advertising market.

Albert Lee - Maxim Group

Finally, you probably cannot elaborate on this much, but it has been some time now since forging the relationship with Recruit, and I was wondering, without getting into much detail, of course, how this relationship has kind of materialized or flourished versus your original expectation. It looks like they have been nibbling away a little bit here over the past couple of quarters. I was just wondering where that stood.

Rick Yan

I think again, two things; one is on the core business, we are learning from them in terms of the sales management and also product segmentation. We mentioned that before. We continue to make changes and improvements on our products, and also on our sales management system.

I think part of the strategic alliance with Recruit also includes the introduction of certain new products and services. We are still working on that and at the time that we are ready to launch something, we are going to make an appropriate announcement.

That has been ongoing. They still have more than a dozen people sitting out in our office and we talk regularly. I think the time will come when we start doing something together.

Operator

The next question is from Wendy Huang with Evolution Securities China.

Wendy Huang - Evolution Securities China

First of all, could you provide the number of job listings on your website? If possible, could you compare that number with your major competitors? How do you see the this trend in the past quarter?

Secondly, you mentioned that the average revenue per page in terms of your offline business declined quarter over quarter, due to the increasing percentage of revenue from lower priced cities. Should we expect in the future that more revenue will be coming from these small cities and this trend will continue?

Thirdly, you mentioned that you expect to spend more money in the sales and marketing, but historically in the first quarter, you usually spend less money than the fourth quarter. So what should we expect next quarter for sales and marketing expenses?

The last question is about your G&A expenses. Is that fourth quarter 2006 is the first full quarter impacted by the higher depreciation expenses coming from your new office building purchase?

Kathleen Chien

Wendy, I am not sure I heard the last question but I think you said something related to depreciation expenses for the full quarter, was it that the first quarter that has included the building expenses? Is that correct?

Wendy Huang - Evolution Securities China

That is the first full quarter, whether we should expect a higher depreciation expenses in the next quarter compared with the fourth quarter.

Kathleen Chien

I would only comment the fact that the building purchase, the full depreciation started actually not in the fourth quarter, so in the prior quarter, so I would say that was not the first quarter that include a full quarter of expenses related to depreciation from the new building.

Going forward, there is always -- we could be acquiring more things or whatever, so it is too hard to give you that number right now but that is not the first quarter during which we have incurred the expenses related to the building purchase.

I think you also mentioned something related to pricing on the print business. Is that correct? I could not hear you very well.

Rick Yan

I think the second question relates to whether the mix of the lower-priced cities will continue to increase going forward. Yes, I think that is probably an appropriate assumption because we are seeing more budget shift by customers from print to online in the larger cities, and we are seeing less of this trend in the smaller cities. So I think directionally, I would say yes, going forward, the contribution from the smaller cities will be higher in our print revenues. That would be the right assumption.

In the longer term, the revenue per page will probably come down because the price is lower in those lower-priced cities.

You had a question about sales and marketing and whether quarter one historically is a low quarter for sales and marketing and quarter four is higher, but I do not think that is the case. Normally what we do is we need to hire people and train them in quarter four so that they are ready to work in the peak season after Chinese New Year. So normally, I do not think we have a drop in sales and marketing expense from quarter four to quarter one, Normally what you will see is an increase, because we might be doing more marketing and promotional activity in quarter one. I would not assume that the sales and marketing costs in quarter one will be lower than quarter four. I think it will would go.

As we mentioned earlier, we are on the offensive and we expect to be more aggressive in gaining market share this year.

I might have forgotten one of your questions.

Kathleen Chien

I think the last question you asked was about job posting volume and compared to our competitors. To be honest, that is a number that we monitor very closely but it is also a number that changes day to day. What I can tell you is that based on our observations and based on the metrics that we use, we believe our market share has held steady versus our competitors, and I think the volume measure we are talking about is at least probably in the range of 2X of our closest competitor. This is defined by job postings that we believe has been posted in the last 30 days.

I do not have a number I can give you, because that number changes every day, but that is the observation we have made in the last eight quarters, I would say, in the company.

The other thing I would say is that based on our observation, and we have said this in the previous calls as well, we believe that there has been some changes between the positioning of our second and third competitor and that gap may be widening. So we will leave the comments at that, because this is something that we do for internal monitoring perspective and that is as much color as I can give to you on that at this point in time.

Rick Yan

It is actually pretty consistent. If you look at the page view statistics, we are around 2X our next competitor. If you look at the job posting statistics, we are about 2X our next competitor, so that is pretty consistent.

Operator

Our final question comes from Catherine Leung with Citigroup.

Catherine Leung - Citigroup

I just have two questions. The first is do you have any plans to do more geographic expansion into new cities in ’07 for your print business? Secondly, can you please update us on the rate of customer churn in this quarter? I know you monitor this very closely. Are you seeing competitors doing a better or worse job of churning away your customers this quarter versus the previous quarters? Thank you.

Rick Yan

On the second question, I do not think we can measure churn because a customer might not be hiring every month or every quarter, so if a customer does not do business with us in quarter four, it might not mean that they have defected to our competitors. It might just be the fact that they have no requirements or needs in that quarter. So it is hard to measure churn.

At the end of the day, if a customer posts advertising, an advertisement in our competitor print or website, we know that immediately. All that comes back to market share. So basically it is all about market share and as we have mentioned consistently, our market position in both print and online has not changed. We have not seen any changes in the competitive landscape or our market position in both print and online in quarter four.

Catherine Leung - Citigroup

And the expansion plans for print?

Rick Yan

At this stage, I think -- the last time we entered a city was in Tianjin in the beginning of 2006. I think the background is the fact that we are seeing a lot more competition since 2005 on the online front. As you can imagine, most of the online market is in the larger cities where there is more Internet penetration. So we have been really focusing our resources, our sales effort in the larger cities so we have not expanded our city portfolio or geographic portfolio since the beginning of 2006. At this stage, we remain very focused to fight the online battle and continue to defend or improve our market position online, so at this stage, we have no change in plan. We will continue to focus on online in the larger cities and we will continue to only do city expansion on an opportunistic basis.

Operator

Ladies and gentlemen, that is all the time we have for questions. At this time, I would like to turn the conference over to Mr. Rick Yan for any additional or closing remarks.

Rick Yan

Thank you for joining us today. We look forward to updating you on our achievements next quarter. We appreciate your continued interest and support of 51job. Thank you.

Operator

That does conclude today’s presentation. We do thank everyone for their participation. Have a wonderful day.

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Source: 51job Q4 2006 Earnings Call Transcript
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