51job's CEO Discusses Q2 2011 Results - Earnings Call Transcript

| About: 51job, Inc. (JOBS)

51job, Inc. (NASDAQ:JOBS)

Q2 2011 Earnings Call

August 4, 2011 9:00 p.m. ET

Executives

Linda Chien - Assistant VP, IR

Rick Yan - President and CEO

Kathleen Chien - Acting CFO and COO

Analysts

Wendy Huang - RBS

Ming Zhao - SIG

Tim McHugh - William Blair

Gillian Chung - Morgan Stanley

Operator

Good morning and good evening ladies and gentlemen, thank you for holding. Welcome to the 51job, Inc. Second Quarter 2011 Conference Call. At this time all participants are in a listen-only mode. After the presentation there will be an opportunity to ask questions. (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.

Linda Chien

Thank you, Mein, and Thank you all for attending this teleconference to discuss un-audited financial results for the second quarter ended June 30, 2011. With me for today’s call are Rick Yan, President and Chief Executive Officer and Kathleen Chien, Chief Operating Officer and Acting Chief Financial Officer. A press release containing second quarter 2011 results was issued earlier today and a copy may be obtained through our website at ir.51job.com.

Before we begin, I would like to remind you that during this call, statements regarding targets for the third quarter of 2011, future business and operating results constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the Private Securities Litigation Reform Act of 1995.

These statements are based upon management’s current expectation and actual results could differ materially. Among the factors that could cause actual results to differ are the number of recruitment advertisements placed, sales orders received and customer contracts executed during the remaining weeks of the third quarter of 2011; any accounting adjustments that may occur during the quarterly close; fluctuations in the value of the Renminbi against the U.S. dollar and other currency; 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 factors section of the company’s filings with the Securities and Exchange Commission. 51job undertakes no obligation to update targets prior to announcing final results for the third quarter of 2011 or as a result of new information, future events or otherwise.

Now I’ll turn the call over to Rick.

Rick Yan

Thank you, Linda, and welcome everyone to today’s call. I will begin with an overview of the second quarter followed by Kathleen with a detailed presentation of our financial results. Then I would discuss current market conditions and our objectives moving forward. Finally, we will open the call to your questions.

We are very pleased to deliver to our shareholders another quarter of solid revenue growth and profitability total revenues for the second quarter were RMB332 million or approximately US$51.4 million, an increase of 27% over the year ago quarter. Non-GAAP EPS exceeded our expectations coming in at RMB1.87 or US$0.58 per ADS.

Looking at each business area, our online business continued to grow robustly as revenue increased 49% year-over-year. We further expanded our customer base in existing and new geographies with nearly 169,000 companies purchasing some type of online recruitment services from us in the second quarter. Average revenue per online customer also increased due to greater demand and competition among employers for talent as well as the impact of the new rate card that was implemented in April of this year.

The transition to the new rate card has been smooth and has not hindered our customer acquisition or retention efforts. In our other HR services area we saw a pickup of activity led by our outsourcing and training businesses. Revenues for the other HR services increased 43% compared to a year ago quarter on the back of growing market acceptance and customer adoption of these services.

As expected our print advertising revenue decreased in the second quarter due to the discontinuation of operations in certain cities over the past year and the resulting decline in page volumes. Going forward we believe that print revenue contribution will progressively decrease as more employers choose our online services for their recruitment advertising needs.

While favorable market conditions have played an important role in growth, our margin improvement has been driven by the significant economy of scale and operating efficiency we have built into our service model. Gross margin hit a record high of 71.8% and excluding share based compensation, which increased meaningfully in the second quarter, operating margin reached 37.6%. As we grow and more deeply penetrate the market, we believe there is further room for margin expansion to exploit synergies between our businesses and to increase our share of overall our HR budgets.

We are on pace for an exceptional year of revenue growth and profitability. With our proven track record for execution, established industry leadership position and powerful brand we possess distinct competitive advantages and move forward confidently to position 51job for sustainable, profitable growth over the long term. I will now turn the call over to Kathleen for a more detailed financial review.

Kathleen Chien

Thank you, Rick. The revenues for the second quarter totaled RMB332 million, a 27% increase compared to the same quarter in 2010. Our online revenues for second quarter were RMB200 million, an increase of 49% compared to the same quarter in 2010. The number of unique employers using our online services increased over 23% year-over-year to nearly 169000 companies in the second quarter due to strong market demand and our customer acquisition efforts

We also saw a 21% increase in the average revenue per online customer compared to a year ago quarter due to the greater spending by employers in light of the growing competition for talent and the impact of certain price increases that came into effect this past April. Versus the first quarter our average revenue per online customer increased by over 6%. We expect average revenue per employer to gradually increase through the year as contracts come up for renewal and the full impact of the higher rate card works its way through our customer base.

Print advertising revenues decreased 28% to RMB52 million compared with RMB72 million in the second quarter of 2010. The decline was primarily due to the discontinuation of print operations in certain cities over the last 12 months as well as the corresponding decline in advertising pages. Print advertising pages in the second quarter of 2011 decreased 39% to approximately 1600 pages compared with about 2600 ages in the prior year’s quarter. However, the page volume decrease was partially offset by the higher revenue per page.

Average revenue per page increased 19% due to greater contribution from the higher priced cities. For the third quarter we expect print revenues as a percentage of total revenues and in absolute dollar amounts to further decline. Our other HR services revenues grew 43% to RMB80 million in the second quarter of 2011. Our outsourcing and training businesses saw greater customer acceptance and increased demand.

Gross profit increased 34% year-over-year to RMB227 million and gross margins increased to 71.8% from 68% in the second quarter of 2010. The margin expansion was primarily due to economies of scale and operating efficiency that we achieved. Included in cost of services in the second quarter were share based compensation expense of RMB1.6 million. Sales and marketing expenses increased approximately 15% year-over-year to RMB79 million in the second quarter of 2011 mainly due to the higher salary expenses commissions and bonuses.

Included in sales and marketing expenses were share based compensation expense of RMB1.3 million in the second quarter. Our G&A for the second quarter was RMB 39 million, an increase of 8% from the year ago quarter, due to the higher share based compensation expense and office expenses. Share based compensation included in the G&A increased to RMB6.8 million in the second quarter compared with RMB4.6 million in the same quarter of the prior year.

Operating income for the second quarter of 2011 increased 69% year-over-year to RMB109 million. Operating margin improved to 34.5% compared with 25.9% in the same quarter of the prior year. Excluding share based compensation expense, operating margin would have reached a record high 37.6% in the second quarter of this year. Net income for the second quarter increased nearly 54% to RMB83.5 million compared with RMB54.3 million in the same quarter of 2010.

Fully diluted earnings were RMB1.41 per common share which is equivalent to US$0.44 per ADS. In the second quarter the company reassessed the carrying values of this long term investment on the balance sheet and determined that an impairment loss in the amount of RMB15.1 million should be made. These long term investments consisted of non-interest bearing loans provided in 2007 and 2008 to Area Link which is holding company of a coupon advertising services business in China. Area Link is owned and operated by Recruit, the company’s largest shareholder, owning approximately 40% of 51job.

The RMB15.1 million reflects the full amount of the carrying values of these long term investments to Area Link. We do not expect to make further investments into Area Link.

Excluding share-based compensation expense, loss from the foreign currency translation, loss from the impairment and their related tax impact, our non-GAAP adjusted net income increased 78% year-over-year to RMB110 million in the second quarter. Non-GAAP adjusted fully diluted earnings per common share were RMB1.87 or US$0.58 per ADS.

In late April we issued stock options to employees and directors at their market value which is significantly higher than the price of the previous stock option grant. As a result for the third quarter we expect that share based compensation expense will continue to increase to approximately RMB12 million in the quarter.

Looking at our balance sheet, our cash and short term investments increased to RMB1.8 billion or approximately US$282 million. Short term investments consist of certificates of deposits with original maturities from three months to one year. Now I will turn the call back over to Rick.

Rick Yan

Thank you. We continue to observe a favorable hiring environment in China for the white collar market that we focus on. While the government has taken actions to curb lending, control inflation, manage growth in certain industries this year, we have not seen these efforts to have materially affected the recruitment plans of the employers that we work with.

The total of customer feedback remains largely unchanged as companies face tougher competition for managerial talent and experienced workers in particular. We see employers are seeking more solutions and purchase more services to meet their hiring targets. Our business resurgency coming out from the financial crisis has attracted renewed interest in HR service industry in China.

Over the past 13 years we have seen innumerable competitors enter and exit our space. However through all this we have each year strengthened and consolidated our market leadership. We have also seen the industry – we have also been the industry innovator, the first to utilize a job listing search engine, mobile apps and other technologies to enhance the experience of employers and job seekers.

The deep domain knowledge, expertise and service scope we possess is unmatched. We are confident that our acknowledged position as the most comprehensive and HR solutions provider will enable us to best capture and monetize the opportunities ahead of us. We are very pleased with the broad progress we are making on our strategic initiatives.

As few weeks ago we achieved two meaningful user milestones as we cross the 50 million mark for registered job seeker accounts and the 40 million mark for resume posted at 51job.com. We believe that we maintain the largest and most updated job seeker information network in China. New customer acquisition for our online business bolstered by the efforts of the Wuhan call center is going well. We have recently expanded our geographical reach and sales coverage.

In July, we launched four new channels to our website, adding 11 new cities. Since the establishment of our Wuhan call center 18 months ago we have nearly tripled our city coverage. Currently we provide dedicated online sales and support in 67 cities across China. We will further increase our national footprint this year. At the same time that we are broadening our online customer base,, we are seeding and creating cross-selling opportunities for our other value added HR services. The development of our outsourcing and training services benefits significantly from our understanding and existing relationship with HR departments on the recruitment front.

Our ability to deliver a complete package of HR services provides us with unique synergies and advantages over any standalone or single product competitor. We continue to lay the foundation for growth in this new areas, educating the market about our value proposition and honing our service capabilities.

Turning now to our guidance, based on current market and operating conditions, our total revenue target for the third quarter of 2011 is in estimated range of RMB335 million to RMB345 million, which would be 25% year-over-year increase at the mid-point. Our estimated non-GAAP fully diluted EPS target is between RMB1.8 to RMB1.9 per common share. Please note that this non-GAAP EPS range does not include share based compensation expense, foreign currency translation loss nor their related tax impact.

This guidance reflects our current forecast which is subject to change. Every day we are learning about the potential of our company and HR services industry in China. As we continue to grow, invest, innovate and evolve, we are focused on providing the best possible experience to our customers and job seekers while delivering the greatest return 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. Wendy Huang from the company of RBS. Thank you, please go ahead with your question.

Wendy Huang - RBS

Thank you for taking my question and congratulations on the solid results. First of all, can you give us some update on the adoption of your new pricing system? It has been four months since you increased the price on online product recently. So are you still sticking to your previous ARPU guidance for the full year?

Kathleen Chien

Thank you, Wendy, for the question. Yes, I think we have been pretty pleased so far with the transition on the pricing side. As you can see that I think we have actually achieved a fairly solid price increase in the second quarter already. I think that we haven’t hit the high end of what we had communicated in terms of what we could achieve by year-end. I think we will continue to strive towards that goal. So I think we are pleased with our progress so far though.

Wendy Huang - RBS

Okay. And also for your Q3 guidance, given that print advertising has seen a sharp decline in absolute dollar amount in Q2, so are you expecting any further decline in dollar amounts for the print business in Q3?

Kathleen Chien

Yes, we are expecting that as a percentage of revenue contribution as well as in absolute dollar amounts that we do expect the print contribution will decline. So, yes, we are – despite the fact that you have already seen that there has been a pretty steep decrease already in the second quarter which I think on the last call we also talked about that. We felt that the Chinese New Year was actually a very peak period for the print business. In fact in the first quarter we felt that had outperformed our expectations certainly. And so we did expect that it would decline in the second quarter already. But we are continuing to expect that as the online platform continues to gain momentum, continues to gain acceptance, that the print contribution, both as a percentage of revenues as well as in absolute dollar amounts will decline.

Wendy Huang - RBS

If this is the case, then it seems that this will put your print advertising contribution to the total revenue to below 15%. And also, it seems that this business is kind of on a trend to reach 10% of total revenue levels. So what kind of long-term exposure you plan to keep to this business segment? I remember previously you mentioned that you will still keep this segment, but what kind of optimal percentage revenue from this segment is in your view?

Kathleen Chien

I think, Wendy I think we have always talked to the fact we believe that this is a very city by city decision and I think we continue to look at it that way. As you know that in the second quarter we actually ramped down another city again. We closed down Kunming at the end of April. So I think again we are going to be ongoingly reviewing this situation as contracts come up for renewal, as we talk about the outlook for the different cities. So I expect that. Again the good thing about it I guess is that it’s becoming a smaller contribution so that’s its impact on the company total performance will be more limited but I think still on – at this point we do not see us exiting that as a blanket decision as a segment. So we will continue to monitor its progress and it will be continually a city by city decision. We’ve not ruled out discontinuing other cities going forward. So I think our attitude has been the same on that.

Wendy Huang - RBS

Okay. And also regarding your other HR business. What kind of seasonality should we expect for Q3 and also can you give us some update on your current HR outsourcing network coverage and city coverage as well. Thank you.

Kathleen Chien

Our coverage is eventually in terms of city wise I think we are covering – we cover actually over a 100 cities now across China, in terms of the coverage. I think again in terms of the absolute number amounts of customers that still continues to be small, it’s 13,000 customers in the space that we were working with. So I think we are pleased with the progress in the sense that we can use the uptick, we can see that the companies are continuing to expand and extend the scope of their service with us if you will. So working with us you actually have more employees that are outsourced and what not. So I think that was a very encouraging sign.

Unfortunately I think outsourcing and some of the other services tend to be a little bit sort of a not as smooth in terms of this growth pattern some times. So some quarters that have higher growth, other quarters have lower growth. But I think that in the last few years I would say probably 20% to 30% has been sort of the average kind of the growth for the segment, overall an annual basis. So I think the second quarter we are very pleased with that. I think the third quarter we don’t expect any special seasonality as it relates to the other businesses. But probably in the fourth quarter things will be a little bit different. But first quarter we are not expecting any sort of extraordinary circumstances. In the fourth quarter but we will probably see some of the other HR services will include contribution from campus product which actually will be then very focused on the fourth quarter.

Wendy Huang - RBS

I see. And you just mentioned the 20% to 30% growth for the whole segment; are you talking about the growth for your own company or are you talking about the overall HR outsourcing industry's in China?

Kathleen Chien

I think we can speak to ourselves, I think it’s very difficult for anyone to actually be able to give that number for the industry overall because the definition that people give to that is actually quite different. But I think to be honest so I think this is a thing that I would expect that we’re probably outperforming the market at any given time in that space because it’s a new segment. It’s one that everyone has to work very hard on customer acquisition and some of that is captive business side, a lot of these government entities in the past which I would not expect to be high growth, but it’s a steady business, a steady base of customers that we have had in the past.

Wendy Huang - RBS

Okay. And finally on your coupon business, Area Link, you mentioned in your prepared remarks that 50 million is total investment you made in the company. Does that imply that there will be no further write-off from this business?

Kathleen Chien

Yes. This is a impairment that we made from full amount so there will not be additional, that’s correct.

Wendy Huang - RBS

Okay, great. Thank you very much.

Kathleen Chien

Thank you, Wendy.

Operator

Thank you, Ms. Huang. And the next question comes from Ming Zhao from the company of SIG. Thank you, please go ahead with your question

Ming Zhao - SIG

Thank you. Good morning, everyone. I have two questions here. First, on the second quarter the number of online customers, as if you saw it from the past two years, from Q1 to Q2, you know, obviously Q2 '09 has the impact in the aftermath of the financial crisis. But last year Q2 the growth rate of that advertising number is pretty significant, and it has significantly slowed down this quarter. Could you give us some explanation on that? Or is that the way you look at this number?

Kathleen Chien

To be honest, Ming, I think if you look at the last few years, I mean the Q2 2010 was probably the highest growth quarter period in terms of absolute numbers. But if you look at Q3 and Q4, the pace had actually kind of tailed off a little bit. So I think sometimes it’s not so linear in terms of how that’s going to change over time. But I think in terms of the absolute number of customers we have added, both first and second quarter, I think that’s pretty much in line. So I think the market sentiment and the trend we feel that has not been changed if you will. I think obviously ’09, ‘010 are little bit sometimes, a little kinky in terms of how it changes from quarter to quarter. But I would say that we are pretty pleased with where we are and I think that by looking at the last few quarters, I mean first and second quarter is pretty much on the same track. So we are pretty pleased with that.

Ming Zhao - SIG

Okay. That’s fair. So my second question is more sort of a macro question. You look at the stock market performance today in the U.S. It caused people to think about in those foreign companies in China, are they going to freeze hiring like they did after the financial crisis? So based on your knowledge about the market, your conversation with those customers, what's your view on the macros impact on your business in the second half of this year?

Rick Yan

Yeah, I think Ming, first of all in terms of our customers base if you look at the 169,000 customers that we transact with in the second quarter, the majority of that is really local Chinese companies. Multinational in terms of number of multinational companies in China is a pretty small number compared to the overall universe. Also, I think the – I think we all know what the concerns are in terms of the – why the stock market kind of – what happened in the past 24 hours and I think China remains to be one of the few growth areas people can identify and invest and get some more growth coming out. So even when we talk to multinational companies in China we felt that most of them are still looking at opportunities in China. They might be cutting back in U.S., might be in Europe but we do feel that most of them are still pretty aggressive in terms of their growth plans in China. And I think that’s reflected first of all in our quarter two results and also reflected in the way we gave our forecast for quarter three. We have not seen a change in the trajectory of customer behavior.

Ming Zhao - SIG

Thank you.

Rick Yan

Thank you.

Operator

Thank you, Mr. Zhao. And the next question comes from Mr. Tim McHugh from the company of William Blair. Thank you, sir, please go ahead.

Tim McHugh - William Blair

Yes, thanks. First I want to ask about sales and marketing expenses. It grew slower than revenue this quarter, and that's an area you've kind of talked in the past about wanting to grow in line with revenue and not really being a source of margin expansion. Has that thinking changed or was there something unusual, I guess, that we shouldn't extrapolate from this quarter?

Kathleen Chien

No, I think our strategy is consistent. I don’t think it’s changed. And we are obviously happy that we are able to do a little bit better than we would like but I think that in terms of where it ended up being as a percentage of revenues, I think – it’s at the lower end but I think it’s still – our strategy hasn’t changed certainly.

Tim McHugh - William Blair

Okay. And can I ask, not to nitpick on the numbers, but the interest income here in the quarter was a lot higher than we've seen in the last few quarters and added a fair amount to the adjusted EPS. Can you talk about, is that just shifting towards some of the stuff out of short-term cash into investments, or is there anything else going on?

Kathleen Chien

A couple of things actually. Essentially I mean China has been raising their rate so I mean we are actually just getting better interest rates on some of the deposits there. So that’s just a natural benefit without having to do too much, I guess in that sense. So I don’t want to take the credit for that. But at the same time I think that we did actually try to manage our cash position a little bit better and we’ve actually been moving more of our funds into RMB which is actually a higher interest rate environment then the U.S. dollar, so that’s also a help.

Tim McHugh - William Blair

And so factoring that in, I'm assuming that's going to continue and help the next few quarters. Can you talk about what type of operating margin you're implying for the third quarter and your guidance, just to make sure I'm getting all the pieces right.

Kathleen Chien

Actually, Tim, I think we have given the EPS, you could probably just work that backward in a way but, so we’d given top line as well, so I think that’s where we are, yeah.

Tim McHugh - William Blair

Okay, I just wanted to make sure I was getting the tax and interest right.

Kathleen Chien

I would expect that if you – one thing Tim, good thing that you pointed this out as well , but if you look at the second quarter obviously if you look at the effective tax rate, it’s actually higher than the first quarter. But that’s’ really driven by the impairment loss that we took for the second quarter. So if you had taken that out, eliminated that item if you will, when you actually do the tax calculation. The tax rate between the first and the second quarter are essentially the same which is in the sort of the 18.5% - 19% range. So just to clarify that as well.

Tim McHugh - William Blair

Okay. And then lastly, can you give us an update on what you're seeing from Baidu and in terms of the competitive threat or their efforts to keep trying to expand into this area?

Rick Yan

Baidu started with a beta service in April, so they have been kind of out for three, four months. We have not had too much feedback from our customers in terms of seeing that as an alternative to hiring through 51job. So I think they continue to make different moves but we have not seen too much of them on the sales front.

Tim McHugh - William Blair

And are they still – I think last time you talked about it, you've heard that they've been going after not as much you but other competitors, trying to hire salespeople. Is that still…

Kathleen Chien

Yes, that continues to be the strategy. Yes.

Tim McHugh - William Blair

Okay. Thank you.

Kathleen Chien

Thank you.

Rick Yan

Thank you, Tim

Operator

Thank you, Mr. McHugh. (Operator Instructions) The next question comes from Gillian Chung from the company of Morgan Stanley. Thank you, please go ahead with your question.

Gillian Chung - Morgan Stanley

Hi, thanks for taking my questions. I just want to know about the difference between doing business using local sales office and through the call center. Do you think using the call center will have some disadvantage compared with using the local sales office to provide HR services? Because for the call center it's harder to provide some personal – to personally interact with the clients compared to the local sales offices, which the sales person visit the client's office and get to know, the hiring is better. Also, the second thing is, is it possible to share with us the margin forecast for call center versus the direct sales? Thanks for taking my question again. Thank you.

Kathleen Chien

Yeah. Thank you for the questions. I think in terms of the way we looked at it, I think geographic sort of the base approach versus the centralized approach. I think the greatest difference is, you trade of two things. One is the management complexity and then the other is standardization. I think that when we are looking at the fact that we are pushing out to the near geography with a more standardized product anyways. I mean online platform now as a product is actually well understood and well accepted. So I think that the need for a lot of human interaction in terms of the face to face is actually much more limited then it would be in the earlier years, I would say. So that’s why I think we thought that it would be more appropriate and actually certainly from a standardized service offering we can do, that it can be offered through a call center. So I think the product features and where it’s at in terms of product cycle allows for that to happen.

People can always argue that, yes, it would be great if someone came to the door and talked to me but you could do the same thing in terms of making the introduction through the phone any other sort of the web enabled technology. So I don’t think that’s been something that’s going to hinder our development. I think in terms of the difference and I think it’s difficult to state that in terms of the pure way to look at it. Because I think when we look at our geographic offices, they don’t offer just a single product line. So it’s not quite comparable in terms of the structure. But I would just say that we obviously believe that with the call center approach to standardization, I think that we can offer and the way that we can actually manage and train our team better, I think would be a huge plus. And I do think that ultimately that will be something that could also be very beneficial in terms of the financial structure as well. So that’s how we view it.

Gillian Chung - Morgan Stanley

Thanks a lot for your answer. Thank you.

Kathleen Chien

Thank you.

Operator

And Mr. Yan there are no further questions at this time now. Please continue with 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 of 51job. Thank you, bye, bye.

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