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51job, Inc. (NASDAQ:JOBS)

Q3 2011 Earnings Call

November 9, 2011 8:00 PM ET

Executives

Linda Chien – Assistant VP, IR

Rick Yan – President and CEO

Kathleen Chien – Acting CFO, COO and Co-Founder

Analysts

Timothy McHugh – William Blair

Wendy Huang – RBS

Wallace Cheung – Credit Suisse

Chun Zhao – SIG

Joseph Tse – FIL Investment

Operator

Good morning, good afternoon and good evening, ladies and gentlemen. Thank you for holding. Welcome to the 51job Inc. Third 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. Instructions will be provided at that time. (Operator Instructions)

I will now hand the conference over to Ms. Linda Chien, Head of Investor Relations. Thank you, ma’am. Please go ahead.

Linda Chien

Thank you, Maggie, and thank you all for attending this teleconference to discuss unaudited financial results for the third quarter ended September 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 third quarter results was issued earlier today and a copy may be obtained through our Web site at ir.51job.com.

Before we begin, I would like to remind you that during this call, statements regarding targets for the fourth 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 expectations and actual results could differ materially.

Among the factors that could cause actual results to differ are the number of recruitment advertisements placed; sales orders received and customer contracts executed during the remaining weeks of the fourth quarter of 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 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 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 highlights of the third quarter, followed by Kathleen with a detailed review of our financial results. Then I’ll discuss current market conditions and our guidance. Afterwards, we’ll open the call to your questions.

Our third quarter performance was characterized by solid revenue growth and profitability. Total revenues for the third quarter was RMB343 million or approximately US54 million, a 26% increase over the year-ago quarter and on a similar trajectory as the first half of 2011

Leveraging scale economies, we expanded our gross margin, reaching a record high of 72.4% in the third quarter, despite continued investment in product development, head count additions and increased employee expenses.

Net income in the third quarter increased 55% compared to the year ago period. Our non-GAAP EPS was at the high end of our guidance coming in at RMB1.9 or U.S. US0.59 per ADS.

Taking a closer look at each business area, our online business continued to exhibit a strong growth trend as revenues increased 49% year-over-year. During the quarter, we extended our dedicated sales coverage and seeded those local markets for new customer acquisition efforts. We now have over 2,200 sales people directly engaging HR managers in 75 cities across Mainland China, 25 cities with physical offices and 50 cities covered by Wuhan call center. We also saw further improvement in average revenue per online employer in the quarter due to greater demand and successful transition to our new price list put in place this April.

We raised online ARPU to RMB1,285 in the third quarter and it is back within the historical range of RMB1,200 to RMB1,300 that we had maintained before the global financial crisis. The significant pickup in ARPU is a positive sign, which indicates to us that the recruitment market remains tight, especially for managerial grade staff as employers compete against each other for talent. In addition, we note in particular that the ARPU increase was led by enterprises of larger size or budget, as they spend more to attract the best candidates.

Another highlight of the quarter was the growing contribution of our other HR services to total revenues. The other HR services area is on pace to meaningfully overtake our print businesses this year. The nature of the core revenues generated in other HR services area tends to be more recurring and less cyclical, providing a positive counter balance to our recruitment revenues. We are making strong and steady progress in rolling out our outsourcing and training services to more employers in China.

For the print business, we continue to monitor the developments within each local market, taking actions to seize operations if and when appropriate. We recently terminated the “51job Weekly” publication in Chongqing, leaving 14 editions in our portfolio. The managed downsizing of print has been slowed as we guide employers to our online platform and other recruitment service offerings.

We are very pleased to be ramping up a record year of revenues, margins, and profits. With our longstanding leadership in the industry, trusted brand, and deep reach, and insight into HR Departments in China, we remain focused on opportunities to consolidate our position, drive sustainable long-term growth, and deliver returns to our shareholders.

I’ll now turn the call over to Kathleen for more detailed financial review.

Kathleen Chien

Thank you, Rick. Revenues for the third quarter totaled RMB343 million, a 26% increase compared to the same quarter in 2010. Our online revenues for the third quarter were RMB213 million, an increase of 49% compared to the same quarter in 2010. The number of unique employers using our online services increased 16% year-over-year to almost 166,000 companies in the third quarter due to new customer acquisition and growing adoption of online services.

We also saw a 28% increase in the average revenue per online customer compared to the year-ago quarter due to the greater customer spending and the impact of the new price list that we introduced in April.

Since the introduction of the new rate card, our average revenue per unique online customer has increased approximately 15% from the first quarter of 2011, exceeding our initial expectations. The customer migration has been smooth, and we believe that their acceptance of the higher prices continue to reflect a favorable demand environment.

Print advertising revenues decreased 31% to RMB43 million compared to RMB62 million in the third quarter of 2010. The decline was primarily due to the discontinuation of print operations in a number of cities over the last 12 months, and also the corresponding decline in advertising pages. Print advertising pages in the third quarter of 2011 decreased 38% to approximately 1,300 pages compared with about 2,100 pages in the prior year quarter.

However, the page volume decreased was partially offset by the higher revenue per page. Our average revenue per page increased 12% due to the greater contribution from the higher priced cities. We expect print revenues as a percentage of total revenues to further decrease in the fourth quarter.

Other HR services revenues grew 31% to RMB88 million in the third of quarter of 2011 due to the increased demand and customer acceptance of our outsourcing and training services. Revenue contribution from other HR services was approximately 26% in the third quarter, and we expect this percentage to increase in the fourth quarter due to strong seasonal demand for services such as campus recruitment.

Gross profit increased 34% to RMB236 million and gross margins increased 400 basis points to 72.4% compared to the third quarter of 2010. The margin expansion was primarily due to the economies of scale and operating efficiency.

Included in cost of services in the third quarter was share-based compensation expense of RMB1.8 million. Sales and marketing expenses increased approximately 20% year-over-year to RMB82 million in the third quarter of 2011, mainly due to the sales force additions and higher salary expenses, commissions, and bonuses.

Included in sales and marketing expenses was share-based compensation expense of RMB1.5 million in the third quarter. In line with our practices in past years, we are stepping up our hiring efforts and increasing spending on marketing activities and customer events in the fourth quarter.

G&A expenses for the third quarter was RMB42 million, an increase of 8% from the year-ago quarter, due to the higher share-based compensation, rental and office expenses. Share-based compensation expense included in G&A increased to RMB7.8 million in the third quarter compared with RMB4.5 million in the same quarter of the prior year.

Operating income for the third quarter of 2011 increased 63% year-over-year to RMB112 million. Our operating margin improved to 34.4% compared with 26.8% in the same quarter of last year. Excluding share-based compensation expense, our operating margin reached a record high of 37.8% in the third quarter. Net income for the third quarter increased 55% to RMB97 million compared with RMB63 million in the same quarter of 2010.

Our fully diluted earnings were RMB1.65 per common share, which is equivalent to US0.52 per ADS. Excluding share-based compensation expense and loss in foreign currency translation as well as their related tax impact, our non-GAAP adjusted net income increased 55% year-over-year to RMB112 million in the third quarter. Non-GAAP adjusted fully diluted earnings per common share were RMB1.89 or U.S.US0.59 per ADS.

Looking at our balance sheet, our cash in short term investments increased to RMB1.9 billion or approximately US301 million, which is over US10.00 per ADS.

We recently entered into a contract to acquire a new office building in Wuhan to accommodate our expanding sales and service team. The transaction is subject to certain closing conditions and the purchase price is expected to be in the range of RMB70 million to RMB73 million, which is approximately US11 million. Additional expenses will be incurred to prepare and furnish the building for occupancy in 2013. We expect to begin making install payment for the purchase in the fourth quarter funded by existing cash reserves.

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

Rick Yan

Thank you. Over the past few months, global economic uncertainty has increased, including concerns about a slow-down in China. While there has been tremendous volatility in the stock market as a result of these fears, the recent hiring patterns and trends we’ve observed by employers in China have remained within our expectations, relatively consistent and in-line with behavior seen earlier this year.

The demand for recruitment related services is inevitably correlated with overall economic sentiment and business confidence, but we believe that several dynamics today differ from three years ago. First, navigating through the previous downturn was a valuable learning experience. Our organization is leaner, our operations are more efficient, and our cost structure is better aligned to respond to market changes.

Second, the composition of our revenues has changed significantly. We primarily generate our revenues now from our online and other HR services area, rather than print, which is more transactional in nature and subject to weekly sales fluctuations. The revenue models for online and other HR services are mostly subscription membership, generally with longer contract terms and (inaudible) provide better sales visibility.

Third, we believe the ongoing development of the Chinese economy plays to our strength and advantages. Promotion of the services sector, which is a stated goal of China’s five-year plan enacted this year, is driving demand for more skilled, white collar workers. Continuing urbanization is creating more commercial centers and denser labor pools, where we can leverage our network to bring employers and job seekers together. In addition, the rapid growth of online population in China has accelerated the understanding and adoption of the Internet as the platform for business transaction and delivery of services.

We are closing monitoring customer demand and feedback, but as we’re having to the seasonally slow year-end period, we will have to wait until Chinese New Year for more clarity on next year’s hiring plans and budget. Fortunately, in 2012 Chinese New Year falls on January 23rd, which will allow us an earlier than normal glimpse into year’s recruitment market zone and sentiment at the time.

On the competitive front, we have not seen meaningful changes in online recruitment industry landscape or structure recently. While there have been new market entrants this year, the competitors we face on the employer end are generally the same as before. While perceived low barriers to entry have consistently attracted waves of interest and large influx of capital into our space, we believe the hurdle of success is also getting higher as our user base continued to grow at a rapid pace, surpassing 51 million registered job seeker accounts at quarter end.

To us, the focus remains clear: diligently execute our business plan, whose soundness and sustainability has been validated by the 34 consecutive quarters of profitability we have achieved. We believe that our track record speaks for itself and we’re confident that we can continue to compete aggressively and win.

Turning now to our guidance. Based on current market conditions and taking into account historical seasonality, our total revenue target for the fourth quarter of 2011 is in the estimated range of RMB360 million to RMB370 million. Our estimated non-GAAP fully diluted EPS target is between RMB1.85 to RMB1.95 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

We believe that we are well prepared and positioned in both the short and long term. We maintained firmly the online recruitment space in China while at the same time building our presence to capture the burgeoning HR outsourcing opportunity, which may one day prove to be larger than the recruitment market.

The power of our integrated operating model allows us to sell and distribute the widest range of HR services to the largest network of HR departments in China, creating the strongest scale economy, deepest customer relationships, and greatest value for our shareholders.

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

Question-and-Answer Session

Operator

Yes, thank you. (Operator Instructions) The first question is coming from Tim McHugh. Please state your company name followed by your questions. Please go ahead with your questions.

Timothy McHugh – William Blair

Yes, thank you. Tim McHugh with William Blair. First I want to ask you about the customer account in the online recruiting business, the growth rates slowed and I think it’s somewhat unusual for it to be down sequentially. Can you talk at all about that and does it in any way reflect some different trends in small and medium-sized businesses, versus large businesses that you’re seeing out there, which also perhaps might explain why the revenue per customer was higher?

Kathleen Chien

Tim, thanks for the question. I think we feel that yes, while it’s down a few thousand quarter-over-quarter, if you will, sequentially speaking, we still feel that overall the picture has not changed, the overall demand environment. We did note that the larger customers tended to be more committed and they had a sort of a longer-term plan, and were executing on that a little bit more. And they are also spending a little bit more, which also helped their revenue per customer, if you will, on the online side.

But I’d say overall that I don’t think that has been a meaningful change in the trend, because it’s only a couple thousand off of the last quarter’s numbers. And in earlier years we’ve often had a situation where between the second and third quarter, typically, it doesn’t very change much anyway. I think the notable difference is probably last year, where things seemed to continue to pick up very significantly.

So, I think, you know, it’s pretty much in line with our expectations, and I do think that, yes, it is true probably that the larger customers seemed to have spending a little bit more than otherwise and I think, but overall I would say that the environment hasn’t really changed and I would not say that. We would note that there has been a sort of very significant drop off of all SMEs at this point in time.

Timothy McHugh – William Blair

Okay, and then lastly can you talk a bit for Q4 here? The guidance seems to imply an operating margin that’s fairly similar to the first half – I’m sorry, to the third quarter and the earlier parts of the year, but I know sometimes you see a lower margin as you ramp up spending on sales and marketing, and those sorts of things in the fourth quarter seasonally. It doesn’t – I know, you said in your remarks, you expect that, but it doesn’t seem to be like you expect a lower margin. Am I wrong in thinking about the seasonal trend or there are some other factors we should think about?

Kathleen Chien

I think, overall we pretty much feel that in terms of the – the revenue of scale that we have gone through has really helped us. We are at the level where that – I think we’re doing a good job in terms of absorbing a lot of the additional costs to investments on sales, marketing, and whatnot. So we feel that the margin targets that we basically put out there are something that we can achieve. I think – this is where I think we’ll be spending more money definitely in terms of the absolute dollar. We just feel that we’re able to absorb that given the revenue sales increase that we’re going to be realized at the same time.

Timothy McHugh – William Blair

Okay, then if I could slip one more in just, the sales force you gave the number for, I think it was 2,200 you’re up to now. Can you give us an estimate of roughly what percent of growth that represents?

Kathleen Chien

This year so far, we have added about I think a low double-digit, I think it’s about 12%.

Timothy McHugh – William Blair

That’s year-to-date or versus Q3?

Kathleen Chien

Year-to-date. Year-to-date, yes.

Timothy McHugh – William Blair

Okay, thank you.

Operator

Thank you. The next question comes from Mr. Phillip Wren. Please go ahead with your questions.

Unidentified Analyst

Hi, good morning, Rick, Kathleen and Linda. Thanks for taking my question. First of all I would like to drill down a little bit more about your customer mix. Will you share with us that how many of yours customers are SME versus big corporation? And then if you will, if you can give us some color on your top three or top five sectors in terms of revenue contribution and what are the trends in terms of (inaudible)?

Rick Yan

Phil, I think I got your first question, which –

Kathleen Chien

Yeah, can you repeat the question? You are breaking up a little bit Phil. We didn’t quite hear it.

Unidentified Analyst

Oh, sorry. I just wanted to drill down a little bit more about your customer mix. For example, the percentage between SMEs and big corporations? And if you will also give us some color on your top three or top five sectors that what are the trends that you have been seeing lately? Thank you.

Kathleen Chien

I will answer the second question first, which is, I actually don’t think that there has been a difference in terms of the sector performance. I think most of the sectors have been pretty strong across the board. And I think that that continues to be the same picture. I know that for example, this year people have been little bit concerned about real estate or property companies, but in fact they have been recruiting just as aggressively as other sectors, because although I think the government policy has been sort of been targeted to reign in that sector, if you will, I think people are making longer-term investments. They do believe that the industry continues to grow in the long-term.

So I don’t – we haven’t seen I would say sector different in terms of recruiting pattern. So we are very, very broad-based, so I think if you look at FMCG, you look at retail, you look at the tech services, everything. So I think it’s pretty spread out that I wouldn’t highlight any of the sectors having sort of an out performance or under performance overall in our portfolio, sort of the white collar job marketplace.

And I think the first question, I think there is no like a perfect definition today what is the larger company versus smaller company. All we can say is that for a larger company when we talk about that we’re probably talking about companies that have longer recruiting plans, have more sophisticated and mature HR departments, and they seem to be spending more overall this year, because I think that they, again, they’re actually better at planning for the long-term. So they’re not sort of subject to sort of wild swings or hiccups, depending on what the media is putting out in the news every day. I think that overall, again, all we can say is that small-medium size companies by definition is the majority of the marketplace and that’s kind of where it’s always been and that’s not going to change any time. And that would be – again, I say, the majority and that would be by definition I think that’s at least 70% to 80% of the marketplace.

Unidentified Analyst

Right, thanks, Kathleen. A follow-up question about your online recruiting. Obviously we are seeing some healthy trends in terms of ARPU, and I am just curious that since you rolled out the new pricing, how many of the customers adopting the new pricing versus some of the contract maybe have a longer horizon that allows you enjoy the lower price?

Kathleen Chien

Well, we rolled out the new price, as you know, Philip, in April, so we’ve gone through the end of Q3 at six months of this. So technically anyone that would have contracted before April 1st would have been in at the lower price, so we expect to finish the rollout by end of first quarter next year. So there is still a fair percentage of people that would have been locked in at the pre-increase rates.

Unidentified Analyst

All right, thanks a lot.

Kathleen Chien

Thanks, Philip.

Operator

Thank you. (Operator Instructions) The next question comes from Wendy Huang. Please say your company name followed by your questions. Please go ahead with your questions.

Wendy Huang – RBS

Good morning, Rick, Kathleen, and Linda. This is Wendy Huang from RBS. My first question is, when you raised your price in April, you guided 5% to 10% year-over-year increase from April onwards to Q1 next year. So given the stronger dynamic of the big advertisers on your platform, do you have any plan to increase ARPU for guidance?

Kathleen Chien

To be honest, Wendy, at this point, I don’t think we’re going to do much to change. We’ve pretty given revenue guidance, that’s kind of where we’re at. I don’t think that is going to change meaningfully between the third and fourth quarter based on what we can see at this point. So I think the bigger question for everybody including ourselves is really thinking about beyond 2011, what will the picture would look like in 2012. So, I think we’ll continue to keep you updated on that, but we’re pretty happy with how we’ve executed the price increase this year. The ARPU is the reflection of both – more spending and sort of the price increases. So, we’re ahead of our expectations and we’re happy with that, but I think at this point, we don’t expect that it should move too much I think in the fourth quarter.

Wendy Huang – RBS

Okay. My second question is your Q4 revenue guidance implied only a 19% to 22% year-over-year growth, so this is lower than what we observed in the first nine months of 2011. So, I just wonder what have made you less optimistic about the recruitment demand or your revenue growth?

Kathleen Chien

To be honest, Wendy, we are actually, there is couple of things that I would say. One is that obviously we have much more limited expectations on the print side. So, I think that’s one thing that’s going to be meaningfully different from people’s expectations probably earlier this year, and it continues to decline and we are ratcheting back the plan, if you will, on the print side. So that’s going to be something that I hope that people will take into account into, but we are still very pleased with our progress on both the other HR services and actually on our recruitment. So, I think the overall picture for us, I think trajectory-wise hasn’t changed. I think just the print market is going to be something that we have to just reign in expectations for, and so that’s a big part of that.

Wendy Huang – RBS

Okay. And also you just mentioned you recently purchased a new office building in Wuhan. So, can you give us some guidance for the 2012 CapEx as a result of that change?

Kathleen Chien

Well, we’re contracted to buy the building. So, technically we are actually not going to take possession of that until end of 2012. So, at this point, it will not actually impact our P&L really for 2012.

Wendy Huang – RBS

How about CapEx for 2012 then?

Kathleen Chien

The building, actually, the contracted price for that is about US11 million. So, again that’s not that meaningful in terms of how that would affect us, because that’s going to be depreciated for a long period of time. So it’s a very small percentage.

Wendy Huang – RBS

So the renovation and whole construction will take one year, I guess that should include all the kinds of costs in 2012 as well, right?

Kathleen Chien

No, we will not take possession of the building until end of 2012. It’s under construction now. So, we have contracted to buy, it is not ready for delivery, yet. So, I think that we will be including that in 2013 for the most part.

Wendy Huang – RBS

Okay, great. Thank you, Kathleen.

Kathleen Chien

Thank you, Wendy.

Operator

The next question comes from Wallace Cheung. Please state your company name followed by your company name followed by your question.

Wallace Cheung – Credit Suisse

Hi, good morning. This is Wallace from Credit Suisse Hong Kong Research. Hi, Rick, Kathleen and Linda, thanks for taking my question. I think there are two questions here say. One is, I know it’s difficult to have a clear visibility about 2012, but say vis-à-vis like three months ago or one, two months ago how would management see the online recruitment market? Are we going to see like relatively weaker, met expectation, or actually seeing the situations, actually feel pretty much stable?

Second question is, I think for sure, on macro basis there could be some concern about the slowdown in economy. From management perspective how would you prioritize the strategic initiative, say, for example like try to maintain profitably or (inaudible) on a more long-term business, will management take this opportunity to be even more aggressive, expanding into like non-recruitment areas or even maybe doing some potential M&A to expand in market share in order to sort of increase the market share in longer-term when market pick up? Thank you very much.

Kathleen Chien

I guess the first question in terms of demand overall, again, I don’t feel that we’ve seen much difference at this point. I think our expectations for 2011 has been pretty much what we kind of communicated with everybody after Chinese New Year. So I think the demand environment for us I would say has not changed very much. To be very honest, again, we don’t try to look on beyond 2011 after Chinese New Year until it happens because, again, we get a lot of feedback, we have lot of communications, but usually the tone really get sets after Chinese New Year. And so I think we’ll wait to kind of see what the environment looks like. To be honest, I think sometime requirement – it seems to little bit turn on the dime, because sometimes business confidence is something that’s very hard to kind of predict or foresee three months in advance. So I think it’s very difficult to say what the picture will look like in February of 2012.

So I think – but overall we just say that at least 2011, I don’t think the picture has changed from – and it’s been consistent with our expectation all along, and that continues to be the case I would say at this point.

Rick Yan

And we have always stated that our strategic objectives is sustainable and profitable growth. So growth is our key mission and it has to be done on a sustainable and profitable way. And from that regard, we are certainly focused on growth. We are profitable because we are more efficient. We became leaner and more efficient after the last global financial crisis. So we always look at efficiencies of improvement opportunities, but it doesn’t mean that this is done just for the sake of increasing profitability, but it’s more to get ourselves more efficient and more sustainable in-terms of long-term growth.

You also asked whether we might look into other areas and also whether we might look at M&A opportunities. And I think we always look for growth opportunities including M&A opportunities, but I think it’s hard to find something that’s good and reasonably priced. And maybe the opportunity might come up if market prices becomes more rational, but we do have a lot of cash reserve on our balance sheet. And we certainly looking at opportunities to utilize that asset to further drive our growth.

Kathleen Chien

Yeah, and I will say, Wallace, as you know, we’re already in the lot of the other HR service segment, which is unlike anybody else in the marketplace. We’re the only company that’s serving more of a fully integrated service provider in the HR vertical. So I think we continue to be very innovative in our product development, we continue to look at opportunity into HR agencies and I think that’s something that we are way ahead of everybody else in the marketplace, because there is one else I can point to who has actually done that.

Wallace Cheung – Credit Suisse

Thank you for very insightful answers. Just one quick follow up, what if the economy sort of – against everyone including your company, so how we will management respond to it and how much flexibility that you can say, in terms that maybe (inaudible) maybe head count, wherever, that you can manage as such at least we can achieve the management target to maintain sustainable growth say in next year?

Kathleen Chien

Wallace, I am sorry, you’re breaking up, we could not hear your question. Can you repeat the question?

Wallace Cheung – Credit Suisse

I just – sorry about that. I just want to simplify that how would management respond to the market if the economy really slowed down more substantially than what we expected before?

Rick Yan

Back in 2008, that happened, just a few years ago, first quarter of 2009 we were down year-over-year 25%, but we were still be able to maintain profitability. Fundamentally, you do two things, you look for new growth opportunities and we started some new online products including some services that we focus on the job seekers rather than corporations. And at the same time you look at your cost structure and you just get yourself more efficient. So I don’t think there is anything different. This is how we manage when, you know, growth and efficiency. So we’ve gone through that just a couple of years ago, and I think as we mentioned in the remarks, we are now a leaner and more efficient. And I think also at that time, print was still a bigger component in our revenue portfolio, which was more transactional and more subject to fluctuations in the business cycle.

Now we are more on the online and other HR services area, which are more membership based and subscription based and have a longer kind of for sales visibility. So I don’t think – we have been around for more than 10 years and we have been public for seven years. And we have been profitable for 34 consecutive quarters. And I don’t think if the economy comes down we know, we will continue to look for opportunities for growth and we will continue to manage our efficiency.

Wallace Cheung – Credit Suisse

Thank you very much.

Operator

Thank you. The next question comes from Ming Zhao, please say your company name followed by your questions. Please go ahead with your question.

Chun Zhao – SIG

Thank you for taking my questions. This is Ming Zhao from SIG. I wanted to get updates on your call center. How is that call center doing so far? How many staff do you have in there? How has the customer acquisition because of that going right know?

Kathleen Chien

Ming, thanks for the question. I think we are progressing nicely on the Wuhan center. We have sales and service desk are based there. I think we have about 350 people there at this point in time. So and that’s part of the reason why we continue to believe that we need to expand and actually acquire more office space in Wuhan – contracted to acquire more spaces as a result of that. So, we’re pleased with the progress. Having said that, again, that is a small part of the total head count for us and therefore in terms of – its contribution, it’s still very limited, single-digit, but we’re happy with having this centralized approach to reach out to newer geographies and think we’re progressing just along our plan quite well. So, we’re pleased with that.

Chun Zhao – SIG

Okay, just follow-up on that, geographical distribution of the customer base for online recruitment. What is the current amount looking like – Tier 1, Tier 2 cities, Midwest, how is that distributed in your customer base?

Kathleen Chien

Sometime, we think it’s misleading to look at that way because decision-making centers would actually cover office locations across different places, so somebody that makes a decision in Beijing actually might have recruiting demand across all different cities in China, so it’s difficult to kind of look it that way. So, I think that in obviously the coastal centers are more developed. They actually have a bigger Internet marketplace overall, larger critical mass of users. So, I mean the cities that we’ve been in the past are going to be the ones generating the majority of our revenue. So, that’s kind of where we actually have more resources as well. So, that’s kind of it, but I think in terms of, again. the bigger cities are – everybody knows Beijing, Shanghai, Guangzhou, and Jinan are going to be the bigger cities and that’s kind of in line with everything else. So, I think there is not really big patterns that we can point to.

Chun Zhao – SIG

Okay. So, another follow-up question to the earlier question. In the third quarter, this reduction of online customers by a few thousand. Has that anything to do with the group buying companies or the real estate companies, automobile industry, those are seemingly the weak spots in the economy and what’s yours, what are you seeing there?

Kathleen Chien

Those guys actually account for a very tiny, tiny percent of the customer pool. So I would not characterize them having any impact on those customer accounts overall as the big driver. So I do, obviously, the sentiment on the group buying companies overall in the marketplace has probably been on a decline for the last few months and people feel that the model is not as sustainable, and so I think some of those companies have been cutting back their head count, so that’s been pretty well publicized. But again, they are not a huge, a part of the total picture and I don’t think that they – I would not characterize them as the reason for our account being off by a couple of thousand, so.

Chun Zhao – SIG

Okay. Thank you.

Kathleen Chien

Thank you Ming.

Operator

Thank you. There is a repeat question from Wendy Huang. Please go ahead with your question.

Wendy Huang – RBS

Thanks for taking my questions. Again, I have some housekeeping questions. First, I remember that historically November is a high season for the campus recruitment. So can you confirm that this will be the trend for the upcoming Q4 as well, so that we will be positive for the other HR business? Thank you.

Kathleen Chien

Yes, Wendy. Seasonally speaking campus recruitment is a big part of Q4, still that continues to be the case this year.

Wendy Huang – RBS

Okay. And similarly your closest competitor (inaudible) is said to plan for a U.S. listing in the coming years, so based on my observation, currently the traffic over the job posting difference between (inaudible) and 51job is just a 20%. So I just wonder if – can you comment on the market share gap, traffic gap or maybe the price gap between you and your closest competitors, and if your observation is different from what I’m seeing now?

Kathleen Chien

Well, okay. Let’s see, first one you said price gap, I think that overall, we both raised prices this year. So I think we’re probably still kind of maintaining a gap between the two of us, but we’re probably now a much bigger gap with the third and everybody else in the marketplace. So I think in terms our gap overall hasn’t changed this year, because they’ve raised prices and we’ve raised prices, so that’s pretty much similar. Is there traffic gap, and what was the other question, Wendy?

Wendy Huang – RBS

The job posting gap, the volume gap.

Kathleen Chien

Actually, I think the gap should be bigger than that. I don’t know where you have your information from, but I believe that the traffic, the posting volume information, I think it is actually the gap to us, it seems to be bigger than that but I don’t know your source, but we believe that it’s bigger than that. It is probably, I’d say, 25% to 30% between that. But anyways, that’s kind of where we are. Again, not meaningful difference within the last period of quarter that we can see. Again, I think that you actually raised a question that no one has actually talked about, which is, what do we think of competition potentially going public. I think to be very honest, we will welcome more transparency overall, because it’s very difficult for us to not have numbers to compare ourselves against. And again, their revenue breakdown or business model might be different from us in a way because they think that they focus just on recruitment as far as we can tell. So I think once hopefully, if they have an opportunity to become public, we can actually have more data that’s more transparent and publicly that everyone can talk about and sort of apple-to-apple basis, but at this point it’s difficult for us to comment on certain things because the lot of numbers are not validated anywhere else and there is no reliable third party data for us to obtain that information.

Wendy Huang – RBS

And relevant question to that regarding the competitive landscape. Baidu recently officially launched their recruitment Web site by (inaudible), so how do you look at this new entry to the market?

Kathleen Chien

I think if you ask anybody in our space sort of the recruitment specialist, if you will, everyone will say that they have actually made much more noise on the PR side than they actually done on Web development or anything else. So, at this point I think, Rick mentioned early as well, the competitor that we continue to see at the customer end continues to be the same people that we saw in the past and that will not include this particular venture that has been backed by Baidu.

Wendy Huang – RBS

Okay. Finally, if I can have one more question. If we look at different moving parts in operating expenses, so historically the sales and marketing cost always go up sequentially as you’re preparing for the next year’s marketing campaign. And also the G&A costs were come down sequentially. So, should we use this as a benchmark to forecast the Q4 G&A and S&M cost?

Kathleen Chien

I think this year, we’ll definitely see probably pick up on both because I think that with a lot of – we’re actually committed to hiring more people, I think G&A cost actually has been held fairly constant for the first three quarters of the year and I think we’re actually going to be probably again adding some head count there as well. So I do think that they will trend up on the absolute dollar terms for everything at this point in time. But again we’ve already given our guidance for our margins, so I think if you net out the picture that’s going to be where it’s going to be at.

Wendy Huang – RBS

Okay, you’ve mentioned that 2,200 head count for the sales people, what’s the total headcounts standing now?

Kathleen Chien

We’re about 4,660.

Wendy Huang – RBS

Okay.

Kathleen Chien

At the end of Q3.

Wendy Huang – RBS

4,600 at the end of Q3?

Kathleen Chien

Yes.

Wendy Huang – RBS

Okay. Thank you. Thanks a lot.

Kathleen Chien

Thank you, Wendy.

Operator

Thank you. The next question is a follow-up questions from Wallace Cheung. Please go ahead with your question.

Wallace Cheung – Credit Suisse

Hi, thank you. Two further questions. One is, can I get a better understanding on the non-HR surface line, the growth and market (inaudible). And say for example even if the economy not exactly doing better than expected can still grow this line as such to offset comp potential downsize from their recruitment campuses? The second part question is a follow-up with the Wendy question on. Obviously, maybe management in the near-term kind of pressure from a new entrant, but have you seen any sort of aggressive hiring from your competitors, especially (inaudible), as such maybe management need to keep your existing talent and maybe to further increase of your salary expenses as well or generally speaking, how can you maintain your talents pool within in the firm? Thank you.

Rick Yan

The first question about – I think your first question is about our HR services, right? I think if you look at the past seven to eight quarters, it’s been going around 30% year-over-year. We believe this is a solid growth trend and actually as we, again, as we said in the comments that the outsourcing market may one day be bigger than the recruitment market. So we think there is still a lot of potential and these, again, as we said is the more recurring revenues. So people who outsource their staff to you most likely they would stay on. Of course, if the economy is really bad and if they have layoffs they might have less people or staff to be outsourced, but those are more recurring and more steady revenues compared to recruitment and certainly compared with print. So I think the other HR area, again, if you look at the past six, seven years that we have data, the growth has been very consistent and solid.

I think your second question is about Baijob or Baidu, but I think they started actually much earlier this year although they said officially they launched a new Web site recently. But they’ve been around for more than six months and they have hired hundreds of people six months ago. They (inaudible) out six months ago and they have not make any impact on the market and on our customer end in the past six months, and I don’t see how changing the name would fundamentally change everything. We have not seen that, we have not seen that they changed their product or model and they seems to be using the same people doing the same thing except changing their names and I don’t see how customers will react to a new name in a meaningfully different way

Wallace Cheung – Credit Suisse

Thank you, Rick. Regarding my first question, just quickly, as I pretty well understand that these market – sort of outsourcing and training service area to be a little bit more fragmented than what we’ve seen in the recruitment side right now. Is there any plan that management will be more interested to consolidate the market or to further expand your market share in this area as such, so to ensure your management target to maintain sustainable growth going forward?

Kathleen Chien

Well, as I think you know – I think Rick reiterated earlier that, you know, growth is always the major objective, how we achieve it really depends on the number of different factors and needs. Consolidation through M&A really is defined by how sound the business model is for the target acquire, what’s their profitability level, what’s the size, because integration also has risk as well. And for a lot of the HR service company in China, I mean, they typically are actually government backed or government owned in the past. There is an extra layer complexity that we need to be very careful about.

Having said that, again, we have the cash on our balance sheet to be able target and afford acquisition if it is appropriate. So, I think we’re in much better position than anybody else in the marketplace to do so. I think when you said that it’s more fragmented than other, maybe a recruitment phase, I would just characterize it is just different stage of development, but in a way it’s not necessarily more fragmented, because I mean recruitment itself was actually very fragmented when we started this well and some of it didn’t exist.

So I think the opportunity is there. We believe that the opportunity ultimately is much bigger actually than recruitment. We have made strides into penetrating the marketplace, unlike anyone else that’s around us in terms of the competition. And so, I think we stand ready and able to capture opportunities for growth.

Wallace Cheung – Credit Suisse

Thank you. Just one final quick question, again, it’s on the non – side. So, as we seeing the revenue keep growing, do you expect quite high operating leverage on – in terms of gross margin and operating margin? Thank you.

Kathleen Chien

We’ve always said that our revenue, I mean, we have very scalable sort of revenue driven kind of scalability for most of our businesses and so that’s how we characterize that business as well, because again, once you have the infrastructure network set up, adding and serving additional customers is actually not sort of going to add meaningful cost to our cost structure. So we believe that the characteristics are the same.

Wallace Cheung – Credit Suisse

Thank you.

Kathleen Chien

Thank you.

Operator

Thank you. The next questions come from Joseph Tse. Please go ahead with your questions.

Joseph Tse – FIL Investment

Hi, this is Joseph from FIL Investments. I have really small question about the cash in the short term investments. I’d like to know more details as to where the cash lies and what exactly is the short term investments?

Kathleen Chien

Joseph, basically cash is just deposited in the bank. Short term is actually defined anything in terms of having longer than three months in maturity. So, they’re actually just in deposits.

Joseph Tse – FIL Investment

So, yielding nearly nothing?

Kathleen Chien

Yielding market rate.

Joseph Tse – FIL Investment

So, can I know what roughly that effective yield is?

Kathleen Chien

Well, it’s –

Joseph Tse – FIL Investment

Ballpark, just ballpark.

Kathleen Chien

If you look at our interest income every quarter it’s about 11 million in total.

Joseph Tse – FIL Investment

So, there is just nothing, okay. Good. The lower, the better actually.

Kathleen Chien

Okay, I’m not sure.

Joseph Tse – FIL Investment

That’s what I’m trying to get at actually.

Kathleen Chien

I’d say that it’s a safety first and then, obviously just yield market rate. Unfortunately, the market rates are not great at this point in time, but I think safety first.

Joseph Tse – FIL Investment

Right, excellent. Okay, I just wonder whether companies like yours may buy some of the trust products, the wealth management products, yeah. All right.

Rick Yan

No.

Kathleen Chien

No, I think safety first.

Joseph Tse – FIL Investment

Excellent, thank you.

Kathleen Chien

Thank you.

Operator

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

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 and bye-bye.

Operator

Thank you. Ladies and gentlemen, this concludes our 51jobs Inc. third quarter 2011 conference call. Thank you for participating. You may now disconnect.

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