51job, Inc. (NASDAQ:JOBS) Q2 2016 Results Earnings Conference Call August 4, 2016 9:00 PM ET
Linda Chien - VP, HR
Rick Yan - President & CEO
Kathleen Chien - COO & Acting CFO
Wendy Huang - Macquarie Group
Xin Wang - Citi
Ryan Roberts - MCM Partners
Thank you, operator and thank you all for attending this teleconference to discuss unaudited financial results for the second quarter ended June 30, 2016. 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 2016 results was issued earlier today and a copy may be obtained through our website at ir.51job.com.
Before we begin, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. All forward-looking statements are based upon management's expectations at the time of the statements and involve inherent risks and uncertainties that may cause actual results to differ materially.
Potential risks and uncertainties include but are not limited to those outlined in our public filings with the U.S. Securities and Exchange Commission, including our Annual Report on Form 20-F. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements except as required under applicable law.
Also I would like to remind you that during the course of this call we will discuss non-GAAP measures. Reconciliation to the most directly comparable GAAP financial measures are provided in the tables appended to the press release. This conference is being recorded and broadcasted on the internet and a replay will be available through our website at ir.51job.com.
Now I'll turn the call over to Rick.
Thank you, Linda, and welcome to today's call. I will begin with an overview of the second quarter followed by an assessment of current conditions, then Kathleen will provide a detailed discussion of our financial results and provide our guidance for the third quarter of 2016. Finally, we'll open the call to your questions.
While we saw generally stable market demand for our online recruitment services in second quarter, the performance of our other HR services area was impacted by the implementation of the value-added tax policy, effective this May.
Total revenues of RMB560 million were at the high end of our guidance and non-GAAP EPS was RMB3.19 which exceeded our forecast. Our online revenues increased 11% in the second quarter. We continue to execute a balance growth approach by achieving contribution from both increased customer count and average revenue per customer.
The number of active paying unique employers increased 7% to 322,000 companies. Online ARPU increased 4%, marking the fifth consecutive quarter of year-over-year improvement. Despite macro headwinds in this time of economic change in China, we have demonstrated the tangible value of our services to employers and benefitted from more wallet share of customer projects. Our strong brand awareness among jobseekers is firmly intact as we near a milestone of 100 million resumes accumulated into our database.
In the other HR services area, as we expected, the transition from a business tax to a value-added tax scheme affected our financial results and the growth of other HR revenues moderated to 9% in the second quarter.
The application of the VAT scheme on May 1 changed the definition of and reduces the amount that we recognize as total revenues, negatively impacting the comparability of revenues to prior periods.
However, we have seen no change in customer behavior or demand for our other HR services and the uptake and usage of these services; especially our BPO services remain robust. We stay focused on leveraging our sales force and strengthening our efforts to introduce more customers to these services to capture better monetization.
Turning now to our current market assessment, we expect recruitment conditions to maintain positive, moderate growth along the same trajectory of what we have been observing in the first half of this year.
While feedback from employers do not indicate any meaningful changes in hiring quotas in the near term, they are seeking more in terms of quality, effectiveness and results. Employers today are continually looking for better, more efficient solutions that will deliver the best-qualified candidates. The recruiting industry is evolving and we have been taking action to position the Company towards being more complete, multi-faceted yet targeted.
In the past year, we have extended our coverage to three separate jobseeker channels, the core 51job flagship site for entry to midlevel white collar workers, Yingjiesheng for new graduates and 51jingying for experienced professionals. With multiple platforms and their own distinct corresponding mobile solution, we're engaging with jobseekers at greater depth and relevancy across their entire career lifecycle.
Outside of recruitment, we have recently made investments and formed partnerships for training, testing and HR outsourcing services. Arguably, our Company's biggest asset of all, we are strengthening our sales force infrastructure and customer management systems in conjunction with our increased focus on upselling and cross selling assets.
We are laying the foundation to pursue many new opportunities that will be important contributors to 51job's future and we are doing it in a disciplined manner on a track record of sustained, healthy profitability.
I will now turn the call over to Kathleen for a detailed financial discussion of the quarter.
Thank you, Rick. In my following presentation, please be aware that all financial numbers are in the reporting currency of the Chinese renminbi unless otherwise stated. Also, please note that all growth rates are on a year-over-year basis as compared to the corresponding period in 2015 unless otherwise indicated.
Our total revenues for the second quarter of 2016 were RMB560 million, representing a 10% increase. Our online revenues for the second quarter grew 11% to RMB337 million. In line with our strategic plan, the increase was driven by modest growth in new customer acquisitions and complemented by the continued realization of higher average revenue per unique employer.
Our customer account increased by 7% as we net added over 21,000 employers compared to the year-ago quarter. Online revenues per customer continued its upward trend and increased 4% in the second quarter. We remain focused on developing a high quality revenue pipeline with balance growth of new customers and ARPU.
Revenues for other HR services increased 9% to RMB187 million in the second quarter, driven primarily by the greater usage of our business process outsourcing services, which was partially offset by the implementation of the VAT policy change that went into effect this year.
Beginning May 1, other HR services revenues ceased paying the business tax and became subject to VAT plus other relevant surcharges, which changed the definition of total revenues. The recognition of revenues now is on a net of tax basis and therefore reduces the amount of revenues reported by the Company.
Also, particularly for BPO services, the initial uncertainty surrounding how to implement VAT and the thereafter required operational adjustments for the new tax calculation, documentation and payment procedures did cause some delays and disruptions in the on boarding of new business in the second quarter.
We believe that these VAT related operational issues have been largely resolve and our BPO business is back to normal. Although the VAT change will still affect year-over-year revenue comparisons until the second quarter of 2017, we remain confident in the growth prospects of our other HR services.
Gross profit grew 9% to RMB395 million and gross margin was 72%. Included in cost of services in the second quarter was share-based compensation expense of RMB3.7 million.
Sales and marketing expenses increased 14% to RMB198 million in the second quarter. The increase was primarily due to the higher employee compensation expenses and headcount additions.
Included in sales and marketing expenses in the second quarter was share-based compensation expense of RMB3.2 million. Without share-based compensation, our sales and marketing expenses were 35% of net revenues compared with 34% in the year-ago quarter.
Our G&A expenses increased 5% to RMB69 million in the second quarter. The increase was mainly due to higher employee compensation and office expenses. Share-based compensation expense included in G&A was RMB16.2 million.
Operating income increased 5% to RMB128 million and operating margin was 23.3% compared with 24.6% in the second quarter of 2015. Excluding share-based compensation expense, our operating margin would be 27.5% compared with 29.3% in the year-ago quarter.
Due to the change in the value of the RMB against the U.S. dollars and the foreign currency impact on the convertible senior notes we issued in 2014, we recognized a foreign exchange of RMB6.6 million in the second quarter.
Under mark-to-market accounting we also recognized a gain of RMB8.6 million in the second quarter associated with a change in the fair value of the convertible senior notes.
Other income in the second quarter also included RMB64 million in local government financial subsidies versus RMB45 million in the year-ago quarter. Net income attributable to 51job for the second quarter was RMB169 million and fully diluted EPS was RMB2.9 or $0.44 per share.
Excluding share-based compensation expense, the loss from foreign currency translation, the change in the value of the notes as well as the related tax impact of these items, our non-GAAP adjusted net income attributable to 51job was RMB190 million in the second quarter.
Under if converted method, the non-GAAP adjusted fully diluted EPS was RMB3.19 or $0.48 per share.
Now turning to our balance sheet, we ended the second quarter with a strong position of RMB5.34 billion in cash and short term certificate of deposits, equivalent to approximately $804 million. The use of cash resources continued to be prioritized on pursuing investment in M&A opportunities.
We are in advanced stages of discussions on a number of transactions, and based on current conditions, we may utilize up to RMB450 million in cash for these investments. We aim to complete these investments before the end of 2016 and will provide details as appropriate upon closing.
Turning now to our guidance, based on current market conditions and factoring in VAT's impact on other HR services, our total revenues target for the third quarter of 2016 is in the estimated range of RMB575 million to RMB595 million.
For the non-GAAP fully-diluted EPS target our estimated range is between RMB2.45 and RMB2.65 per share under the if converted method.
Please note that this non-GAAP EPS range does not include share-based compensation expense, the impact of foreign currency translation, any change in the fair value of the convertible notes, nor the related tax effect of these items.
Total share-based compensation expense is expected to be between RMB23 million and RMB24 million for the third quarter of 2016. This guidance reflects our current forecast, which is subject to change.
That concludes our presentation. We will be happy to take your questions at this time.
The first question from Wendy Huang. Please state your company name followed by the question.
Thank you. It's Wendy Huang from Macquarie. So it looks like your value guidance suggests that the top line start to kind of stabilize and maybe go back to the double digit growth. Can you give some comment on the overall underlying demand and the result of the macro environment change on your business?
Secondly, just some housekeeping on the accounting issues. I noted that the net loss attributable to the non-controlling interest jumped to RMB492 million this quarter. Can you give some color on the reasons behind it? And also, from the EPS taxation perspective, the diluted share count decreased from the RMB62 million last quarter to RMB58 million this quarter. So how should we actually model the share count, diluted share count basis going forward?
The third question is mainly on your cash usage and M&A activities. You mentioned in your prepared remarks that you may actually enter into various transactions in the second half, so can you provide more color in what kind of particular areas that you are looking for the candidates and also to strengthen your business? Thank you.
Hi, Wendy. Thank you for the questions. I'll try to go through them one by one. If I miss anything, please just tell me. I guess first thing, just going back to demand overall, I think we believe that the situation is stable in China. I don't think that there have been significant changes in the economic trends going on and therefore we expect that the business in the second half of the year should be similar to us versus the first half of the year.
Obviously in the second quarter there were some business disruptions related to the implementation of the VAT change but I think with that largely behind us we hope that the business will go back to a more stable situation and that our customer on boarding and everything else should be resumed back to normal level. So I think that's why we are thinking the second half will be a stable situation.
A second question related to the non-controlling interest, I think maybe the numbers you are thinking about may be a little bit off by magnitude. It's RMB490,000 so it's not a large number.
I don't think -- yes, that's okay. I just wanted to confirm that it's not a large number so there's been no significant change on that front.
The third question related to the diluted share count. I don't think that -- we are looking at, probably looking at similar kind of share count for the third quarter at this point in time, just because sometimes the dilution, the share count is affected by the share price and how that's calculated. But I think that we should expect that it should not be that dissimilar to what the number is for second quarter, as in guidance for the third quarter.
And then finally, in terms of just M&A activities, yes, we are definitely been looking at spending a lot of time in this area. And I think prior to this I think we've discussed how we believe that we're looking in two particular areas; one is just continuing to expand the suites of products and services for the HR customer. So I think we are continuing on that track.
And then on the other side is we've also been exploring further and thinking about whether or not there are opportunities for us to cooperate and invest in opportunities to monetize some of the individuals. So, those are the kind of the two areas that we've been looking at. All the opportunities we're looking at are in China. And so I guess that's as much color as we can give at this point in time, until we close this specific transaction then we'll actually be able to provide you with more specific detail.
The next question comes from Xin Wang. Please state your company name followed by your question. Please go ahead with your question.
Hi, management. Thank you for taking my question. My question is regarding competitive landscape. As recently Liepin had just done $100 million funding and also offer white-collar package targeting at campus and junior white collar market, and basing on just the invest in Liepin.
So how do you see the current competitive landscape? And please provide more color in competition with Liepin and Zhaopin. On the other hand, how should we expect your sales and marketing expenses this year, how to see the allocation, sales cost and marketing activities? Thank you.
Hi, thanks for the question. I guess just the competition first. You know, honestly speaking, Liepin is actually not a new competitor in the marketplace so I don't think that them offering a new package is really going to change the market dynamics.
I think our primary competitor still remains Zhaopin for the most part on online recruitment and that is not something that we expect that will be changing in the short term. I don't -- to be honest, we haven't really seen Liepin active in the campus area at all, so I guess they're trying to maybe explore and make forays, but at this point we do not believe that they are a significant player in these spaces at all.
I might just add that what you just mentioned, existing competitors offering products and services that already exist in the market. We haven't really seen any emerging new competitors or new products or services being introduced to the market.
And we do believe that we are probably more in the forefront of introducing new products and services into the market in the next six to 12 months. So, I think our market has been always very competitive and everybody try to expand into many different things.
I think you also mentioned about [Indiscernible] and I think they've been around for a long time too. And I guess they all try to get more revenue because their revenue base is pretty small and they try to do more products and services and try to capture more revenues, but those products and services are already existing products in the market. So we don't see those meaningful trends that we need to worry about.
Sorry, the second question maybe, just on the marketing. I think yes, I think in the last couple of years our sales and marketing has trended up slightly and we're looking at 2% to 3% of revenue higher than prior years, if you will.
I think it's pretty balanced in terms of what we're trying to achieve because we're obviously trying to have a limited sales growth but we're still adding sales headcounts. But at the same time, because of the new product that we're serving, we're actually going to put some money behind the marketing to also kind of launch and develop its brand in the marketplace.
So I would expect that the sales and marketing as a percentage of revenue to be similar to what it's been for the first half of the year as for the second half and that in terms of the allocation issue, will still be sort of two-to-one in terms of two to sales, one to marketing, as the ratio of spending.
Thank you. Could you please quickly update us on what's the number of sales staff in Q2 and with total headcount? Thank you.
Our total headcount is just about 7000 at this point, of which about 3700 plus is actually sales-related.
All right. Thank you.
The next question comes from Ryan Roberts. Please state your company name followed by the question. Please go ahead with your question.
Hi, this is Ryan Roberts from MCM Partners. Good morning, management. My first question was on the BPO side. I think in the past we've talked about it in, I don't want to say vague terms but in terms of the KPIs we don't really have -- hasn't been anything concrete to really judge how the business is growing other than the reported revenue. I was wondering if management could talk to us about some of the more qualitative factors they're looking at with respect with gauging growth through the segment.
Thank you for the question. I think the reason why there's been not a very specific individual KPI that we can provide in that particular area, just that's because the services actually are not fully standardized and they're very customer-specific in terms of what type of services they pick up. It could be a combination of payroll services plus benefits services, plus other filing management and all those things. That's why there's not a single KPI that we go to. We really just use the growth in revenues to kind of track our progress over time, if you will.
I think our strategy has always been looking at penetrating larger customer -- medium to large customers in this particular area, and once you kind of get into accounts, you start small but the ability to actually increase the number of employees served and individual customers is the area we're pushing quite hard on.
At this point in time, our number of customers served is still in the thousands, you know, four-digit range, closer to the five-digit range at this point in time. But that is something that we're still working on. At then at the same time what we're doing more of is really trying to up the number of employees served per customer we serve. So, that's how we're looking at the business.
Okay. Thank you. Just a little more on that, in terms of the customer acquisition for that segment, I think earlier we talked a bit about some crossover from the online job search business. Are we still seeing more of that, or is there kind of -- the acquisition channels, is there any difference in terms of where they're coming from? Can you give us some color on that as well?
Yes, sure. I mean it's still 100% overlap. All of the customers are customers that we kind of cherry picked from the recruitment pool. Our recruitment pool is still the largest and still expanding. So that is really where we're going to continue to go up.
Okay, great. Thank you very much.
[Operator Instructions]. The next question comes from David Lee [ph]. Please state your company name with your question. Please go ahead with your question.
Hey guys, thanks for taking my question. I just want to understand the VAT impact on other HR revenue. So what is it on a like-for-like basis if you packed out that impact?
Yes, just kind of going to the VAT. The differences really are definitional differences, which is that historically if we actually signed a contract for $100 in revenues, what we recognized as total revenues is $100. And then on that number we'll pay 5% in business tax, getting us net revenue of $95. In the current regime under VAT, everything we do is actually a net of tax basis, and we pay 5% or 6% VAT on the services.
So, instead of recognizing $100 as revenue when we sign up a contract, I will end up deducting the revenue -- the tax to be paid on that, and total revenues actually drop down to $94. Total revenue is at $94, and then net revenue is also at $94. So if you look at the total revenue line, which is what we have historically reported, there will be a 6% gap.
Got you. Okay. In terms of -- if I look at the agreements you guys are talking about with some of the target companies in the second half, are these targets you are -- are the agreements already being signed, or is this something where the RMB450 million -- they're just something that's an estimate of what you guys are about to pay? Can you maybe give us a little bit more color on what these terms are? What are some of these things you guys are looking at, if convenient?
Yes. They're in the advanced stages of discussion at different points, but no, none of the deals have actually come to closing. But the numbers we gave are because we actually have a good sense of what those numbers would be in terms of what we commit to these particular transactions. But they're not closed yet.
Okay, terrific. Also I saw the other income jumped up quite a bit, other income net. Can you just talk about what's the increase from RMB45 million to RMB64 million? What really drove that?
Yes. Those are actually related to financial subsidies that we receive from the government from time-to-time. Last year at around the same time, in the second quarter, we received RMB45 million in financial subsidies. This year that number increased to over RMB60 million, so that is the number that we're talking about.
Okay. Yes, it's very -- it's hugely significant. I just want to understand -- can you break that down? Is this just everywhere in China, or just a particular region, or anything like that?
This is in particular to some of the business that we run specifically, so it's actually just for one company.
For one company, okay, okay. Do you guys expect the year-on-year increase over time will still be something this significant, like 20% plus, or maybe even more?
Unfortunately this is something we can't really predict, because with these government subsidies there are no specifics that we can actually rely on as a guarantee, if you will. But we hope that if we continue to do well in our businesses, that we'll continue to receive the support of the relevant agencies. But I cannot count on that.
Yes, because the reason I'm just kind of curious about this is because the top line isn't growing that aggressively, right, so I'm just kind of curious if this -- I mean how should we think about this as -- I don't want to say a leading indicator, but is this something because of the volume of the business you're doing, or is this something where over time if the revenue growth slows down, this will become -- start declining? Is that a fair way to think about it?
To be honest, I think we just cannot budget for anything, which is why typically we have not tried to give guidance of financial subsidies. And so I would say that those are not related directly. So I would not budget that in almost at this point in time in terms of our own calculations, because we cannot be certain of the timing and the when the amount that can or will be received. Therefore we will report our subsidies as we see them, but other than that we actually don't do that in terms of our regular budgeting process, because we can't count on that.
Okay. Terrific. Thank you so much.
The next question comes from Ryan Roberts. Please state your company name followed by your question. Please go ahead with your question.
Hi, it's Ryan again. I just wanted to jump back in. I actually wanted to ask a question, if I could, about the ARPU growth for the online recruitment. I was wondering if Management could give us some more color about how we should look at that going forward.
It seems like we've added quite a few new services and we're trying to integrate those. I think Yingjiesheng that's going to come online a little bit later in terms of being a big contributor. I was just wondering as we look out ahead to coming quarters and years, how should we expect to see the spending per unique employer shape up?
Hi, Ryan. Yes, I think if you go back through five or six quarters of the Company's numbers, if you will, I think what we're looking at is trying to balance our growth so that half of it is coming from ARPU growth and the other from customer additions, if you will. So I think that is really what we're looking at, and that's what we are targeting for the next several quarters.
That's what we're applying for. At the same time, as we've communicated that we will continue to look at product and service expansions, so we hope that we will be able to continue to have a lift in the ARPU over time to support our growth. So, that's really what we're looking at.
Okay. If I could just touch upon the price question for just one second, I think in the release you mentioned that there's been really no change in overall pricing levels for a while now. I'm wondering, as we bring more services and we add more value to customers, at what point can we think about increasing the price a little bit? Or is that a little bit -- is there some elasticity we should think about there?
No. I think we're focusing on getting customers to take up more types of services rather than try to jack up the price for the same thing. That's really our strategy at this point in time. China is typically a low price market, as I think everyone pretty much can see, so I think we're more focused on trying to give them more product and have them consume more product rather than try to increase the unit prices.
Got you. Okay. So is it fair to assume that as we're adding more services, the actual bundle price -- the amount of the bundle will go up -- sorry, the spending will go up but the individual service prices that will be pretty constant?
Correct at this point, that's right.
Got it. Thank you very much.
Thank you for joining us today. We look forward to speaking with you next quarter, and we value your continued support of 51job. Have a good day. Thank you. Bye-bye.
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