51job, Inc. (NASDAQ:JOBS) Q4 2016 Earnings Conference Call February 22, 2017 8:00 PM ET
Linda Chien - VP, IR
Rick Yan - President & CEO
Kathleen Chien - COO & Acting CFO
Ryan Roberts - MCM Partners
Xin Wang - Citi
Welcome to the 51Job, Inc. Fourth Quarter and Fiscal Year 2016 Conference Call and Webcast. [Operator Instructions]. I would now like to turn the conference over to Linda Chien, Vice President of Investor Relations. Please go ahead.
Thank you, Operator and thank you all for attending this teleconference to discuss unaudited financial results for the fourth quarter and fiscal year ended December 31, 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 fourth quarter and fiscal year 2016 result was issued earlier today and a copy maybe 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 provision of the U.S. Private Securities Litigation Reform Act of 1995. All forward-looking statements are based upon management expectations at the time of the statement and involved inherent risk and uncertainties that may cause actual results to defer 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 20F, 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. Reconciliations in the most directly comparable GAAP financial measures are provided in the tables appended to the press release. This conference call is being recorded and broadcasted on the Internet and a replay will be available through our website at ir.51job.com. Now I will turn the call over to Rick.
Thank you, Linda and welcome to today's call. I will begin with a review of the fourth quarter 2016 followed by Kathleen with a detailed discussion of our financial results and our guidance for the first quarter of 2017. Finally we will open the call to your questions. We are pleased to close 2016 with a solid set of results, maintaining good growth and momentum in the online business and managing through the VAT policy impact on the other HR services area, fourth quarter revenues were in-line with expectations and RMB694 million. Non-GAAP EPS was RMB3.61 which exceeded our forecast due to better operating efficiency. Our online revenues increased 15% in the fourth quarter led by an acceleration of employer additions. The number of unique employers increased more than 17% to 337,000. Although year-end is traditionally a slow period for general hiring and we usually experience a sequential decline in the employer count from the third quarter. We benefited this year from the robust customer interest in campus recruitment that's where we were successful new user acquisition by the sales force.
However, the influx of new customers did have an offsetting effect on the overall ARPU as compared to 2015 level that was enhanced by the inclusion of [indiscernible]. Although we are seeing a return to faster growth of employer additions we continue to emphasize upselling and cross selling initiatives aimed especially -- our more sophisticated larger sized customers. We believe our reorganized sales force is now better in-line for productivity improvement in the long term hence we execute a high quality growth strategy focused on achieving both volume and ARPU increases.
In the other HR services revenues increased 12% in the fourth quarter driven by strength in seasonal offline campus recruitment activities in addition to greater usage of BPO and training services. Our full range of services along the entire value chain of human capital management has consistently been our unique competitive advantage in China. Although we will have to absorb the impact of VAP on revenue recognition and year over year comparisons for this assessment [ph] until mid-2017. We look forward to ramping up our sales efforts to roll our BPO and training capabilities to more customers. Beyond just the numbers and we flashing back on 2016 as a whole we're most encouraged about the progress we make on product development over the past year. Behind the scenes we have been working on certain projects and some of them have recently been brought to the market. To improve the user experience we have refreshed the flagship 51Job.com website as well as upgraded our search engine methodology to further enhance job relevancy and matching. Last November we introduced the online employee referral function in our eHire and prior platform, a personal connection is always highly valuable in recruitment and through this function HR managers can disseminate their listings to groups and communities on a social network, track the source of referrals and ultimately reward employees for their recommendations. Also just before Chinese New Year we launched online candidate background check services in collaboration with a credit monitoring company in China. Our online service offerings are more innovative and comprehensive than ever and we have seen enthusiastic response from both employers and job seekers. We are excited about our product pipeline as we continue to incubate ideas and pilot new services that diversify and expand our engagement point with users.
Turning now to our current market assessment, we observed that the year of the roaster is off to a favorable start. With economic conditions in China being viewed as generally stable, we see employers moving forward with their hiring plans and white collar recruitment activity has been healthy. Feedback from our recent research survey on salary expectations shows moderate increases on par with levels off the past two years indicating to us steady and rational labor market conditions. Therefore based on the limited data we have gathered so far in the post Chinese New Year peak period we are optimistic that overall recruitment demand remains solid in 2017. We expect that the market will maintain a positive toll in growth patterns as last year.
Just as the HR industry has evolved significantly over the past two decades, [indiscernible] 51Job taken a meaningful action to adapt and grow to meet the ongoing and emergency needs of employers and job seekers. We are confident in our multi-product, multichannel strategic plan which will further establish 51Job as the most complete HR services provider in China. We believe that we are in a firm position for sustained and profitable growth.
I will now turn the call over to Kathleen.
Thank you, Rick. In my following presentation please be aware that all financials numbers are in reporting currency of the Chinese renminbi unless otherwise stated. Also please note that all growth rates are on year over year basis as compared to the corresponding period in 2015 unless otherwise indicated. Our total revenues for the fourth quarter of 2016 were 694 million representing a 14% increase. Our online revenue for the fourth quarter grew of 15% to 424 million on the back of better than expected customer additions. A number of unique employers rose 17% as we net added nearly 50,000 companies compared to the year ago period. The effect of the strong customer acquisition did reduce our overall ARPU by 2% as it outpaced and offset the continued progress we are making on increasing spend by larger size companies. In addition please note that Q4 2015 ARPU level was lifted higher by the initial contribution of [indiscernible] affected by the implementation of AT [ph] revenues for other HR services increased 12% to 270 million in the fourth quarter. As a reminder beginning on May 1, 2016 our other HR services revenues ceased paying business tax and became subject to a VAT plus other relevant surcharges. The recognition of revenues is now on a net of tax basis and therefore reduces the amount of revenues report. The growth of other HR services in the fourth quarter was primarily driven by the demand for seasonal campus recruitment projects and services as well as the greater usage of our BPO and training services. Our gross profit grew 14% to 487 million and gross margin was 71%. Included in the cost of services in the fourth quarter was share based compensation expense of 3.5 million.
Sales and marketing expenses increased 18% to 203 million in the fourth quarter. The increase was primarily due to higher employee compensation expenses and headcount additions, included in sales and marketing expenses in the fourth quarter was share based compensation expense of 3 million. With our share based compensation expense and sales and marketing expenses were 29.6% of net revenues compared with 28.8% in the year ago quarter. The impact of VAT and the consequent reduction in reported revenues was the primary factor in the higher percentage of sales and marketing spend to revenues in the fourth quarter and it will continue to affect this ratio in the first half of 2017. Our G&A expenses increased 6% to 74 million in the fourth quarter. The increase was mainly due to higher employee compensation and office expenses. Share based compensation expense included in G&A was 13.6 million. Income from operations increased 12% to 210 million and operating margin was 30.5% compared with 31.3% in the fourth quarter of 2015. Excluding share based compensation expense our operating margin would be 33.5% compared with 34.7% in the year ago quarter. Due to the change in the value of the RMB against the U.S. dollar and the foreign currency impact on our U.S. dollar cash deposit and U.S. dollar denominated convertible notes we recognize a foreign exchange gain of 1.6 million in the fourth quarter.
Under mark to market accounting we also recognized a gain of 4 million in the fourth quarter associated with the change in the fair value of the convertible notes. Net income attributable to 51Job for the fourth quarter was 203 million and our fully diluted EPS was 3.45 or $0.50 per share. Excluding share based compensation expense, the gain from foreign currency translation and a change in fair value of the notes as well as a related tax impact of these items non-GAAP adjusted net income attributable to 51Job with was 218 million in the fourth quarter. Non-GAAP adjusted fully diluted EPS was 3.61 or $0.52 per share.
Now for the full year results, total revenues for 2016 increased 13% to 2.38 billion. Online revenues grew 14% to 1.55 billion and comprised approximately 65% of total revenues. The growth was driven by both volume and ARPU increases as the annual count of our unique online employers grew 13% to 461,000 companies and online ARPU rose 0.7% in 2016. Contributing 35% of total revenues our other HR services area grew 11.5% to 826 million in 2016 and was actually natively impacted by the VAT adoption in May of 2016. Gross profit increased 13% in 2016 to 1.68 billion and income from operations increased 8% to 612 million. Net income attributable to 51Job was 566 million and fully diluted EPS was 9.68 million. Excluding share based compensation expense the gain from foreign currency translation and the change in the fair value of the notes as well as a related tax effect of these items, our non-GAAP adjusted net income attributable to 51Job increased 4% to 721 million in 2016.
Under the if conversion method, a non-GAAP adjusted fully diluted EPS for 2016 was 12.13 or $1.75. And turning now to our balance sheet we ended the year with a strong position of 6.08 billion in cash and short term certificate of deposit equivalent to approximately $876 million of which approximately 20% was kept offshore. The priority for the use of cash resources remain on investments in M&A. Since mid-2016 we have completed three transactions using a total cash amount of approximately 259 million. We continue to actively pursue several targets and opportunities. Turning now to our guidance, based on our current market additions and factoring in the VAT's impact on other HR services as well as seasonality related to an early Chinese New Year holiday in 2017. Our total revenue target for the first quarter of 2017 is in an estimated range of 595 million to 650 million. For the non-GAAP fully diluted EPS target our estimated range is between 2.55 and 2.75 per share under the if converted method. Please note that this non-GAAP range does not include share based compensation expense the impact of foreign currency translation and any changes of value fair value of the converted notes nor the related effect of these items. Total share based compensation expense is expected to be between 22 million and 23 million for the first quarter of 2017. This guidance reflects our current forecast which is subject to change. That concludes our presentation. We will be happy to take your questions at this time. Operator, please go ahead.
[Operator Instructions]. Our first question today comes from Wendy Huang with Macquarie. Please go ahead.
This is Hillman [ph] calling on behalf of Wendy from Macquarie. My first question is about the ARPU trend, so if we exclude the impact from the new customer growth and also the benefit from the [indiscernible] last year how has the ARPU being doing for the existing customers and going forward how should we think about the upside as well as the ARPU for 2017 and I have a follow-up question.
In terms of the ARPU trend as you can see that this is something that we have been working no steadily for the last several quarters, in this particular quarter our new customer acquisition actually outpaced our actually original plan so it actually ended up dragging down the over our ARPU but in terms of the existing customers that we're working with we continue to make some progress in terms of lifting the ARPU. So I think if you look at quarter three as a reference point if you will I think that if we're pushing beyond sort of be a 15% customer growth levels we do find it hard to kind of make the offset work for us so that would actually have a negative impact on our ARPU if customer acquisition greater than that kind of threshold.
And another question is on the recent transactions. Could you share more on the business [indiscernible] and also synergy that we are seeking going forward and if possible can we also touch on the valuation piece? Thank you.
I will not be speaking very specific about the valuation of these company just because these are private companies and out of respect of their you know situation that we will not be disclosing their financials for them. The transaction that we had completed two of them are actually for just minority stakes in the company and we're not expecting to operate or get heavily involved in their operations and so that we do not expect them to impact our results directly for the most part but I think that you know these continue to be areas that we're exploring in terms of thinking about how we extend the platform that we have to have a complete set of services for HR. So one of the companies are actually in the area of training that actually focuses on offering services to both individuals and businesses in the field of finance and accounting and another company is actually offering a mobile based platform that's focusing on connecting businesses and individuals to meet the demand for short term and on demand kind of work opportunities. So those are the types of things that we're working on as we continue to build out our services offering in the HR chain but I will not be touching on that valuation again because of their private companies at this point in time.
The next question is from Ryan Roberts with MCM Partners. Please go ahead.
Just had actually a couple if I could, I wanted to also ask about the new customer acquisition. Can you guys give us some color on what drove that and is there any shift in kind of the industry or kind of customer size that we're seeing and I've a follow up.
I think in terms of just customer acquisition in general I think we're at the point where most new customers we take on -- I mean they SMEs for the most part, so as we take on more and more of these if you will it actually has a negative impact on our overall ARPU because they are small customers are starting up using services and paying them for the first time so that's kind of the situation. I don't think that there's any sort of specific observable differences in terms of you know shifts in industry that we're looking at or anything like that but they tend to be small customers or you know private companies these are not large BMS [ph] that or state owned companies or in manufacturing industries for the most part. So I don’t think that there has been any observable differences I guess in that front.
And I want to ask about the impact of [indiscernible] and how the integration has gone? It's been about a year now, just want to see -- how should we look at that impact kind of going forward and the overall results and kind of what should we expect to seek any synergies in other parts of the business.
I think we're very actually happy with the [indiscernible] integration in general because I think as you say yeah it's been about a year plus now into the process and I think we're at now trying to integrate more and more of the back end if you will so that we can actually offer users even more kind of smoother progression from sort of the campus job search process to then becoming someone that is actually in the marketplace that will then be looking for their second and third jobs. So helping them kind of keep that information coming in one place and streamlining the entire process and also on the enterprise front we're also integrating the platform so that companies that actually simultaneously post positions to [indiscernible] to as well to filing jobs. So again making things easier for them to find all the solutions they need in one place. So I think that you know it's actually going very well and we're very pleased with that progress.
So is that entire integration that kind of linking the back end and is that totally done or is that 75% what kind of progress do we have so far?
I say that the basics is in place but we're still looking to add on more features and functionality as well. So I would say the basic infrastructure is in place so that’s kind of 80% I would say and that we're looking to add on more stuff over time.
[Operator Instructions]. The next question is from Xin Wang with Citi. Please go ahead.
My first question, what's the year-on-year growth of [indiscernible] portal respectively in Q4 and how do you compare the ARPU on [indiscernible] and 51Job portal and how will these overlapping customers allocate your budget between these two websites this year. My second question is how do you see the competitive landscape, you think that your peers have being more aggressive in acquiring new customers and do you see any pressure and this case what's your strategy in short to mid-term like in future three years. Thank you.
Let me share the answer to the first question first with Yingjiesheng, I will say that the progress on Yingjiesheng has been the one where we are trying to actually get more customers obviously to take on more services. It's not about reallocation between 51Job and Yingjiesheng or a substitution for the most part. We're actually trying to get more customers to take on Yingjiesheng as a new product for them to purchase if you so that’s kind of how we're looking at that. I would say that the Yingjiesheng growth rate overall is actually faster than 51Job because it is coming from a much smaller base if you will so that is expected and we're very pleased with that situation because again it's about actually bringing a product now to more customers that already have an existing relationship with 51Job but that we're looking for them to buy more of something new rather than to reallocate the budget from 51Job to [indiscernible]. So I guess that’s the Yingjiesheng situation.
Yes in terms of our competitive landscape again we are still competing with the same set of competitors, it hasn’t changed very much. In terms of pressure we did not see any change in terms of the intensity of the competition but more importantly we're focused on new customer acquisition as well as increasing ARPU through up selling and cross selling our products. As you can see that we're introducing a lot of new products, organically as well as through M&A's. Our current share of customer wallet is not very high so we do believe that for the next three years our focus is really on getting more customers and getting more upselling and cross selling so that our ARPU can go up steadily. So that’s our focus. I don’t think the competitive landscape has changed.
Yes and just one more thing I would add I mean if you look at where we are today on our ARPU versus for example [indiscernible] on their ARPU I mean there is actually a very meaningful GAAP at this point in time still and I think it really reflects like how they're looking at customer acquisition overall. I think that we've stated in the last couple of years continuously that we do not think that having too much small customers is necessary investing for a longer term because I think kind of balance what you're looking for in terms of new customer account versus contribution per customer. So I think you know we're always trying to be a little bit more cautious on that front and we're not trying to get everything on under the sun because some of the companies we feel are very, very small and their viability is not necessary long term and not sustainable and maybe we're not looking to go that low if you will in terms of the customer acquisition point. So I think as Rick had said I don't think that the landscape competitively has changed very much in terms of the players that we're facing and I think we're just going to market it with a different strategy because I think ultimately our goal is to actually help our companies do more than just hiring online if you will and so that is something that's a very big strategic difference between what we're trying to do and perhaps some of our competitors.
The next question is from Thomas Chong with BOCI Research. Please go ahead.
This Ree [ph] on behalf of Thomas Chong. I've two questions, the first one is could you share with us the margin expansion in the next two or three years and the other question is regarding your use of cash in the next few years. Thank you.
Let me answer the second question first, the use of cash. I think you can see that the last couple years we've been making steady progress on the M&A side so I think that's really where our focus is in terms of the use of cash at this point in time and so I think that's what we're trying to do with the fund that we. And the first question you had was margin trends, margin trends for the next two or three years correct?
I'll be honest and say you know I will not be kind of going too far out in terms of looking at margins at this point in time, I think the number one thing we're looking at is to make sure that we can maintain the growth level for the company that would be healthy for the long term and I think that's really the number one focus. At this point in time we're not looking for necessary margin improvements in the next two years.
This concludes our question and answer session. I would like to turn the conference back over to Rick Yan for any closing remarks.
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. Bye, bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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