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Edited Transcript of JOBS earnings conference call or presentation 4-Aug-17 1:00am GMT

Thomson Reuters StreetEvents

Q2 2017 51job Inc Earnings Call

Shanghai Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of 51job Inc earnings conference call or presentation Friday, August 4, 2017 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kathleen Chien

51job, Inc. - Co-Founder, Acting CFO and COO

* Linda Chien

51job, Inc. - Head of IR and VP

* Rick Yan

51job, Inc. - Co-Founder, CEO, President, Secretary and Director

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Conference Call Participants

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* Alicia Yap

Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research

* David Li

* Ryan Clifford Roberts

MCM Asia Limited, Research Division - Senior Research Analyst

* Wendy Huang

Macquarie Research - Head of Asian Internet and Media

* Xin Wang

BOCI Research Limited - Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the 51job, Inc. conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Linda Chien. Please go ahead.

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Linda Chien, 51job, Inc. - Head of IR and VP [2]

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Thank you, operator, and thank you all for attending this teleconference to discuss unaudited financial results for the second quarter ended June 30, 2017.

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 2017 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. Please refer to the press release for a description of these non-GAAP measures and their significance to management in evaluating the company's financial performance. Reconciliation to the most directly comparable GAAP financial measures are provided, where available, 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.

I'll turn the call over to Rick.

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Rick Yan, 51job, Inc. - Co-Founder, CEO, President, Secretary and Director [3]

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Thank you, Linda, and welcome to today's call.

I will begin with a review of the second quarter, followed by Kathleen with a detailed discussion of our financial results and our guidance for the third quarter of 2017. Finally, we'll open the call to your questions.

We are pleased to deliver a strong second quarter on the back of continued positive sales momentum and operating efficiency throughout the company.

Exceeding our expectations, total revenues were RMB 673 million, and non-GAAP EPS was RMB 3.34. Top line outperformance, together with the inherent scale benefits building through our operating model, drove meaningful profitability and margin expansion in the quarter.

Our online business saw solid growth of 19% in the second quarter, led by consistent sales execution and product innovation. We maintained a fast pace of new customer acquisition while concurrently achieving a healthy industry-leading online ARPU level.

The number of unique employers using our online services increased by more than 58,000 compared to the year-ago quarter as we deepened market penetration and broadened our customer base. While this influx of new users does create near-term pressure on ARPU, our sales force has demonstrated the ability to upsell and increase spending by existing larger-sized customers to mitigate this effect. We're encouraged that the efforts we undertook to reorganize the sales team have proven to be very effective and are yielding visible results. We believe that we can continue to successfully deploy a high-quality growth strategy that balances volume increase and ARPU improvement.

In the other HR services area, we saw growth accelerate to 23% in the second quarter due to several factors. First of all, the impact of VAT on year-over-year revenue comparison ended in May 2017, and we are back on apples-to-apples basis with respect to growth rates. Second, increased sales resources and a stepped-up focus on product rollouts to customers that began earlier this year is gaining traction. Finally, our better integration and combined delivery of the various value-added services within the other HR area, as well as in tandem with our online services, is resonating with employers.

While we observed greater interest for more complete and comprehensive HR solutions, employers still desire the flexibility to select those specific modules that are most relevant and urgent to them and to create the ideal package of HR services that meet their needs.

Whether it is providing online recruitment with off-line placement services or assessment tests with targeted hiring campaigns, we are uniquely positioned to capture new monetization opportunities and maximize share of wallet of HR budgets in a highly efficient manner. We will continue to grow our capabilities and leverage our wide-reaching assets across all aspects of the HR value chain.

Turning now to our current market assessment. White collar recruitment demand has maintained a positive tone as employers have stayed active in hiring amidst generally stable economic conditions in China. We are optimistic that this market sentiment will prevail through the rest of 2017, which will provide a favorable backdrop for us to execute our strategic initiatives and introduce new services with the goal to further elevate our growth trajectory.

We're also excited about the upcoming campus recruitment peak period as graduate hiring is a niche segment we have made big strides in over the past few years. We have upgraded and enhanced many aspects of the end-user experience, including the launch of a new mobile app. And with more cohesive collaboration between our online and offline resources, we are looking forward to a strong campus season.

The investments we have made in business productivity and product development are bearing fruit, and we are confident more upside as well as more hard work lies in the long road ahead. As we have grown and evolved, we have never deviated from our core beliefs: to create tangible value, to deliver top-notch quality, and to vigilantly preserve the integrity of our platforms and services for all job seekers, employers and stakeholders. With diligence, consistency and focus, we are forging a clear path to realize our vision of 51job as the multi-faceted, end-to-end HR solutions leader in China.

I will now pass the call over to Kathleen.

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [4]

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Thank you, Rick.

In my following presentation, please be aware that all financial numbers are in our 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 2016, unless otherwise indicated.

Our total revenues for the second quarter of 2017 were RMB 673 million, representing a 20% increase. Online revenues for the second quarter grew 19% to RMB 444 million due to new customer acquisitions and a slight increase in the average revenue per employer. The number of unique employers increased 18% to more than 380,000 companies compared to 322,000 in the year-ago period. Through successful upselling that increased spending by existing customers, we offset the effect of new customers and their lower-priced initial purchases to realize a 0.7% increase in overall online ARPU in the second quarter. We aim to continue a balanced approach as we push ahead in our dual sales objective of increasing customer count as well as revenue per customer.

Revenues for other HR services increased 23% to RMB 229 million in the second quarter. The growth was driven by solid customer adoption and usage of several products, including our BPO, training, testing and assessment as well as placement services.

The 1-year mark of the business-tax-to-VAT transition and its impact on other HR revenues was reached in May of 2017, after which time, the year-over-year growth comparisons are now normalized.

With the negative effect of the VAT implementation behind us, we believe that other HR services revenues are on track to return to higher growth.

Gross profit grew 23% to RMB 487 million, and gross margin increased to 73.2%. Included in cost of services in the second quarter was share-based compensation expense of RMB 3.2 million.

Sales and marketing expenses increased 15% to RMB 228 million in the second quarter. The increase was primarily due to higher employee compensation expenses, headcount addition and greater advertising spend. Included in sales and marketing expenses in the second quarter was share-based compensation expense of RMB 2.7 million.

Sales and marketing expenses as a percentage of revenues was similar to first quarter 2017 level of about 34%.

Our plan is to continue these expenditures focused on strengthening our sales force, increasing our customer base and promoting our product offerings. That said, we are always very disciplined with regards to spending, and we closely measure return on sales investments and track our progress on sales productivity.

Our G&A expenses increased 3% to RMB 71 million in the second quarter. The increase was mainly due to higher employee and office expenses, which was largely offset by a decrease in share-based compensation expense. Share-based compensation expense included in G&A was RMB 14 million compared with RMB 16.2 million in the second quarter of 2016.

Income from operations increased 47% to RMB 188 million, and operating margin increased to 28.3% compared with 23.3% in the year-ago quarter.

Excluding share-based compensation expense, operating margin would have been 31.3% compared with 27.5% in the year-ago quarter.

Capitalizing on economies of scale and scope as the fundamental core of our business model, we achieved significant margin expansion and operating efficiency without sacrificing any important investments in the sales and product development areas.

In the second quarter, under mark-to-market accounting, we did recognize a noncash loss of RMB 115 million associated with the change in the fair value of the convertible notes. Due to the change in the value of the renminbi against the U.S. dollar and the foreign currency impact on our U.S. dollar cash deposits and U.S. dollar-denominated convertible notes, we also recognized a foreign exchange loss of RMB 2 million in the second quarter.

Other income in the second quarter included RMB 20 million in local government financial subsidies compared with RMB 64 million in the second quarter of 2016.

In total, in the first half of 2017, we have received RMB 70 million in subsidies compared with RMB 64 million in the first half of 2016.

Net income attributable to 51job for the second quarter was RMB 71 million. Fully diluted EPS was RMB 1.16 or USD 0.17 per share.

Excluding share-based compensation expense, the loss from foreign currency translation and the change in the value of the convertible notes as well as related tax effect of these items, our non-GAAP adjusted net income attributable to 51job increased 9% to RMB 207 million in the second quarter.

Non-GAAP adjusted fully diluted EPS was RMB 3.34 or USD 0.49 per share.

Turning now to our guidance. Based on current market conditions, our total revenue target for the third quarter of 2017 is in the estimated range of RMB 685 million to RMB 705 million.

For the non-GAAP fully diluted EPS target, our estimated range is between RMB 3.1 and RMB 3.3 per share under the if-converted method. Please note that this non-GAAP EPS target 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 RMB 24 million and RMB 25 million for the third quarter of 2017.

Guidance for earnings per share is provided on a non-GAAP basis due to the inherent difficulty in forecasting the future impact of certain items, such as the gains and losses from the foreign currency translation and the change in the fair value of the convertible notes.

We are not able to provide a reconciliation of these non-GAAP items to expected a reported GAAP earnings per share without reasonable effort due to the unknown effect and potential significance of such future impacts and changes. This guidance reflects our current forecast, which is subject to change.

This concludes our presentation. We will be happy to take your questions at this time. Operator, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Alicia Yap with Citigroup.

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Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [2]

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I have a couple of questions. The first one is related to the outperformance and the re-acceleration of the other HR services line. So you cited 3 reasons for that during the prepared remarks. So I wanted to get more color on the specific new products that you have rolled out during the quarter that helped to gain tractions and probably helped to gain some revenues growth on that. And then any chance you could share with us the numbers of average customer count on your BPO business and the ARPU per customer, either on an annual basis or the quarterly basis? And lastly, on that front, is that -- would you be able to share roughly within this other HR revenue line, how much -- or how big is the BPO versus training and also versus the payment service?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [3]

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Okay, I will attempt to answer most of those questions, Alicia, and if I leave anything out, just remind me again. Just kind of in terms of revenue outperformance, if you will, overall, I think we're pretty pleased, in general, that we felt that across the board, each of the revenue lines actually exceeded our expectations for the second quarter because, as you know, our guidance was for RMB 640 million to RMB 660 million in revenues, and we came in at RMB 673 million. So that was actually fairly evenly distributed across the different lines, both in the basic online recruitment services that people are more familiar with as well as in the other HR-related revenues. Now specifically, in the second quarter, other HR revenues actually outgrew recruitment, which is a reversal of trend versus the first quarter. And I think that really reflects the fact that this is a push that we've been on for the last, I would say, 6 to 8 quarters, where we really refocused and realigned our sales resources to really focus on cross-selling and upselling across the board. And that is really kind of going after key accounts to make sure that people are taking up multiple product lines rather than maybe using services that they've been more familiar with in the past. In terms of just the revenue contribution by the different service line within other HR revenues, it is actually a hodgepodge of a lot of different things, obviously, but training and BPO services as a group would be a large majority of that, if you will. In terms of the customer counts that we're serving in that bucket, I think year-to-date, we haven't seen that numbers, per se, have actually expanded dramatically. But again, it's about how much we're selling into each customer as we continue to focus on the medium and large customers, overall. And so that's kind of the color behind the revenue performance for Q2. I hope that answers most of your questions.

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Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [4]

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Yes. So just to follow-up on that, is that -- I think you mentioned -- Rick mentioned there were some new products rolling out, right? And then when you think -- when you say customer count wasn't the main contributor that expanded the number, but mostly on selling more, right? So can you maybe give us a little bit more colors in terms of, for example, the progress? Like, what are the initial service? Let's say, a customer adopting that BPO business, the first couple of service that they would adopt? And then -- or would you push it first? And then following that, what are the upselling service that follow up in the subsequent quarters?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [5]

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Yes, just maybe to give a sense -- first, I guess, when we look at the customers, for the baseline services, what we would start with is usually actually doing sort of benefits processing, which is actually help collect social insurance payments and tax payments or other different kind of benefit fund that needs to be made, contributed to. And then we can actually help them with calculation of payroll, we can help them with the on-boarding documentation, we can help them apply for certain permits in other cities. There's just a host of different product lines that people can pick up over time, if you will. So it really kind of comes with the fact that you need to kind of get the baseline services up and running first and then go from there. And then in terms of -- on top of that, what we've been able to do a lot more is, as we kind of mentioned a little bit on the prepared comments earlier, is really trying to bundle the different services together to create a better solution overall. So for example, if we're working with customers on a recruitment project, we wouldn't be just thinking about helping them necessarily just to say, "Hey, let's do the interview or the screening itself." We might actually suggest them to use more scientific approaches and tools to help them kind of pre-screen, not just kind of reading a resume, if you will, but using assessment tests to see aptitudes or fit to the organization or certain competency kind of a base test, so to help them actually be able to filter out what are the best candidates for the organization overall. And then on top of that was obviously also bring in some of our newer service lines with background services or our referral products it can bring. So really kind of packaging everything together so that it actually ends up being a better overall solution so that the hiring managers are able to identify the best candidates who are the best fit for the organization. So that's kind of the situation.

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Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [6]

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I see. That's very helpful. Just one very quick -- another question is on the margins. So we've actually seen having pretty good operating leverage over the past few quarters. Any comments to share that what will be the target for further margin expansions for this year and next year?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [7]

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Yes, I think we've always said that revenue growth is really the #1 thing that kind of -- that we've been focusing on. And I think in terms of where we're taking leverage -- or you've seen the leverage is really not in the sales and marketing, which we feel that is really the driver for longer-term growth on the top line. But if you look at our cost of services, our G&A expensing, if you will, as we continue to push forward on having higher growth rate overall at the top, those are the buckets where we'll all see the leverage coming in more directly, and that's where we should be focused on.

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Operator [8]

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Your next question comes from Wendy Huang with Macquarie.

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Wendy Huang, Macquarie Research - Head of Asian Internet and Media [9]

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First, I just want to get some clarity on the VAT tax policy change impact on your others business. I think previously, you mentioned that you expected impact to be largely down in the second half. So I think the Street had been anticipating the big reversal or reaccelerating of the other HR services from actually Q3 onwards. But actually, to our surprise, it's happening Q2 already. So with the Q2 actually already accelerating to around 20%, but Q3, we should see the fourth quarter impact, if I'm correct. Should we actually see the further step-up in the year-over-year growth of the other HR?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [10]

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I think, yes. I mean, obviously, we came in ahead of our expectation in the second quarter, so that is a strong performance that we're happy to see our team execute on. With the second quarter, there is about 1/2 quarter which has been -- sort of the VAT's more apples-to-apples, if you will, because the policy kind of annualized in May. So there was kind of 1/2 quarter of that. But I think, obviously, we still have expectations that we can continue to do better across the board. And that we hope that with the VAT impact fully behind us in the second half of the year, again, that we should be able to return to stronger growth rate overall, in general. Within the other HR services, if you look at it, first quarter versus second quarter, there's a little bit of a jump in terms of the growth rates, but that is partly driven by the VAT issue, but just in fact that I think that our teams continue to push forward and executed well in the second quarter as well. So I think that's really a reflection of a combination of both.

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Wendy Huang, Macquarie Research - Head of Asian Internet and Media [11]

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Also, in your prepared remarks, you mentioned that second quarter is actually the first time, in fact, for a long time that other HR actually outgrew the recruitment again. Should we expect this kind of pattern to continue into Q3? What's implied in your Q3 guidance?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [12]

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I think we obviously have solid expectations for both of our businesses because I think the biggest change that I think we've been able to instill in our organization in the last 2 years is really the stronger upselling and cross-selling across the board. And that was something that we took some time to work on and it's something -- an initiative that we began in 2015, including some sales organizational realignment. So I think we're finally getting to see more of the benefit of that. Now with other HR services, because of the fact with regulation as well as kind of the VAT policy changes, that has actually kind of clouded some of the performance within those sectors over the last 1.5 years. But I do think that we have strong expectations, that we hope that -- certainly, that other HR should return to a higher trajectory versus last year. And we'll see what happens, but I do think that we do have strong expectations on both service lines, if you will. And that in the longer-term, they've actually been a similar growth rate, although I would say that in the longer, longer term, I guess looking forward, that we do expect the other HR to grow as a percentage of revenue overall. So it will have higher growth rates than recruitments services, I believe.

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Wendy Huang, Macquarie Research - Head of Asian Internet and Media [13]

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I see. And also, can you give us some update on the regulation changes actually on the business front in this BPO area? And also give us update on the competitive landscape. In particular, what are the other like more SOE, Shanghai FESCO and Beijing FESCO, those entities are doing actually against you guys?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [14]

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To be honest, I don't think there's been any significant new change recently on the HRO side the first half of this year. The challenges in the last kind of 8 -- 12 months has more been related to the VAT issue, which is not an additional regulation in terms of the service model. But in terms of FESCO or the other kind of the state-owned government agencies, we actually haven't seen any sort of strategy or tactical changes that they've put into place. So I feel that with the VAT issue largely behind us -- although we do expect that, in general, government, in terms of how they do taxation and maybe some of the issues related to collection of benefits and payroll taxes, will continue to evolve. But I think that's just something that we need to work with in this sector, in general, as kind of a deregulation and our policies come into place to continue for the government to be able to beef up the social safety net for the country.

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Wendy Huang, Macquarie Research - Head of Asian Internet and Media [15]

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Okay. Can you also share some color on the sales team changes that you mentioned in the prepared remarks? And also, what's the latest headcount for the total company and also for the sales team?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [16]

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Well, the sales realignment is something that we had put into place. We kind of started on this effort in 2015. And essentially, what we've been able to do and get our team to realign kind of into, I would say, 3 different streams. We have what we called, obviously, the key accounts who are focused on the largest and highest-potential customers. Then we have a kind of the medium-sized companies, where we feel like they have good growth potential, and these are matched with salespeople that have at least a couple of years' experience so that they are able to focus on getting customer to sell -- or buy more product lines versus where, traditionally, maybe they have focused just more on just recruitment in general and online. And then we have obviously the small-medium accounts, which are served by the more junior salespeople who are new to our organization as they're learning and getting up to speed about different product lines. And they're focused on really just getting more customer accounts. So that group is more on volume, if you will. The medium, sort of the middle group is more focused on product uptake so that we're able to achieve the cross-selling. And then the key accounts is really about upselling across the board because, obviously, they're covering a lot less accounts than the other groups, and that is actually how it's structured at this point in time. So I do think that, that focuses the energies of the different groups on different metrics, and that they're compensated according to those metrics. And it's actually worked out much better for us in the last, obviously, year and 1.5 years now.

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Wendy Huang, Macquarie Research - Head of Asian Internet and Media [17]

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The number for the headcount, if you can share it?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [18]

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Total headcount, we're about 7,300; and our sales force is just under 4,000, at about 3,900.

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Wendy Huang, Macquarie Research - Head of Asian Internet and Media [19]

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Okay. And maybe last, just a follow-up on the comment you just made. What's your definition of the key accounts? Is it by the revenue size or by the number of employees they have? So what's your definition of that? And also, how many key accounts do you have right now?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [20]

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That's an evolving definition because we really look at what their potential and their need is at this point. So I wouldn't cut it as a customer -- employee count, whatever. But in general, we're talking about companies that have thousands of employees, so that's kind of the scale we're talking about.

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Wendy Huang, Macquarie Research - Head of Asian Internet and Media [21]

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How many do you have then now, the key accounts?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [22]

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I don't think we'll be disclosing that specific number, but it is actually probably, I would say, a 5-digit number.

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Operator [23]

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Our next question comes from Xin Wang with BOCI.

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Xin Wang, BOCI Research Limited - Research Analyst [24]

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I have 2 questions. The first one is could you share any color on your other income for the third quarter? Shall we expect a similar amount to the second quarter as this item would add to your earnings? And the second question is regarding the gross margin. So your gross margin was pretty stable Q-on-Q considering the over-20% Q-on-Q growth in other HR services. So it seems the change in your revenue mix has limited impact on your gross margin. Can you share more color on the trend? Should we expect the gross margin of other HR services improving? As the third quarter is a strong quarter for campus recruitment, how do you see the impact on your overall gross margin?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [25]

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Thanks for the questions. First question on other income is actually related to government subsidies for the most part. We cannot predict the amount and the timing of that income, if you will, and so we have no expectation built in at this point for Q3 because, again, we cannot predict that. However, in the first half of this year, as I think we mentioned a little bit earlier, we received a total of RMB 70 million in financial subsidies from the government versus RMB 64 million for the same period of time last year. So that's just a comparison metric that you can refer to, but we have no expectations, and we cannot clarify what will be the timing or the amount would be or could be for the third quarter. So we're not budgeting that into our forecast, if you will. Secondly, in terms of just margins overall, yes, I think we've always said that what drives our margins overall are really about total revenue growth rather than specific product mix changes, overall. And so, you'll see that first versus second quarter, although that the growth rates for the 2 different buckets of revenues was different, margin, just because we actually grew strongly on top line overall, was able to help us in terms of just getting more leverage. So we believe that we run a very scalable business, and that if we are able to achieve strong revenue growth, that should actually be reflected in growing margins for us overall. Thirdly, just to clarify, when we talk about the strong upcoming campus season, the actual activity level will be -- and revenues will actually be captured in the fourth quarter rather than the third quarter. So it is -- from a revenue perspective, Q3 is not a campus-related quarter. It's really Q4. So we will actually comment more about campus specifically when we actually talk about Q4 when we release Q3 earnings. So that's kind of the situation.

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Operator [26]

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Your next question comes from the line of Ryan Roberts with MCM Partners.

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Ryan Clifford Roberts, MCM Asia Limited, Research Division - Senior Research Analyst [27]

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I just had a one -- actually, a couple of questions on the kind of the cross-selling and the kind of also the customer adds. So I guess the first one is can you give us a sense of how you measure kind of the effectiveness of the cross-selling effort in order to drive overall key account -- overall account revenues? And number two is on the ARPU. You mentioned the kind of the dilutive effect of the new customer adds. And I'm just wondering, do you have any kind of color you can share on, let's say, earlier established customer cohorts or something of that nature that can give us a sense of what the actual impact was on a quantitative basis?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [28]

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Thanks for the questions. I'll try my best to maybe give you a sense of how we look at the situation. In terms of cross-selling, overall, I mean, I think what we look at is really about how many different product lines that, say, customers take up in terms of how we measure our progress, if you will. So let's say that, in general, a new customer, they might be just taking the most baseline services, which may be just posting services. And then we would expect that over time they should actually be buying resume downloads, maybe some visibility packages, and now perhaps, will also think about that -- whether or not they can actually package some of the testing products to help them filter candidates, or maybe they can actually also take up some background check services to help them verify and validate some of the credentials of the candidates that they hope to onboard. So that's kind of -- the kind of thinking in terms of how we guide our sales people to manage their customers and navigate through the kind of a walk-up in revenues. And so on top of that, in terms of just looking at cohorts, that's a little bit more difficult sometimes because individual customers all have these different needs. And they come in at different size, and they have kind of different industry dynamics that may drive their spending level year to year and not necessarily driven by us, if you will. So I think that's a little bit more challenging to think about. But again, I think we focus on trying to get them to uptake more service lines. We also look at the possibility to extend the term of the membership, which is also an important parse from a new customer to kind of what we call tenured customers. So new customers will come in at the short end, maybe starting with monthly membership, and then maybe buying a couple of the months, during the course of the year in their first year with us, and then moving that up to maybe 3 months to 6 months, and, ultimately, making sure that they're buying annual subscriptions, if you will. So that's kind of the roadmap. I hope that answers your questions.

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Ryan Clifford Roberts, MCM Asia Limited, Research Division - Senior Research Analyst [29]

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That's very helpful. If I could just ask -- sneak in one follow-up, just quickly. It's kind of on an unrelated topic. With respect to how we're matching job seekers, I think we've talked earlier about some of the technology we're trying to use to bridge the employers, kind of their needs, and find the right employee candidate -- the right candidate for them. I just wanted to ask more of a top-level, higher-level question in terms what kind of technology are you kind of bringing in to answer that -- or to answer that question or to address that challenge? It seems like we have years of data and significant data, and from a candidate perspective, the resume database and this kind of stuff. I'm just wondering, are we providing any kind of, let's say, big data approach to our customers to help them try to find the best candidates?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [30]

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Yes. I mean, to be honest, this is something that we've been doing for a very long time. And obviously, this is almost like -- there's no end to this, I guess, in a way because I feel like the market continues to evolve and there's maybe different technology and newer technology. We continue to think about how we can apply it in our day-to-day services. From an employer perspective, I think what we've been trying to do a lot more of is really track the successful candidates, who's coming to organization and where are they losing candidates to, to get a sense of their comings and goings, if you will, and trying to match that better in terms of the candidates that we recommend to them, who we think will have similar profiles. And then we also try to understand who are the candidates -- or the resumes of candidates they looked at or they wanted to interview to, again, get a sense of their preferences. And sometimes, the challenge is the -- really how much people are willing to pay as well, right? So the compensation issue enters the equation and kind of can upset how successful the recommendation could be or not be. But again, trying to look at the user behavior, from an employer perspective, on what seems to be that type of candidate they'd like and they've taken on and then look at also where they come from, if you will, and try to get a sense of the right kind of a profile of candidate that we should be recommending to them. And then, on the flip-side of that, if you will, when you look at job seekers, again, we want to get a sense, from the data perspective, to see what kind of jobs they've been interested in, what type of categories of companies they seem to have a better fit, whether it's a smaller company or a larger company, and location or preference. I think we try to take in all of that into perspective when we try to recommend opportunities to them as well, so hopefully, that we can actually shorten the time for people to find a job or find a candidate. And that -- it is actually a sense where you're not necessarily trying to get volume, you're trying to get quality out of that recommendation. So I think that's something that we've been working on for a very long time. And to be honest, I think the work is never going to be done, but I do think that there's been more analytic tools that's come into the marketplace that enable us to better analyze larger sets of data even, and I think the efficiency level is increasing.

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Operator [31]

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Your next question comes from [Will Maine] with [MBA].

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Unidentified Analyst, [32]

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Employer growth numbers continue to show strong growth, yet sales employees don't seem to have moved over the past 6 to 9 months. Historically, there has been a correlation with the 2 growing. Has that now ceased? I guess, what should we think in terms of sales headcount growth going forward?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [33]

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Yes, I think this is a great question, actually, for us, in a way. I think that, ultimately, we do believe and we continue to believe that customer count will be related to sales headcount, but sometimes, there's sort of a lag effect, if you will. Sometimes, we bring on a new batch of sales people, and in their initial period with us, they might not be as productive, if you will, as they continue to learn about product and get to understand our services and how you position and sell to customers. So it may take them a little bit of time to ramp up. So sometimes, there's a lag effect. We do think that we will continue to add to our sales force because that's a big part of our sales and marketing investment, but I think we have been more cautious in terms of the speed that we're adding sales people in the last, I think, year. I think, overall, though, we think that our sales headcount on a year-over-year basis for the full year this year will probably be in the kind of a high single digits, and I think that's kind of where we hope to be at. So hopefully, again, revenue can outpace our sales headcount growth. And that's how we measure how we've done in terms of upselling and cross-selling in a way, but we do think that sales headcount continues to be part of the growth driver of the business and that we will continue to add to that.

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Unidentified Analyst, [34]

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Just to follow-up on that. Sales and marketing expenses have been around the 34% of revenue mark for a little -- the first half of the year. Is that a good run rate for this year? And then looking ahead into 2018, do you think there will be some operational leverage on that line? I appreciate, you did mention it a little bit earlier.

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [35]

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Yes, I think, again, I think we're focused on making the right sales and marketing investments to drive longer-term growth. So I don't think that necessarily that's where we want to take leverage on. So -- and that kind of goes back to my comment just now that we do want to continue to add sales headcount, so that's part of what we are planning for. I do think that there will be more leverage coming in from the cost of services and the G&A bucket if we are able to execute and continue to have higher growth rates overall. So that's how we are looking at it.

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Unidentified Analyst, [36]

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Okay. And maybe just one follow-up on the guidance. It looks like the revenues -- revenue is up on a quarter-on-quarter basis, yet non-GAAP EPS is down on a quarter-on-quarter basis. How should we think about that? Is that mainly the subsidies coming through? Is that a big driver of that?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [37]

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Well, it's part of the equation. As I said, we're not budgeted for anything in the third quarter, but that's something we can't fully predict anyway. So I think that, that can be a little bit of that. But again, I think we did actually outperform our budget, if you will, in the second quarter. So maybe that's a little bit of a reflection behind that as well, obviously.

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Operator [38]

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(Operator Instructions) Your next question comes from David Li with Lizard Investors.

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David Li, [39]

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I just have a couple of questions. First of all, on the other income, it's obviously been progressing tremendously over the last few years. It's becoming a bigger contribution, and this quarter, it kind of dipped down quite a bit. Can you just talk a little bit about, sort of in a historical context, what happened now, and also, how do you guys think about that going forward? And then have I few other follow-ups.

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [40]

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Well, I think for other income, again, this is really driven by financial subsidies from the government, and it's not something we can budget or forecast for because it's something that we cannot have assurances as kind of a business revenue that we could tackle if we worked hard for it. So that is something that we just can't budget for. In terms of then, just the magnitude of the overall other income, again, the timing, because it's compounded very tricky between quarters, it does create some fluctuations in our result on a quarter-to-quarter basis. But overall, if you look at the first half of this year versus the first half of last year, essentially, we went from RMB 64 million last year to RMB 70 million this year, which, I think, overall then, if you look at first half result, it hasn't really had a major impact on total performance. So that's kind of what it is.

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David Li, [41]

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Okay. No, that's perfect. And also in terms of the unique employer growth, that's been pretty impressive this quarter. It's probably higher than I've seen in my recent memory. Any specifics in terms of drivers on how much of it is due to new product introduction? How much is due to the macro recovery? Or anything, sort of external or internal factors you can comment on?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [42]

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So we believe that it's execution, firstly, because I do -- I don't -- we don't think that the macro has meaningfully changed in the last couple of quarters. So I think that we feel that our execution has been strong this year, and I think that we are pleased with the progress of our sales team in terms of their ability to convert customers. And I think that it's a lot of the hard work that we have probably put in the last 18 months to kind of get us to where we are today, because again, sometimes you play a little bit of a catch-up game in terms of what you can realize, because when you initially add salespeople, they may not be quite productive yet because they're just learning the business, new to the business. But I think that a lot of that effort is probably what we put in last year, and we're seeing the results of it. It's bearing fruit a bit this year a little bit more, so I think that's the situation.

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David Li, [43]

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Okay. And also, on the M&A side, what kind of -- I mean, Ryan asked about the cross-selling opportunity. How many new products do you guys have introduced in the last couple of years? And also, sort of if you have to look at the pipeline, or -- obviously, you guys probably don't want to disclose much, how do you guys think about sort of the product categories going forward? How many new products we should kind of think about? Also, from a sort of customers' perspective, is the suite of products expanding a little bit more dramatically or less dramatically -- I mean, less drastically over time?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [44]

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I think -- I guess, the way we would look at it is that, for us, I mean -- although I think primarily people originally have looked at 51job more as sort of an online recruiter, if you will, but we've never defined ourselves as an online recruiter. We've always believed that where we want to be and continue to focus on trying to be the full-service kind of HR solution service provider, which means that aside from recruiting, which is obviously a big bucket of service that we can bring to the table, we also want to be active in training and testing. We want to be active in the outsourcing business. Everything that an HR person can do, if you will, we want to be able to ultimately have a service line for it because we think that, obviously, it's the same customer budget, it's the same department you're selling to, and there's a lot of synergies between how you can serve it, and ultimately, the end-user also appreciate actually having a one-stop shop in many ways as long as you can provide a good product. I think that this is something that we've not seen in many -- in any of the markets around the world because I think people tend to specialize a lot more in established markets where there are incumbents in every single silo. But I think China has afforded us a very unique opportunity, and I believe that we can be there to expand our product portfolio to meet the various service needs of our customers. And so I think, within each of those different lines, we actually have a lot of little products we're always trying to bring to table and seeing what takes off more or how -- what we need to do to tinker or adapt to make it grow, if you will. And we have a lot of customers we're always kind of dealing with as well, right? So I think that we've been actually much more aggressive in the last 2 years, though, because of the fact that our own internal efforts has also been supplemented by our M&A activities, which means that we're bringing products or services that have had some good feedback from the marketplace, and then using our sales distribution network to make it much quicker in terms of customer or market acceptance and have more customer take-up. So I think that's the difference between, probably, I would say, the company's strategy or product introduction kind of cycle or speed. Last 2 years was much faster than it was previously, so I think that's kind of where we're at today.

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David Li, [45]

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And just quickly, on operating leverage again, what's the thought process here? I mean, I understand you guys are not managing necessarily on a margin-to-margin on a quarterly-by-quarterly basis. I just want to understand -- obviously, the base is obviously bigger now. Is it fair to assume like sort of if we're ramping up similar revenue growth going forward, the rate of growth in operating expenses will kind of decelerate a little bit more and setting it up for more of a new normal for us to think about? Or that's something that could change pretty dramatically? And maybe just your thoughts on that.

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [46]

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Well, to be honest, I think it all comes down to our overall revenue growth. I think we've always said and we've been very clear that we think that everything is based off of that. If we kind of have a baseline budget we plan for with what we do when we start the year in terms of our expenditures, which is largely people, if you will, and if we are able to beat sort of our growth in expenditures on people side, for the most part, and have strong revenue growth, everything kind of flows through quite well. Now -- but in terms of the investment areas we look at, obviously, we prioritize sales and marketing very specifically because again, that's really driven by sales efforts, and we continue to feel like that's not an area we will take leverage on and it is not an area where we think we can take leverage on at this point in time because we feel like there are still a lot of customers out there that we continue to want to interact with and that we continue to want to acquire. But in terms of, then, the cost of services or G&A, where we try to optimize and automate and bring more efficiency to our processes, that's where we will try to take leverage on. But I think the #1 thing that will affect the outcome of what our margin profile is, is really about total revenue growth. And so that's something that we'll be continuing to focus on because that's really going to be, ultimately, a driver. Yes.

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Operator [47]

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Your next question comes from Wendy Huang, and this is the last questioner, from Macquarie.

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Wendy Huang, Macquarie Research - Head of Asian Internet and Media [48]

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Just housekeeping questions on the balance sheet items. It looks like the cash decreased sequentially this quarter. Is it mainly due to the reclassification of some items such as the short-term investments? And also, I noticed that the convertible note seems to actually -- moved from the current liabilities to the non-current liabilities. So what's the reason behind that? And also, does this actually have anything to do with the noncash loss you recognized on the P&L related to the convertible notes?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [49]

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Thanks for bringing those up, Wendy. Those are great questions. In terms of cash, I mean, cash and short-term investments are all cash from our perspective because short-term investment actually just comprises of deposits from 3 months to 1 year in length. So that's just a classification difference. So total cash, if you will, for the company has not decreased. It has actually, in fact, increased. Second question, classification of the convertible. The reason why actually, earlier on, it was classified as a short-term payable was really because there was actually a put option that was available to holders. That was actually in April of this year. So once we actually passed that point, if you will, that was no longer in play, and so actually, the holders could not actually put back the bonds within a reasonable period of time anymore, within the 1-year window. And so that's why it got reclassified again. And then in terms of then, finally, the question related to the change in the fair value of the convertible, that's a separate issue which is related more to the value of the notes in the marketplace, which is actually linked to our share price. So as our share price has actually increased substantially in the last quarter, the value of the convertible notes also ran up at the same time, which is why we had to incur a loss because it was actually remeasured the higher share price and the higher convertible notes price. So those are explanations behind the 3.

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Wendy Huang, Macquarie Research - Head of Asian Internet and Media [50]

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That's very clear. So now, you are -- as you're sitting on the USD 1 billion cash and -- is there any update on the usage of cash?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [51]

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Yes, I think, to be honest, I don't think the philosophy of the company has changed very much, overall. I think we continue to focus on investments. I do think that with the cash on hand, we have been able to pursue various opportunities. And that in the last year -- 2 years, if you will, I think that has actually brought the company benefits, overall. In addition to that, obviously, we had an employee share buyback strategy in the past as well as, I think, people have also raised the question of potentially whether or not there would be a dividend policy coming down the line. I think those are questions that we are actively considering and that we will update the market and investors with more information when decisions are made.

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Operator [52]

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This concludes our question-and-answer session. I would like to turn the conference back over to Rick Yan for any closing remarks.

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Rick Yan, 51job, Inc. - Co-Founder, CEO, President, Secretary and Director [53]

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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.