U.S. Markets close in 20 mins

Edited Transcript of JOBS earnings conference call or presentation 10-May-19 2:00am GMT

Q1 2019 51job Inc Earnings Call

Shanghai May 22, 2019 (Thomson StreetEvents) -- Edited Transcript of 51job Inc earnings conference call or presentation Friday, May 10, 2019 at 2:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Kathleen Chien

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

* Linda Chien

51job, Inc. - Head of IR and VP

* Rick Yan

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

================================================================================

Conference Call Participants

================================================================================

* Alicia Yap

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

* Wendy Huang

Macquarie Research - Head of Asian Internet and Media

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, and welcome to the 51job, Inc. First Quarter 2019 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.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, operator, and thank you all for attending this teleconference to discuss unaudited financial results for the first quarter ended March 31, 2019. 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 first quarter 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 statement 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. Reconciliations 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.

Now I'll turn the call over to Rick.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Linda, and welcome to today's call. I will begin with an overview of the first quarter, followed by an assessment of current market conditions. Then Kathleen will continue with a detailed discussion of our financial results as well as provide our guidance for the second quarter of 2019.

Amidst economic uncertainty in China, we saw a slower start to 2019 as employers show greater caution in their recruitment plans in the new year. Net revenues for the first quarter grew 12.4% to RMB 912 million. But by executing with efficiency, we increased operating income by over 20% and non-GAAP EPS exceeded expectations at RMB 5.33.

Heightened concerns about the economic climate in China are weighing on employer decision-making and hiring targets. We observed a lackluster post-Chinese New Year recruitment season, which saw a considerable swing in the supply and demand pendulum as the number of active applicants materially outpaced the increase in new job vacancies. While our platforms saw record levels of resume submissions by job seekers, employers exhibited a lot of hesitancy and were slower to post new positions.

These conditions moderated online revenue growth to about 12% in the first quarter. And among those employers who were hiring, we did make progress on our key strategic objectives of increasing revenue per employer. ARPU rose 24% as customers value the tangible results and effectiveness of our services, which believe -- which we believe is noteworthy in this period of careful budget allocation and spending.

We will continue to pursue our high-quality growth strategy in 2019, keeping our attention on higher potential longer-term customers while moving away from microsized transactions. Our goals are still the same: to maximize our sales productivity and to strengthen our monetization capabilities.

In the other HR services segment, revenues grew 13.5% in the first quarter. Due to the implementation of recent regulations, our HR outsourcing operations experienced some short-term pains. We made a series of necessary adjustments to our data system and processes to comply with new government requirements primarily as they relate to the significant overhaul of the individual income tax law that went into full effect in January. However, we remain very excited about the HRO opportunity in China and believe these new regulations will institute a more concrete framework for compliance and enforcement of both taxation and social insurance that will benefit the market development and customer understanding of the HRO services over the longer term.

In the first quarter, our training and assessment services continue to be a star performer, and we will further broaden our offerings in this area this year. Historically, our value-added HR services have been -- have shown more resiliency to macro concerns, and we will look to step up promotions of these services and increase their contribution to growth.

Turning now to market -- to current market conditions. Due to a sluggish economic environment, we have a soft outlook with limited growth in recruitment demand in 2019. On the more favorable side, we see that some larger sized and more established companies with financial stability are attracting a stronger response from job seekers and gaining a competitive edge in capturing top talent right now. On the other hand, for some SMEs, we are, as expected, observing greater volatility and fluctuations in the hiring activities. In general, we feel that the market has shifted to a wait-and-see mentality as employers are anxiously searching for any clarity or direction as to where things are heading.

Many are also dragging out and lengthening the recruitment process, which has hindered the velocity of natural turnover in the jobs marketplace. That said, we have seen these behaviors before. We are completely reminiscent of what employers have done during previous period of economic uncertainty. In addition, similar to past cycles, the Chinese government has reiterated a commitment to maintaining a healthy labor market and undertaken recent policies to support enterprises. We are cautiously optimistic about the effect of these actions in the near term and are closely monitoring how conditions evolve.

As we navigate through a tougher economic environment and await more visibility, we are dedicated to executing our strategic plan that emphasizes quality growth, product development and financial discipline.

First, we will continue to concentrate on productivity improvement and look for upselling and cross-selling opportunities. The main growth initiatives for the year are unchanged as we aim to drive ARPU increase in the online business as well as to raise customer uptake and deepen engagement in other HRO services. We intend to remain selective in adding new employers, especially in light of the present market landscape.

Consistent with the process we began last year to better qualify employer potential, we expect to see some further reduction to the online customer base in 2019 due to companies, more likely small-sized ones, no longer existing or becoming dormant during this economic cycle. Among our portfolio of services, the recruitment segment usually bears the biggest brunt for macro headwinds, and we will explore more conversations with customers about the other HRO needs.

Second, on product development, we continue to make strides in linking and extending how 51job assists customers with their various HR issues. The rollout of AI-based tools for candidate assessment has been well received by employers, particularly applicable to those companies with large volumes of job positions and applicants, by meaningfully saving them time and resources.

For many HR managers, they also find it very difficult to properly evaluate the technical design, programming and engineering skills of R&D candidates, and we are working on a new testing solution to address this problem. In the area of recruitment, we have introduced the 51modo brand and mobile app which focuses on entry-level frontline sales and customer service jobs primarily in such industries as retail, food and beverage, health and beauty, logistics, transport and housing.

Early user feedback has been very encouraging with job seekers commenting positively about the validity and reliability of the recruitment information on this platform. Combining our solid product pipeline and our sales force which has a superior track record for monetization, we are building a strong foundation for future growth.

Finally, a core pillar of 51job's business philosophy has always been accountability and cost management. We remain thoughtful about consistently managing our expenditures and reviewing the cost components of our operating infrastructure. We will continue to maintain financial discipline to balance strategic investments with appropriate returns.

Whether in good or challenging times, we stay true to our mission, to create a bigger and better 51job that leads the HR industry in China with high-quality services and sustainable, profitable growth.

While 2019 is bringing us some obstacles to overcome, our business fundamentals are solid, and we are confident that we have the right action plan to continue to realize our long-term goals.

I will now pass the call over to Kathleen.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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.

Net revenues for the first quarter of 2019 were CNY 912 million, representing a 12.4% increase, which was weaker than our original forecast due to a greater impact of the macro overhang on hiring plans and of the regulatory changes that have affected our HRO business. Online revenues for the first quarter grew 11.9% to CNY 613 million. The growth was driven by continued improvement in revenue per employer, which was partially offset by a decrease in unique employers. Our online ARPU rose 24.5% in the first quarter primarily due to the upselling efforts as well as the changing customer mix to limit the number of low spend accounts.

As Rick mentioned earlier, we will continue to direct our focus on more established companies and remain selective in adding new employers in this economic environment. Compared to last year, ARPU uplift will be more difficult to achieve as the labor supply and demand dynamics is more advantageous to employers this year. With better applicant-to-job ratio, some may not need to purchase premium services as much to enhance their recruitment results at this time.

Revenues for other HR services increased 13.5% to CNY 298 million in the first quarter. While our training and assessment services continue to perform well, our HRO services saw some delays in the onboarding of new customers and their employees due to operational roadblocks related to new government regulation. We believe these impacts are short term, and we look forward to getting our HRO business back on track in the second half of the year.

Beginning January 1, 2019, we have changed the presentation of government surcharges and included these amounts into cost of services. Our 2018 figures were reclassified to conform to this presentation. Reflecting this change, our gross profit in the first quarter grew 11% to CNY 662 million, and gross margin was 72.7%, which was a small decline versus the 73.5% in 2018 due to higher employee compensation expenses. Included in cost of services in the first quarter was share-based compensation expense of CNY 4.7 million.

Our sales and marketing expenses increased 5% to CNY 289 million in the first quarter. The growth was primarily due to higher employee compensation expenses as well as greater advertising expenditures. We still have intentions to modestly expand the sales force and maintain robust marketing activities to promote our brands and platforms in 2019, but we will be mindful of measuring the returns of these investments as always. Included in sales and marketing expenses in the first quarter was share-based compensation expense of CNY 4 million.

Our G&A expenses increased 5.5% to CNY 90 million in the first quarter. The increase was mainly due to higher employee compensation expenses and share-based compensation expense included in G&A was CNY 20.6 million. Income from operations increased 20% to CNY 284 million in the first quarter, and operating margin was 31.1% compared with 29.1% in the year ago quarter due to some improvements in operating efficiency. Excluding share-based compensation expense, operating margin would have been 34.3% compared with 31.9% in the year ago quarter.

Under mark-to-market accounting, we recognized in the first quarter a large noncash loss of CNY 419 million associated with the change in the fair value of the convertible notes. The notes matured on April 15, and all noteholders requested conversion of their holdings from debt to equity. The principal amount of USD 172.5 million was converted into about 4 million ADSs, which is approximately 6.5% of shares outstanding. Other income in the first quarter included CNY 62.5 million in local government financial subsidies.

In 2018, there were no subsidies in the first quarter, but we received a substantial figure in the second quarter instead. So therefore, please note that the difference in the amount and the timing of subsidies, if and when they are received, may have a material impact on the year-over-year EPS comparability.

Excluding share-based compensation expense, gain from foreign currency translation, the change in the fair value of the convertible notes as well as the related tax effect of these items, the non-GAAP adjusted net income attributable to 51job increased 44% to CNY 349 million in the first quarter. Non-GAAP adjusted fully diluted EPS was CNY 5.33 or USD 0.79 per share.

Although our outlook for the second quarter and the near term is more cautious, we still believe that the overall HR market in China has strong growth potential in the long term. Despite the less favorable macro backdrop now, our top priorities will be to continue to attract and retain the best talent and to expand and upgrade our product and service portfolio so that we are best positioned to capture and service customer needs as they arise.

And finally, turning to our guidance. Based on current market conditions, our net revenue target for the second quarter of 2019 is in the estimated range of CNY 935 million to CNY 975 million. For the non-GAAP fully diluted EPS target, our estimated range is between CNY 4.15 and CNY 4.45 per share. 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 CNY 29 million and CNY 30 million for the second quarter of 2019. 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 foreign currency translation and the change in fair value of the convertible notes. We are not able to provide a reconciliation of these non-GAAP items to expected reported GAAP earnings per share without unreasonable efforts 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.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I have a few questions. First is on the better-than-expected margin. Could you elaborate if there was any cost-cutting measure that you did during the first quarter that result to lower percent of the increase in expense versus your revenue growth, which lead to the better margin despite slowing top line growth? And how should we think about the margins trend in the next few quarter?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. Thank you, Alicia, for the question. Just on the margin itself, yes, we actually performed better than we expected on the operating side, probably partly because we were not as aggressive in hiring as we had planned, so that actually was a little bit of a modest cutback in terms of the new head count additions. Secondly, to be honest because we actually did not achieve the target that we had hoped for, the sales bonuses were actually more limited and the costs were more limited than we had expected upfront. So some of the operating costs that we saved were actually, if you look at the sales and marketing increases on a year-over-year basis, it's actually more limited.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I see. I see. That's helpful. And going forward?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And going forward, that's right. Yes. But I think from our perspective, we still believe that sales and marketing investments will be very important in the long term for the future success of the company. So therefore, that we expect to be still modestly looking at increasing head count and continue to try to push for better results from productivity, but hopefully, that we will also be able to return to a higher track and be able to continue to promote and look at pushing out new services and products with our efforts to market the new other HR services.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sure. My second question is related to the macro and also the change of the regulation. So I think on the macro side, just have you seen the pickup of the hiring? Is it based on your 2Q guidance as reflected? Or given these 2 weeks, we have this trade war issues, seems to be continued to drag further. Do you think there is a risk to your 2Q guidance and even more downside in the second half? And then related to the regulations on the income tax, you mentioned it will be more short term and you expect that to be -- recover or better in the second half. And can you elaborate a bit like how it has affected the HR service in terms of the revenue coming in? Is it because of the delay of the hiring impact? And then related to that is that when we gave out the first quarter guidance, did we actually expect these to be happening? Or is it because there was a lot of changes that we didn't expect and now come in lower. That's why your 1Q came in lower than you previously guided?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Let me try to answer them maybe a little bit in combination then. I think overall, I mean, we are -- we probably, I would say, that had expected the year to be better than what Q1 turned out to be, and again, this goes back to the macro situation where we felt that the post Chinese New Year peak was not as high as we had hoped, and the duration of that increased activity was actually shorter than we expected. So combined, it came to a situation where we did not achieve the target that we were looking for when we had communicated in end of February. So I think that, that is really the kind of the overall tone in the marketplace.

And if you think of it as sort of, I think everyone is kind of pushing things out a little bit longer and dragging their feet in hiring. So what it does is that it actually then reduces the turnover and the general velocity in the marketplace, which is usually kind of helpful for our business. So that when the hiring gets delayed, there's actually some impact down the line as well because if someone were going to hire in March and didn't make that happen and maybe they will hire in April, but maybe not, maybe they will push it to May.

So I think some of that is just the suspension and kind of the wait-and-see that's kind of dragging things down a little bit. And so that's been what's happening in the marketplace for us. And I think I know that there will be new discussion on the trade issue is kind of a forefront of the news coverage again, but to be honest, it never went away, I think in the minds of a lot of customers as well because it was never fully resolved, although the tone was a little bit more optimistic for a period of time in the middle. So I think the overhang is still there. So I think that's what's contributing to this kind of a wait-and-see. So people aren't ready to kind of really push the pedal and can move forward on things. So I think that's what's going on in the marketplace.

Then in terms of the regulation and HR, and it does have a little bit of an impact and related to the kind of the slowness in hiring because usually we expect people to be more aggressive and more quickly to ramp up after Chinese New Year. And so that's also been delayed, which is what part is related to recruitment. And secondly, with the whole change -- in the overhaul of the taxation scheme, that just required a lot of work, both from collaboration from customers as well as our side, and everyone was spending a lot more time and effort trying to complete the reconfiguration, if you will, of the tax scheme payments and the benefit scheme payments so that it took a lot more time in general and attention from everybody. And so that may also have contributed to the slowness in hiring.

--------------------------------------------------------------------------------

Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [8]

--------------------------------------------------------------------------------

I see. Yes. That's very helpful. Just one last on the housekeeping. Could you remind us the total head count that you have and the numbers of sales personnel that you have as of the end of the first quarter versus the number that you had at the end of 2018?

--------------------------------------------------------------------------------

Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO & COO [9]

--------------------------------------------------------------------------------

Yes, we're just over 8,000 in our head count , and our head count in terms of sales side is up very modestly, just over about 100 people.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question comes from Wendy Huang from Macquarie.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

First, I still want to get more clarification on that income tax law on your other revenue, HR outlook. I just couldn't quite understand why this (inaudible) actually affect the employer's onboarding or the new employee affect your outlook and your leverage. And also, if you expect this impact to be renewed in the second half, should we expect catch-up or acceleration in the second half of the revenue and therefore the full year of the revenue trend growth should still be quite normal or intact?

And secondly, the number of the online recruiters continued to decline sequentially this quarter, but I guess that's partly because of macro, partly because of the [sell-through] structure effort you did a year ago. Since we are now pushing the 1-year anniversary of the sales restructure, should we expect this number to actually stabilize from second quarter onwards? How actually are you expecting that in your second quarter guidance?

And lastly, related to your margin this quarter and also considering your single digit revenue guidance for the next quarter, I just wonder how much more you can do on the savings side if the revenue is to stay at the single-digit level, should we actually expect some operating deleverage for the rest of the year?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Wendy. Let me go back to the HRO question first, which is because of the collection scheme actually moved from the local sort of social benefits bureau to the taxation side, I think there's been a lot of processes both from the customer side and our side that needed to revamp to reconfigure to make things happen. And so as part of that process, if you will, both our side as well as the customers that we're working with, we're trying to figure out how that would impact their operations and processes. So a lot of people were then not quickly to hire because they were trying to sort this out before they were actually going to add a lot more people into the mix.

And then secondly, in general because related to the recruiting kind of a softness, if you will, people then were not as aggressive in hiring after Chinese New Year. So both of that kind of impacted the trajectory for the first quarter for HRO. We expect that this will be kind of dragged out into the second quarter as well. So -- but that is just part of the transition process. But we expect that once this kind of gets sorted out in the first half of the year, second half should look better and we should return to a more healthy trajectory. But I don't think there's a way to kind of make up for lost time in a way in this business because this is recurring monthly revenue served, if you will, so we won't be able to kind of mix back, if you will, the -- or do the catch up, if you will, for the second half. But we just expect that second half, the growth rate in the HRO business should be more robust versus what we're looking at now for the first half of the year. So that's the picture on the HRO side.

Secondly then, on the customer count, if we look at the -- kind of the changes in the last few quarters last year in terms of there's been sort of slight decreases in customer account every single quarter, and I think that we're continuing to make some progress and trimming away some of the really micro-sized account from our portfolio. And I think we've made a lot more progress in that front. As you say correctly that some of that is going to be related to general macro softness, and some of it is our proactive decision to trim away accounts. But hopefully again, by the second half of the year, we would hope to be more stabilized and have a truer picture as to a reset point that we're at. And we're still going through that process, so second half should also be somewhere we're looking at that we will have a better kind of equilibrium point that we should arrive at. But it is still ongoing in the second quarter and potentially in the third quarter a bit as well.

Finally, on the margin side, as we've said earlier that we are not actually necessarily prioritizing margins. We are still looking for ways to continue to push our revenues forward and that would be still the #1 priority for the company. And in fact, we expect that in order to keep the best people in the marketplace, we will continue to have to pay market standards and be aggressive in recruiting, and that will be something that we'll continue to be focused on. We may be more modest in terms of the overall head count addition, but we still want to be able to have good packages to use to attract good talent to the 51job team. And so we will not necessarily be focusing too much on margins so that it may be that margins will not improve and may even slightly contract, but I don't think that either way, it will be a very significant change. So I think we've given guidance for the second quarter, and so that will be the reference point that we should be looking at in terms of how we're looking at for the year.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Rick Yan, 51job, Inc. - Co-Founder, Director, CEO, President & Secretary [14]

--------------------------------------------------------------------------------

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.