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Edited Transcript of JOBS earnings conference call or presentation 1-Mar-19 1:00am GMT

Q4 2018 51job Inc Earnings Call

Shanghai Mar 5, 2019 (Thomson StreetEvents) -- Edited Transcript of 51job Inc earnings conference call or presentation Friday, March 1, 2019 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 & COO

* Linda Chien

51job, Inc. - Head of IR and VP

* Rick Yan

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

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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

* Wendy Huang

Macquarie Research - Head of Asian Internet and Media

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Presentation

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Operator [1]

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Good day, and welcome to 51job, Inc.'s Fourth Quarter and Fiscal Year 2018 Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Linda Chien, VP and Head of Investor Relations. 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 fourth quarter and fiscal year of 2018, ended December 31, 2018. 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 full year 2018 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. 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.

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

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Thank you, Linda, and welcome to today's call. I will begin with highlights of the fourth quarter and the full year, 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 first quarter of 2019.

We're very proud to celebrate our 20th anniversary in operations with a strong fourth quarter that closed a milestone year of robust financial results and achievements. Total revenues for the fourth quarter grew more than 28% to RMB 1.12 billion, and non-GAAP EPS exceeded expectations at RMB 6.67.

For 2018, our revenue growth was 31%, and non-GAAP net income surpassed the billion mark, coming in at a record RMB 1.37 billion. We extended our long track record of profitability to 7 consecutive years, which we believe is a unique accomplishment unmatched in our industry and also an amount over all Internet peers in China.

Our online business has continued to demonstrate solid progress and development. In line with our strategic plan, we have made meaningful strides to drive up online ARPU. We believe employers have increased their spending in recognition of the tangible quality, value and effectiveness in the recruitment results that we have consistently provided.

For the full year 2018, ARPU increased 39% as we targeted upselling efforts on higher potential employers, and successfully elevated the level of customer engagement across our wide array of online products and platforms. While our decision to reevaluate the customer base has led to an expected reduction in the number of employer count in 2018, we believe the significant improvement we have made in sales productivity has strengthened 51job's monetization capabilities that will have important implications for our future.

As we deepen our relationships with the finest employers and job seekers in China, we are confident that we can better identify emerging needs, develop new innovative solutions, drive product adoption and realize greater value for our services.

In the Other HR services segment, revenues grew 35% in the fourth quarter and 34% for 2018. While increased usage of our BPO, training, assessment and placement services continue to this growth throughout the year -- contributed to this growth throughout the year, the fourth quarter was boosted by a record season for campus recruitment services and saw 51job conducting over 10,000 events in more than 500 school locations in China. In conjunction with our campus brand, Yingjiesheng.com, we assisted employers in providing hundreds of thousands of job openings to college graduates and young people who are critical to the talent foundation and ongoing development of all companies in the Chinese economy as a whole.

Integrating complete online and offline resources with full end-to-end customer support, 51job has gained the acceptance and commitment of employers as a trusted partner for all their recruitment and HR issues. We continue to explore new services, and we will further broaden our competencies through both in-house development and mergers and acquisitions.

Turning now to our initial market assessment for 2019. Based on limited post-Chinese New Year data, our first week indicates positive but slower growth in hiring activity compared to last year. Current uncertainty about economic conditions in China have made employers more selective in adding staff, although we remain optimistic that market demand for high-skilled, white-collar workers may be less affected, due to greater competition and long-term need for this labor demographic. We see the larger, more established companies remain more active employers, tougher in the peak recruitment period, taking advantage of their well-known names and financial resources to attract candidates.

For SMEs, we expect there will be more volatility in the hiring demand in the near term as they adapt to the economic backdrop. In recent employer surveys and media stories, we have also noted several anecdotes that some organizations are concurrently laying off poor-performing staff while seeking new talent to restructure and reinvigorate their operations. So while the number of new job openings may be more modest this year, replacement hiring will continue to be a strong driver of market activity.

As companies are making decisions about the size of their workforce, our research shows that the cost of retaining talent will only continue to rise.

On the salary front, our conversations with employers point to expected wage inflation for white-collar workers of around 6% in 2019, an increase on par with the average over the past decade.

As the 2019 recruitment environment takes shape, we remain focused on executing our high-quality, multiproduct growth strategy. Our sales team will push forward on increasing uptake of services by existing customers, while we also complement these efforts with product development of more complex -- of more complete, higher-value and best-in-class HR solutions.

With the combination of our long-standing leadership in the industry, our many established recruitment brands and channels, as well as our proven candidate evaluation and HR management tools, we have confidence that our services will resonate strongly with top employers as they are very thoughtful about budget allocation and meeting their goal efficiently this year.

Over the past 2 decades, 51job has proactively innovated to capture even greater opportunities in the HR market in China. Our evolution and accountability has been openly chronicled in our long history as a listed NASDAQ company. We have a 14-year report card, which has documented, from start to finish, the many challenges we have overcome, transitions we have undergone and triumphs we have realized. Leaders are those with consistent -- leaders are those who consistently raise standards and make breakthroughs.

As we think about our future, we only look ahead at building a better 51job that has high quality, increased productivity and greater efficiency. We will continue to take the driver's seat in forging our own unique path to sustainable and also profitable growth.

I will now pass the call over to Kathleen.

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO & 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 with the corresponding period in 2017, unless otherwise stated.

Our results for 2018 include the consolidation of Lagou to our financial statements. As Lagou's contribution to 51job's overall results was not significant, we will not be discussing or providing separate details for Lagou.

Total revenues for the fourth quarter of 2018 were CNY 1.12 billion, representing a 28% increase. This is the first time that our quarterly revenues has exceeded CNY 1 billion. Online revenues for the fourth quarter grew 24% to CNY 646 million, driven by a significant increase in average revenue per employer, but a decrease in unique employers as planned. Online ARPU rose 34% in the fourth quarter due to our successful upselling efforts, higher prices for some online products instituted early in 2018 and, to a lesser extent, a change in the customer mix to limit the number of low-spend customers.

In line with our initiative to prioritize higher potential employers and to terminate coverage of certain accounts, we saw a 7% reduction in the estimated number of unique employers to 343,000 companies compared with 371,000 in the year-ago period.

In light of current market conditions and greater volatility in the recruitment demand observed among small-sized companies, we will maintain our sales focus on more-established employers in 2019.

Revenues for other HR services increased 35% to CNY 475 million in the fourth quarter. This was led by strong demand for campus recruitment services and the continued uptake of our BPO, training, assessment and placement services. Gross profit grew 23% to CNY 779 million, and gross margin was 70.3%, a decline from last year's level due to the increased employee compensation expenses as well as additional costs such as venue rental and event decoration related to providing our campus recruitment services. Included in cost of services in the fourth quarter was share-based compensation expense of CNY 4.7 million.

Sales and marketing expenses increased 11% to CNY 265 million in the fourth quarter. The increase was primarily due to higher employee compensation expenses, headcount additions as well as greater advertising expenditures. However, sales and marketing spend decreased meaningfully over the third quarter of 2018 as we decided to curtail some marketing plans and also moderated the hiring of new salespeople in the fourth quarter to wait and monitor conditions in the new year. While we expect to expand the sales force and increase promotion of our brands and platforms in 2019, we are always disciplined in tracking, measuring and maximizing the returns on these investments. Included in sales and marketing expenses in the fourth quarter was share-based compensation expense of CNY 4 million.

G&A expenses increased 17% to CNY 89 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 CNY 19 million in the fourth quarter. Income from operations increased 34% to CNY 425 million in the fourth quarter, and operating margin was 38.4% compared with 36.8% in the year-ago quarter. Excluding share-based compensation expense, our operating margin would have been 40.9% compared with 39.2% in the year-ago quarter.

In the fourth quarter, under mark-to-market accounting, we recognized a large noncash gain of CNY 449 million associated with the change in the fair value of the convertible notes. The decrease of the trading price of our ADSs on NASDAQ resulted in a corresponding decline in the value of the convertible notes during the period. As the notes are a liability on the company's balance sheet, the decrease in the fair value was recorded as a gain on the P&L although it has no impact on the company's cash flow or cash position. Due to the significant impact of the change in the fair value of the convertible notes, we recorded net income attributable to 51job of CNY 856 million in the fourth quarter. Fully diluted earnings per share was CNY 6.22 or USD 0.90 per share. Excluding share-based compensation, loss from foreign currency translation, the change in the fair value of the convertible notes as well as the related tax effect of these items, our non-GAAP adjusted net income attributable to 51job increased 35% to CNY 436 million in the fourth quarter. Non-GAAP adjusted fully diluted EPS was CNY 6.67 or USD 0.97 per share.

Now for the full year results. Total revenues for 2018 increased 31% to CNY 3.78 billion. Online revenues grew 30% to CNY 2.43 billion and comprised 64% of total revenues. The growth was driven by higher revenue per unique employer, which rose more than 39% in 2018. Since we began the transition to a high-quality growth strategy, we have increased average online spending from about 3,300 per employer in 2015 to over 5,000 per employer in 2018. The ARPU improvement in 2018 also reflected our strategic decision to focus sales resources on more productive revenue growth and to terminate coverage of certain smaller-sized accounts, which led to the decrease of online customer count by 6.6% in 2018.

Other HR services revenues grew 34% to CNY 1.35 billion in 2018 due to the greater customer acceptance and adoption of these value-added services. Gross profit grew 30% to -- in 2018 to CNY 2.7 billion, and income from operations increased 32% to CNY 1.15 billion. Net income attributable to 51job was CNY 1.25 billion, and fully diluted EPS was CNY 19.82. Excluding share-based compensation expense, loss from foreign currency translation, a change in the fair value of the convertible notes as well as the related tax effect of these items, non-GAAP adjusted net income attributable to 51job increased 44% to CNY 1.37 billion in 2018. Non-GAAP adjusted fully diluted EPS for 2018 was CNY 20.94 or USD 3.05.

Turning now to our guidance. Based on current market conditions and factoring in seasonality due to the Chinese New Year holiday, our total revenue targets for the first 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 4.25 and CNY 4.55 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 CNY 31 million and CNY 32 million for the first quarter of 2019. Our 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 the 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 effects and potential significance of such future impacts and changes. 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our 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. Number one is regarding the unique employers decline, the net decline of these 22,000. Is that still attributable to the optimizing of the sales team coverage? Or is that somehow related to the slower demand from the recruiter -- I mean, from the employer side? And then, I think, Kathleen, you mentioned on the prepared remarks something about 2019 that you wanted to maintain sales focus. So is that suggesting 2019, the active employer count, will be unlikely to show increase? Or any color on that will be helpful. And then my second question's on the gross margins. So gross margin this quarter actually declined to 70%, which is a level that we have not seen since fourth quarter of 2016. So could you give us some colors on the reasons? And then how should we think about the gross margin level for 2019?

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

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Thank you, Alicia, for your questions. Let me try to answer them the best I can. Firstly, in terms of just customer count, I think, for Q4, we would say that that's actually related to our planned reduction of trying to, again, recalibrate the number of accounts that each salesperson can be serving. So I would say that, that is the main reason behind that rather than any sort of a market sentiment or market changes. And then in terms of then going into 2019 in terms of what we're looking at, I think, to be honest, we are less focused on trying to think about customer count as a number or a metric that we focus on, but more, again, going back to how many accounts can our salesperson reasonably serve and continue to maintain a good relationship and to increase the amount of upselling and cross-selling that we should be getting from these customers in terms of additional penetration in their share of wallet. So I think, in 2019, our strategy will be very similar to what we had adopted in 2018, and we'll continue to focus on that and we're not really targeting a specific number on customer count. And then the third question relates to the gross margin, if you will, in terms of the changes. I think, obviously, with the fourth quarter, typically, that is one way we've actually alluded to the fact that because the increase has a big component coming from campus recruitment and that particular product line does actually have some more offline costs versus some of our other businesses, and so because that was actually a more significant portion in the fourth quarter, that leads to a decline in the gross margin. However, if you look at the operating margin, it is actually not affected. So again, that's something that we're not too concerned with and that's really due to the revenue mix issue. For the first quarter, I would say that we would kind of go back to think about, again, just because some of these numbers are kind of seasonal in nature, so I would just go back and say that we would probably not be as benchmarking first quarter to fourth quarter, but looking at more on a year-over-year basis in terms of how we look on the margins. But that's kind of where we are.

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

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If I may, can I just follow up with Rick's comments about the macro situations? We've also been hearing from some industry people about after the Chinese New Year, it seems like the hiring, kind of like, indication seems a little bit weaker than previous year. And so -- and then also, I think a lot of workers decided not to return to the coastal cities and then remained in the hometown. So I think, Rick, given jobs in the industry for over the past 20 years, how would you ascribe this situation this year versus what you have seen over the past different, kind of like, the macro situation? And for, let's say, the workers that are remaining in the hometown, will these present more opportunity to us? Or is that more -- potentially more naturally based to the recruitment side? So any color will be helpful.

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Rick Yan, 51job, Inc. - Co-Founder, Director, CEO, President & Secretary [5]

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Yes, I think I will say that, as we said in our comments, I think the market is -- we're seeing a slower growth, but we're still seeing demand. We haven't heard a lot of employers saying that they're not recruiting or laying off staff now. So -- but people are a little bit taking a wait-and-see attitude to their recruitment plan. So unlike 2018, right after Chinese New Year, people are rushing to hire people. I think this year, I think people are taking a more slow approach to their recruitment plans. In terms of some, as you said, some people are not returning to the larger cities and staying at their home counties, I think that relates more to the blue-collar segment. As we focus on the higher-value employers, the more established companies and also the more high-skilled, white-collar workers, I don't think that has a major impact on that segment. But in general, hiring is getting more and more difficult as the demographics in China is shifting to a more -- a less supply of labor versus the economic growth of the economy. So I think hiring will continue to be difficult, and I think established companies will continue to actively recruit. As we said, we think that the SMEs will probably have a more -- have more volatility in their hiring activities.

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Operator [6]

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

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Wendy Huang, Macquarie Research - Head of Asian Internet and Media [7]

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First, I still want to dig more into the demand side and the macro environment because we are hearing lots of -- especially the big companies, I believe they are your existing customers as well. So they're talking about either to lay off a lot of people or freeze the headcount. For example, yesterday, I think the Country Garden or so, a property company, also said to lay off like 60% of the people, and also even among lots of Internet companies, they are talking about to freeze the headcount or cut the people there. So it seems you are talking about one of your strategies is really to focus on the big accounts. Are you actually seeing any like impact from those attitudes from those companies? You can say I want to dig more into Kathleen's comment about the campus recruitment impact on the margin side. Can you actually provide more color why campus recruitment is affecting the gross margin, not creating margin? And because in my understanding, OpEx are pretty spread out among the older revenue segments. And thirdly, can you provide some color regarding how deeply you are penetrating into your BPO customers? Because I think, previously, you kind of talked about, in terms of the customer carriage, that's already a good grasp that you are trying to tap into the bigger pockets. So can you share some of the progress you are making on that front? And very lastly, on the customer payment side, can you provide some update? Given the macro changes, are you seeing any delay of the payments or any of your big customers trying to negotiate on the payment terms?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO & COO [8]

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Thank you, Wendy. Let me try to again answer the question as best as we understand it. I think the first question relates to market demand in general. I think we -- obviously, everyone's kind of reading the same news flow, and I think there is always some focus on certain companies making large announcements, saying that, potentially, they will be laying off people. And that is something that happens from time to time. I do think that, yes, it is true that probably there's been more such announcements in the last 3 months versus the same time last year, for sure, but I think that it is something that we've gone through many economic cycles and it is actually not something that we would be overly concerned about in terms of just saying, hey, everyone's going to take the same approach because, at the same time, we do know of a lot of companies also who are actually performing very well in their own segments that still want to actually recruit talent. So it's just that talent flows from one industry to another or from one company to another. So that is something that's happening. But I think, overall, I think Rick has already commented on this as well, that, overall, we do think that it is true that this demand this year, so far, in terms of coming out of the block from Chinese New Year, is slower than last year, but I don't think that we've come to a point where we feel like it's everyone pulls out the stop and no one's hiring. And that's not the case. And if you also know, sometimes, a lot of companies, maybe they will be restructuring some parts of their businesses, but at the same time, they're adding headcount in other divisions as well that are the well-performing ones. So I think it's actually something companies are taking time to reassess what their people, personnel structure is in to plan accordingly. But overall, we would say that new-job creation is probably lower this year, so far, and that replacement hiring may be driving more of the demand, especially for the larger companies. And so that is kind of the situation as we see it right now. And things are kind of off to a slower start this year. Just people are kind of taking their time, but it is early in the year yet. So that's kind of the picture that we see. The second question on the campus margins and your comment that you were not sure why it was actually hitting the cost of services, in fact, actually, a lot of the offline costs that we talked about, whether or not it be actually helping corporates go to campuses to hire, they might be organizing recruitment talks and fairs for people, and that would actually carry online component. And those costs are actually booked under cost of services and has no impact on the operating expenses for us because it's not an operating cost for our normal sales and marketing staff or our G&A structure. So that is how our cost structure is broken out. So it is something that if there are additional offline costs related to such projects and engagements that we perform for campus recruitment, those additional costs get booked into cost of services. And so that is why, my earlier comment in that, that is why it's affecting the gross margin rather than the operating margin. The third question on BPO customer penetration. No, our strategy is the same. We've continued on to focus on the larger customers, and we believe that that's where the largest opportunities are and that is actually the more stable and recurring set of customers that we can expect in the marketplace. I mean, overall, as you can imagine, when times are more difficult, if you will, companies that are smaller that have less resources are actually more prone to failure because they don't have enough cash to continue to fund their businesses. So I don't think that our strategy would change at this time, especially to focus on other sets of customers. So I think that we continue to want to push ahead, and that for the BPO business, a lot of it is going to be a continued penetration of existing customers rather than to just necessarily be recruiting a lot of smaller customers into the mix. So our strategy on that front is actually not changed by the economic climate at this point in time. Sorry, and the last question, I think it was the customer payment. No, we're not -- we don't have any of this, what you mentioned happening, concerns right now. I mean, we've -- for the smaller customers, our policy typically has always been to collect the cash upfront and to provide the services. That has not changed. For the larger accounts, it is normal arrangement as well, for the most part. There may be some payment processing requirement and cycles for them, but we have not had any issues in terms of increased customer negotiations or defaults or whatnot. That has not happened at all. So that is where we are.

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

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That's very helpful. On the BPO, I wonder if you can provide any color how actually the ARPU of the digital customer has actually changed in 2018 versus 2017.

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

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Wendy, we can't really use the ARPU kind of a concept for the BPO because it's actually per service, per employee kind of that's uptick. So it's not possible for us to provide that metric. But all I can say is that in terms of the progress we're making on that front, we continue to add more people count rather than customer count, if you want to think of it in percentage terms. So our customer counts may not have changed very significantly, but our revenue growth actually is more driven by the number of employees we serve under the customers and the service uptake across the board.

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Operator [11]

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

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Rick Yan, 51job, Inc. - Co-Founder, Director, CEO, President & Secretary [12]

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Thank you for joining us today. We look forward to speaking with you next quarter and value your continued support of 51job. Have a good day. Bye-bye.

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Operator [13]

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The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.