Q3 2019 Earnings Call

Good day and welcome to the five one job incorporated third quarter 2019 conference call and we've got.

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I would now like to turn the conference I'd that Tim as Linda Chen. Please go ahead.

Thank you operator, and thank you all for attending this teleconference to discuss unaudited financial results for the third quarter ended September Thirtyth 2018.

With me for today's call, our Rick Yan, President and Chief Executive Officer, and Kathleen Chien, Chief operating officer, and acting Chief Financial Officer, a press release containing third quarter results was issued earlier today and a copy may be obtained through our website at <unk> dot five one GAAP dot 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 could 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 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 Companys financial performance.

Conciliation 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 <unk> IR Dot five went off dot com now I'll turn the call over to Rick. Thank you Linda and welcome to todays call.

I'll begin with an overview of the third quarter.

Assessment of current market conditions.

Then Kathleen will follow with a detailed discussion of our financial results as well as people buy all guidance for the fourth quarter 2019.

Market conditions have been very challenging this year, that's ongoing economic concerns and U.S. trying to treat patients.

Significantly influenced the spending and becoming plans all employers.

However, through diligent south institution and top quality customer service would be maintained over all positive momentum with net net revenue growing 4% to RMB 989 million third quarter.

Profitability also remain solid with non-GAAP income of RMB 4.49, or U.S. dollar 63 cents for the quarter.

Oh online we call. It seven continues to feel the brunt of this current macro slowdown.

Employers are still very cautious about head count decisions. Some companies have towson too conservative financial resources and stand on the sidelines, let's see a white cavity on economic direction.

That's expected this market cone costs negatively impacted current demand in 2019.

Now on our revenues decreased 2% on a year over year basis, he knows the core.

In line with all forecast, we saw a reduction in the number if you need to employers primarily due to limited activity or dahlman behavior by smaller sized organizations.

But this was largely offset by improved ARPU on the back office vessel upsetting efforts focus on more established companies.

We remain focused on our long term strategic objective of driving up revenue per customer.

How high quality services hold up effectiveness and tangible results.

It is our policy to elevate our ability to consistently so and that's a monetize and you live customer base, which we believe will further solidify five in jobs industry leadership and on Jeff 50.

India I like how surfaces sentiment this area stay resilience and revenue grew 16% into third quarter.

A major differentiating feature 11, just business model is the uniqueness and diversity off our large portfolio of surfaces to address multiple aspects off a child responsibilities.

The value proposition of our training assessment and I was hoping surfaces has continued to resonate well with employers.

Using our training and assessment surfaces would believe companies have been able to shop in this election and investment in the best Holland, thereby improving and probably positivity and manage turnover.

Well I also think surfaces, we are assisting customers with core operational obligations, such as payroll processing and government compliance work.

Which has a strict standards that always need to be a here to by employers.

Through our comprehensive suite topic, how solutions and it anyway. The salesforce with extensive domain knowledge, we have stepped wishing more engagement points and deepening relationships with a choppy paboase. Despite this time of uncertainty and volatility.

Turning now to our current market assessment.

Given the circumstances, we have already navigator throughout this year and the fact that yeah and is traditionally a slow purely for general hiring we believe that customer demand will stay soft. These feel these last few months of 2019.

Oh I thought you know experience the dynamic nature of the China market, a tremendously we sent each year as companies, we flat or what has happened make adjustments and it down to the surroundings.

With Chinese new year falling on a calendar in late January .

Earlier, Danny their normal holiday will provide data points on and probably a sentiment in hiring activity sooner in 2020.

We know for patiently to see how the market toll plays out and we'll share our observations on our next quarterly call.

Purists off difficulty obviously bring business challenges, but we believe they also test and strengthen five in jobs organizational DNA for continued evaluation and development.

Justin just as in past cycles, we have stayed focus in moving ahead to lay the groundwork to capture opportunities where market conditions recover.

Our newest recommend platform fiber dawdle, which targets entry level from acquisitions in surface industries is gaining uses and building a solid reputation for inflammation accuracy and reliability.

As Chinese companies expand outside of countries borders and become more globalized, we're working with more customers on a requirement of overseas pounds, and we Tony's conducting board and hundred events and the Pos here.

I haven't job has the most operational and financial resources dedicated to the HIV industry in China.

We are bringing more panos seemed to our ecosystem.

Well make a recent investment CDP holdings, which I said, Oh by the of human capital management services through a cloud based platform that we believe that synergies without a child's halting business.

We have we have also entered into an agreement to be a cornerstone investor in the proposed IPO of quality University group.

Which is an upgrade to the higher education and vocational schools that we believe will enhance the.

The critical supply and demand link for equipment, and what a training purposes.

I'm proud to lead an 8000 member team assignment job. That's on late spring you know commitment to deliver the best to our customers Jobseekers partners and shareholders.

Our business fundamentals are robust and we are confident enough strategic blue plant that will be with bigger and better five and job to realize consistent sustainable and profitable growth I'll now I'll now pass the call for the Kathleen.

[noise]. Thank you Rick.

In my falling presentation. Please be aware that all financial numbers are not reporting currency of the Chinese renminbi unless otherwise stated.

Our net revenues for the third quarter of 2019 were 989 million, representing a 3.6% increase.

Other online revenues increased on a sequential basis to RMB 633 million it declined by 2.4% on year over year basis.

As we continue to be more selective about our customer base, we focus on and successfully drove up revenue per employee.

Inline with our long term high quality customer public strategy, we continue to prioritize our sales efforts and so anything relationship into more established companies in China.

We do expect similar dynamics for the fourth quarter in which will continue to focus on ARPU improvement.

Revenues for other HR services increased 16.4% to 356 million in the third quarter driven by the growth of our training assessment and HR outsourcing services.

Trading business has been they start with one this year and our HR services is more back on track. After some adjustments made in accordance with that new paths and government Mcgregor regulations that went into effect earlier this year.

Similar to previous years for the fourth quarter, we are expecting meaningful contributions from our seasonal campus recruitment services, which is still seeing healthy activity. This year. Despite the soft tone for general hiring.

Beginning January 1st of 2019, we have changed a presentation of government surcharges and included these amounts into cost of services.

2018 figures were reclassified to conform to this new presentation.

Reflecting this change gross margin was 69% in the third quarter of 2019 compared with 71.7% in 2018.

The increase in cost of services was primarily due to higher employee compensation expenses as well as seasonal head count additions for a campus recruitment business.

This year, we saw some employers choosing to launch a graduate hiring campaign earlier than usual in September which resulted in some additional costs incurred in the third quarter.

[noise] per usual for the fourth quarter, we are expecting a further rise in logistics costs, such as the new rental and event decorations related to providing our campus recruitment services.

Included in cost of services in a third quarter well share based compensation expense of five point Sixmillion.

Our sales and marketing expenses increased less than 1% to 326 million in the third quarter as we were discipline in our spending.

As we mentioned on past calls we have slowed our internal sales hiring for 2019, although we continue with our marketing campaign to promote our brands and services.

Included in sales and marketing expenses in the third quarter was share based compensation expense of 4.8 million.

DNA expenses increased 10% to 100 million in the third quarter.

The increase was mainly due to higher employee compensation expenses, especially share based compensation expense and a larger provision for doubtful account.

Share based compensation expense included in January was 24.5 million compared with 20.5 million in the third quarter of 2018.

As a reminder share based compensation expense is calculated and U.S. dollar, which is a currency of our traded stock price. So the recent depreciation of the RMB further increase the share based compensation expenses when reported back into R&D.

Income from operations decreased 5% to 257 million in the third quarter and operating margin was 26% compared with 28.3% in the year ago corridor.

Excluding share based compensation expense operating margin would have been 29.5% compared with 31.4% in a year ago quarter.

Excluding share based compensation expense gain from foreign currency translation as well as it related tax effect of these items.

non-GAAP adjusted net income attributable to five one job was 304 million in the third quarter.

non-GAAP adjusted fully diluted EPS was 4.49 or U.S. dollars 63 cents per share.

As Rick mentioned earlier, we have recently made investments and entered into agreements, we've which which will utilize the company's existing cash resources.

The total cash consideration from these transactions will be funded from our cash held offshore and is expected to be around 112 million U.S. dollars in the fourth quarter.

Finally, turning to our guidance for the fourth quarter 2019.

Based on current market conditions, our net revenues target isn't the estimated range of 1.08 to 1.12 billion.

For the non-GAAP fully diluted EPS target our estimated range is between 4.45 and 4.75 per share.

Please note that this non-GAAP EPS target range does not include share based compensation expense.

Impact of foreign currency translation, nor the related cost effect of these items.

Total share based compensation expense is expected to be between 34, and 35 million for the fourth quarter of 2019.

[noise] 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.

We're not able to provide a reconciliation of these noncash items to expect that reporting GAAP earnings per share without unreasonable effort due to the unknown effect and potential significance of such future impact 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.

Thank you we will now begin the question and answer station.

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At this time, we will pause momentarily to assemble out rough stuff.

Your first question comes from at least here yet [noise] with Citigroup. Please go ahead.

[noise]. Thank you good mining rate Catalina Linda Thanks for taking my questions have.

As a couple of questions number one is regarding your fourth quarter guidance. So assuming Isa HR services remain refill and is that translate to the Pico yield will yet decline in the online recruitment services and so have you seen any worsening hiring sentiment in the fall.

Quota then to third quarter.

And then on the second questions related to the margin outlook, if there's any color on that but early indications he comes off though.

Operating margins actually had into next year and lastly on your 80 million in less than in CDP I'm. Just wondering go south and your job internally have you develop various cloud based solutions asked related to the HR services or would that be reasonable to think about.

That youre BPL dismissed or could be very loud evolve into more standardized solution packages Ah. Thank you.

Hi, Lisa Thank you for the questions first to discuss guidance. If you will we are actually up we're of the mindset that I don't think that the fourth quarter as we're seeing per se, but because it is actually year end and overall the year has been relatively slow.

Compared to prior years that we are expecting that the general hiring to be lighter a in general. So I think a this is not a worsening us a near L.P. well, but because it's actually been a slow year. Overall I don't think that we would expect to be up and they need pick up for the remaining you know month and a half a year.

And also because nature is it early Chinese new year, I think people will be actually trying to reset oh for next year, rather than a do a lot more hiring for the ended the year. So that's why we are actually forecasting a as we are in terms of having a lighter kind of up your end.

For online recruitment.

I'm, sorry, but I'm not saying that there is a deterioration in market sentiment, but I do think that the timing and of the Chinese new year and also because it's just been a I'm not as robust year over all that we are not expecting things to pick up for the remaining a month and half for 2019.

In terms of then for the margin as you mentioned I think obviously I. We believed that you know we are here for the long term and our customers are here for a long term and we continue to evolve and developed product and services that we believe will bring value to our customer.

The long term so despite the fact that this year has been more challenging for us on the recruitment side, especially well you have continued to make a investments in product development to bring new services and products online showed that we are always I'm, you know focus and poor looking in terms and trying to anticipate and meet custom.

Our demand. So we will continue to be making investments on that front end. So that is I'm you know our philosophy on that I think that I'm, obviously I'm in the short term that would mean that because our revenue growth is not robust and we're not forecasting for revenue growth at this point in time for the fourth quarter.

It will mean that on margin will have to take us little bit of let's step back and so I think that's where we offer the fourth quarter. I don't think we are we can actually forecast too far ahead in terms of 2020 at this point because I think our margins are always predicated on how our topline looks.

And we will build a infrastructure yeah without in mind, if you well. So I think we'll be able to give you more color on margins and you know in revenues in general actually once we discuss Q4 results after Chinese new year. So I think that's a timeline.

Finally on the C. D. P investment I think we're very excited that we're able to move ahead with this partnership that we believe that won't be developing a with C. D. P. I think that down we have we both served the HR customer if you will but I think in a slightly different fashion I think that it is.

A different way to serve customers to be well I think that you know most of our services. We are able to have a wider a coverage and we have a larger customer base recovery I think CVP has a slightly different of opposed historically, where they've gone people with certain customers in certain verticals I, but I think.

Thank you know I think there will be a good mix of technology and a solution that we could actually co develop going forward as well. So I think that this is something that that's actually very exciting for the company as we can do report in bringing a a whole suite of products and services and that hopefully will integrate this even better for our customers answer that.

The user experience will be improved down the line. So I hope that answers your question.

Okay. That's it.

Thanks Kathleen.

Your next question comes from 10, Chen with Jefferies. Please go ahead.

Oh, Hi measurement. Thank you. So I'm, taking my question I supposed to question actually that's the first one is on the lumber employers I know that's all things on the year on year quote unquote with a sister has declined has a salaried I'm. Just wondering is there any particular reason behind.

So just I was always the preclinical central for its also a because of all else being moved too much too and sort of diesel employers and they did a minimum level that we want to maintain Oh, no quarterly places and how should we think about this number tools out there some spot quote or even 2010 Gi and my second.

Question is on the coast because we understand it starts we have more control on the social marketing courses reach the country. What do you pay relative unless you also some employees, we do see some leverage but seems like this multi multi also de pressure I'm just wanted to give some color to us do you need a trend goes on June eight and honestly.

More of the reason behind the increase in do you think Hong Kong and moving to try and going to and my last question is on the auto show services I think that actually do better than expected the year on year goes I should we understand the return.

We were talking about the chemistry acumen uncomfortable more revenue portion of this segment in the second homes, but now we're talking about Thomas you Cumin, it's not like teacher recruitment and he is actually doing proton I. Just wanted your understanding the reason behind and that you can pick all schools quoted.

Thank you.

I think you had a long list of questions, let me try to address.

Then I guess hopefully in order.

The first question I think you mentioned that relates to unique employers and to be honest I think you know we've talked about this as their strategy I'm for the last few quarters switches that are much more focused on the quality of customers were serving and that we're not focusing on account per se, we're working to identify the higher.

Got you customers and we want to make sure that we're serving them more deeply rather than to actually taking customers of all sizes. So I think that in terms of the customer account.

Showing some declines I think that's in line with our strategy and it is not a surprise if youre because it's actually a part of the strategy fuel. So I think that it's not something that we're focused too much on as a metric at all so that is not how we would look at the across our business in terms of using customer account as the driver.

Behind it.

In terms of then if I can skip ahead talk a little bit about just generally speaking cost and people I think you know for US we always I have discussed the fact that you know cost people cost is a very big part of our total cost structure and it's actually something that though we are.

Very thoughtful about a one we actually plan ahead, usually but I'm you know usually with people you don't you know decide to hire a person a month, one and just because market sentiment may not be exactly as you would expect higher than the second month, because I don't think that's the right way to build and develop your people and your talent pool.

And so I think you know I'm, we kind of go into every year with a on a baseline of what were won two I should have in terms of support infrastructure and then we go from there obviously through the year if actually the market demand does not they're all in terms of you know versus our forecast were very cautious as we've mentioned Earl.

Earlier in the call. We have also been very disciplined and making sure that.

Just a complaint about adding new people with your but in a short term they're still people that we have kept and that we want to make sure that they're you know focused on developing products and services. So we do not believe that cutting you know a you know people would be the right way to match our cost. So I think that you know given not the revenue growth is not.

As well, but as we wanted or that the you know for the fourth quarter were actually not forecasting growth that well have Tom create some you know pressure on the margins. So I think that's a you know overall you know how it looks.

Finally on the other HR services in terms of what we discussed on campus recruitment campus recruitment is a a much more seasonally product and that the you know the bulk of that happens in the fourth quarter and I think that what we feel so far is that we're pleased to say.

That in terms of the impact on campus recruitment given though that that has been a softer recruitment market overall it actually has fared better than we had expected on what we actually discusses point in the third quarter. So I think that that most likely that you know campus for equipment will be a little bit.

Bigger than what we had anticipated.

And it will probably make up a bigger part of the fourth quarter. Then you know overall in terms of percentage terms. If you will so we think that when we talk about recruitment being hit I think that more that is on the general hiring aside and that campus recruitment has proven to be a more resilient versus that so.

I hope that answers that most of your questions.

Thank you very much.

Okay.

Thank you next question comes from Seattle.

Th capital. Please go ahead.

Yeah, good good money management shifts a actually it's not easy to relate.

Men each ads business under today's Ah Ah Lisanti merriment tips. So my question is you know I sleep.

Hi, Steve you know like a cleaning up our customer base or employee assays and yet I think it back and now it would have oh miscellaneous alone. So when you're going to start to add to do there was birds eye to start the expansion cycle.

So that's number one question also a among your most in 300000 employees. How many of them you. Oh you also provides <unk> HR services. That's the second question. Thank you.

Hi, I'm, it's easy to answer the.

Your first I guess, because yeah, it's a very small and other people that I, she purchases or other HR services overall, and I think that the percentages.

Oh, I think overall I believe it's a single digit present, a if you own though it's a small amount versus the that the large kind of recruitment base out there. So I think that they know we again. These are the very high value customers. Because if you look at 'em de break down into the two categories. Other HR.

Services make up you know a 3rd% to 40% of our revenues. If you look through the different quarters of the year on yet you know, it's only takes a single percentage of total customer account. So you know any contribution per customer is a very very very significant magnitude a difference.

In terms of expansion what you said about you know when do we want to be Ah I think it's not its on a case, where it's kinda sitting on the same several customers and just decided to kind of way certain ones and then you know not getting new one it's actually a dynamic process. If you will they are always customer that we feel like they're they're not you know there.

Not growing as a company if you will and no they have less well prospects for us.

Then that you know the service level that will provide or their internal demand pull decrease and that will be a situation, where we'll see probably transacting with them and then there are always new customers coming into the portfolio, where we need to then identify and understand whether or not they have growth potential and that we will be focusing more.

More attention on those overtime. So I think it's not a case, where we just standing on the same set of customers and not just cutting away some of them.

But without actually adding new ones. So even during this past year and a half if you will where we've actually been very focused on you know trying to prune out there really lower potential customers weve added customers to our portfolio. So it is not a case, where you know we haven't done so but I think that you know it's.

Obviously, a case, where this year is one where I'm I think there's probably more customers that have actually then not been able to continue a themselves as ongoing concern just because the overall macro economic conditions are not very robust and so that had probably added to the degree of.

That sort of the drop if you all to some degree so I think that you know we will continue to be hunting for new customers and we have continued to do so you know last several quarters. It just seems that you know when we look at the number is a net number. So there's addition, and subtraction that the same time and so we're not saying that we.

Not at at customers in the interim so that's the situation.

Okay got it. Thank you. Thank you. Thank you.

This concludes our question and association I would like to turn the conference back over to Mr., Rick Yan for closing remarks.

Thank you for joining us today, we look forward to speak English Unix corner, and we value you'll continue supporting five and job has a good day right.

Yeah.

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

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