Q1 2020 Earnings Call

[music].

Okay, and there will be an opportunity to ask questions to ask a question you May Press Star then one way or your telephone keypad withdraw. Your question. Please press Star then too. Please note that this event is being recorded I would now like to turn the conference over to Linda Chen Vice President and head of Investor Relations. Please go ahead ma'am.

Thank you Chuck and thank you all for attending this teleconference to discuss our not a disaster results for the first quarter ended March 31st Twentytwenty with me for todays call, our weekend, President and Chief Executive Officer, and Kathleen Chien, Chief operating officer, and acting Chief Financial Officer.

A press release containing first quarter 2020 results was issued earlier today.

A copy of the press release can be obtained through our website at <unk> IR.

Uh huh.

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, making 95 Oh.

All forward looking statements are based upon management's expectations at the time of the statement.

In 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 the Oh are based on assumptions as of today and we undertake no obligation to update these statements except as required under applicable law.

Oh, so 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 why description. These non-GAAP measures and their significance to management in evaluating the company's performance.

Reconciliations to the most directly comparable GAAP financial measures are provided where available in the tables up 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> dot five one job dot com now I'll turn the call over to right.

Thank you Linda and welcome to today's call I will begin with an overview of the first quarter total fine assessment of current market conditions.

Then Kathleen will continue with a DCF detailed discussion.

Actual results as well as well by our guidance for the second quarter 2020.

[noise] under 10% unprecedented circumstances, well the one by the culprit 19 endemic.

I'm very proud of how the five and golf team quickly rallied together and adapt to the you all think situation.

Through focused creativity and efficiency, we continue to 40.

Employers and top secret in China, with innovative solutions and high quality customer service.

Oh, no. There's always cells were affected negatively ethics expected decreasing revenues, what's left and forecasted and came in at Allenby 791 million into first quarter.

We also importantly manage expenses and I'll profitability was solid.

GAAP operating margin was over 26%.

Non-GAAP EPS for the first quarter, well ahead of guidance and Allenby <unk> 0.27 per share.

[noise] the extend the Chinese new year holiday in 2020, and a temporary office closures travel restrictions as well as corn teens instituted to fight the virus spread significantly impact economy economic activities and we come to market demand into force.

This quarter.

Oh, well loved business. This resulted in an 11% decrease in revenues with most employers naturally adjusting their hiring plans and compelling spending in a pure rate all crisis.

After reaching a bottom in mid February Devonian job postings, and kinda <unk> applications pick up on El Paso. That's companies began to we opened in faces a cross training.

The first move us wasn't state owned enterprises and lots domestic companies.

He obviously does given their financial strength available resources and focus on long term development.

They were also domain clients, who are early to adopt to our content services, such as online assessment and be deal interviewing.

At the Hot Oh, five engine, so fast and loved it although chesapeake.

That's been our longstanding and deep customer relationships as well. So it's one of its our trust a brand amount job seekers.

We stand ready to assist and support our users in every possible way, especially in these extraordinary types.

Oh, I think trial surfaces simonton fail, the pandemics immediate an abrupt full out on people mobility and social get offerings.

Which decreased revenue by 18% into first quarter.

I'll fly surfaces that were most affected well in person training seminars, that's why I wish we kumon events open how I'm curious to promote and celebrate hiring in the traditional post Chinese new year peak season.

[noise] Oscar establishing appropriate precautions to protect participants and employees, we have begun to offer some classes and host you fancy much.

Currently we have taken steps to transition some of these surfaces online is applicable.

The delivery of southern training content is now available through our Neil you learning platform, which was already in the fundamental sometime it was accelerated to launch earlier this year.

We have also help clients by facilitating online telfair, which includes streaming of cooperate recommended videos and into active engagement with job seekers.

So restrictions on most monies in China, we're working closely with customers on safety protocols and to reschedule you bands already under contract, but more time, maybe needed for them to gain comfort fall in person content again.

Turning now to current market assessment.

Although companies half resume operations and employees have returned to work the market told is still cautious and uncertain.

Due to the ongoing pandemic and is unpredictable future consequences.

Hiring activity data show improvement at a measured pace from the lowest in February but the level remains shy of last year's comparisons.

In general and probably is a gradually dipping their toes.

Back into hiring starting with fewer topless things and being selective about candidates stay awake more information and clarity about where things I had to it.

On the job seeker front.

Applications outgoing opportunities as expected we have received feedback that some workers have been hesitant to airsep mutes office worried that leaving the composition may not necessarily to greener pastures.

With also upset recently a notable difference in sentiment amount employers depending on their content business area.

For those organizations, who provide part I'll surfaces predominantly to the domestic market in China.

We are glad to see that business confidence is rising if the local way of life is returning.

However for those companies were so more on a global scale offers customers a base mainly abroad.

What has to be fallen such and such region, that's Europe and the United States.

These last two month have been very concerning.

Regarding salary levels, and then probably benefit because of the pandemic. Many companies have unfortunately, you indicated to us that they have taken or intend to take some access to change and problem in terms of reduced conversation or justice style size and allocation this year.

Needless to say market conditions are very difficult and many unknowns persist in the role to recovery.

We have full confidence in our proven business model, which has the phase and overcome many instances of global crisis and economic downturns in the past.

Oh blueprint to prevail and emerged stronger each time has been consistent with peace Sweet following pillars.

First we stay true to our call values.

To provide high quality services to customers in jobseekers to be accountable and responsible and the two right bio team members, Oh, because assets our people and the integrity of our platforms, which we don't ever try all sacrifice for you've gotten salter reward.

Second.

We go back to the part of basics.

How can we improved the user experience and enhance the value proposition of how surfaces.

Wi Fi ample financial resources are part of the of the development roadmap has been an affect it.

We will continue to pursue and then you partners to the five in job child ecosystem.

Hi, good we want to life quicker operational excellence.

What's the Chinese governments, we said supporting an acknowledgement of certain digital processes, now, having legal spending and possibility.

We are actively making changes to our BPL business.

Which we believe will step up efficiency and convenience for our customers.

With a constant desire and tenacity to want to do anything and everything better for cost effectiveness.

This is mentality at the foundational five in jobs robust margins and profits.

[laughter], which have been industry best for decades.

And distinguishes us uniquely from competitors by why distance.

We'll continue to raise the bar and challenge ourselves as lead us to.

I'm going to abate fan of car racing. So allow me to use this technology.

Well the role I had my half many winding turns and formidable obstacles haven't job always takes decides to drive a seat and find a way to see a past the crowd to victory Lane.

We believe it is often.

The decisions, we make and actions we take doing the tough. This time that have subsequently led to our most significant accomplishment accomplishments in our 20 year track record.

In this defining moments, we will set ourselves apart with confidence and commitment will continue to position and strengthen five in job to capture more opportunities that pave the path well sustainable profitable growth over the long term.

I'll now pass the call over the Kathleen.

Thank you it.

Oh and my follow it doesn't take please be aware that all financial numbers already know reporting currency of the Chinese renminbi unless otherwise stated.

Our net revenue for the first quarter of two does and then 20 were 791 million, representing a 13% decrease year over year, but above the guidance range that we had provided back in March.

As we expected that disrupted social and economic impact of that pandemic on companies in China weighed on become and demand in the first quarter.

And as a result, our online revenues decreased 11% to 547 million.

Starting in 2020, we will no longer be providing the number of unique employer using our online recruitment services on a quarterly basis.

Since we transitioned our online growth strategy five years ago to primarily focused on driving the monetization of high quality accounts and moderating the pay some new customer acquisition.

Quarterly employee thicker has no longer become indicative of the performance and direction of online business.

Well, however continue to for like commentary and color and highlights.

The trends and behavior that we observed in the reporting period.

In the first quarter far larger sized customers. They stay generally I did the highly selective in a number of positions posted and how many employees they start to add.

The environment was tougher for smaller sized accounts as they focus on finding their flooding under a new normal and prioritize attention on existing workers before adding staff.

Industries that I dress consumer essentials, and personal wellbeing, such as E. Commerce education Bio pharma has continued to see favorable worker demand.

Also the construction sector, which has been bolstered by government infrastructure investment and the real estate sector, which has seen a relaxation of restriction has fared much better recently.

Although contract signings have improved since March employers are understandably being tight on spending in this uncertain environment and we will need more time to rebuild our online revenue pipeline with customers.

Revenues for other HR services decreased 18% to 244 million.

The decline was primarily due to fewer in person training seminars and recruitment events conducted in the first quarter of 2020 as a result of the pandemic any consequent restrictions instituted a public gathering.

As Rick mentioned earlier, some training classes in offline activities have restarted it slightly in March but many events that customers remain committed to our on hold as we await confirmation on when and how we can conduct them give than government restrictions.

We believe that this is a temporary rod pump and we feel that the other HR segment overall will rebound when the scheduling issues are resolved and restrictions are lifted.

Gross margin was seven was 67.9% in the first quarter of 2020 compared with 72.7% in 2019.

The decrease in gross margin was primarily due to the lower level of revenues. This year well cost of services only increased slightly at 2% mainly as a result of gray your employee compensation expenses, which were largely offset by less direct costs related to training and.

Recruitment events.

Included in cost of services in the first quarter was an increase in share based compensation expense to 5.9 million.

Sales and marketing expenses decreased 4% to 276 million in the first quarter.

This is primarily due to a decrease in performance based bonuses and selling expenses, which was partially offset by the greater expenditures on advertising and promotion activities for the post seen wide period that we had already put in motion and committed to.

Prior to any knowledge of that pandemic.

We are staying mindful in controlling staff costs and expect to be honest with all our own hiring plans this year.

Per usual, we will utilize discretion in balancing the near term spending against important investments that will optimize future growth.

Included in sales and marketing in the first quarter was an increase in share based compensation expense to 5.1 million.

Gionee expenses were slightly higher at 91 million in this first quarter.

Well share based compensation expense increased to 26.1 million in 22020 from 20.6 million in 2019.

This amount was largely offset by a decrease in office expenses salaries and bonuses as well with other cost.

Our income from operations was 170 million in the first quarter of 2020.

Operating margin was 21.5% and excluding the share based compensation expense it would have been 26.2%.

In the first quarter, we recognize a mark to market noncash gain of approximately RMB 10 million associate it with a change in a fair value.

Equity investments in quality University group, which is traded on the Hong Kong stock exchange.

Excluding share based compensation expense the gain from foreign currency translation and the change in a fair value of equity securities investment as well as they're related tax effects of these items non-GAAP adjusted net income attributable to five one.

Job was 222 million in the first quarter.

Non-GAAP adjusted fully diluted EPS was 3.27 or U.S. dollars 46 cents per share.

Finally, turning.

Turning to our guidance at the second quarter of 2020.

The pandemic and its evolving economic impact on China, and globally continues to materially affect market conditions and limit.

Our visit Dillard T O.

Revenues in the near term.

While we will continue to provide a forecast for the fourth quarter based on information available as of today. This is subject to change and unforeseen circumstances in the future.

Currently our net revenues targets for the second quarter of 2020 is in the estimated range of 775 to 825 million.

For the non-GAAP fully diluted EPS target our estimated range is between 4.35 and 4.85 per share.

In April we have received some local government financial subsidies and we have factored in approximately 120 million related to this in our second quarter earnings expectation.

The please note that the non-GAAP EPS does not include share based compensation expense foreign currency translation. They change in a fair value in equity securities investment nor their related tax effect of these items.

To note. The total share based compensation expect is expected to be between 37 and 39 million in the second quarter of 2020.

Again this guidance reflects our current and preliminary view, which is subject to change and uncertainty.

This concludes our presentation, we'll be happy to take your questions at this time.

Operator, Please go ahead.

[noise]. Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

Using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we'll pause momentarily to assemble our roster.

And our first question will come from Alicia Yap with Citigroup. Please go ahead.

Yeah.

Hi, I'm running rate had seen and Linda thanks for taking my questions I've. A couple of question related to the guidance. So Hum self fuel second quarter revenue outlook. It seems thing is yet where ya and sequential.

Hi, this trend actually suggesting maybe the hiring demand has yet to resume to normal. So just wondering if these many at you got to the timing where the employer U.S. slow in putting together yeah hiring plans or is this a suggesting that maybe it's a beginning of aside that puts.

Actually you know things are not going to recover I snob <unk> for the recipe sure I'll add to openings and the hiring demand will remain very soft on the shot so and we used to break down previous Yeti you mentioned, a the auto HR revenue all were more effect that's so.

Second quarter also a spirit, so simo directions, where our HR will suffer pick a decline.

And then just quickly on your EPS guidance. So if we you factor in the government subsidy that you receive Oh in April.

Should we assume that the net margins is actually a more in line with your revenue guidance, which is still half a sequential decline.

Decline I spot versus the first quarter matching that you achieve thank you.

Oh, Hi, Lisa. Thank you for the questions. Let me try to cover the revenue questions first the which is just in general heightened demand looking out longer term I think it's too early to call. It for 2020 at this point because I think what we're seeing is that people have had a chance. It just returned to office actually.

Early in April for almost all of China, I mean for ourselves as well I mean, some cities were actually had very late in opening up in its phase It and I think April was really finally in that time when people have across the board been able to return to the office and as you know Amit Beijing. Just relax is you know security level at the end.

End of April event. So again I think that is just a little bit of a pause button that was on that we still haven't fully released if you will.

So I think that in the second quarter, where you're going to see some effect of this continuously but we do feel like everything is moving into right direction and I wouldn't say that you know this is necessarily going to be a long term normal for the rest of you are the year at this point because were seen improvements every week still but after the second quarter.

I think that you know it is unlikely for it to recover to a comparable levels of last year at this point in time. So I think you know we're not calling in for the year. That's for the second quarter, we're not seen that recovery that quickly because they think that there is gonna be some time lag too.

The pipeline that we built to the business. So that is the situation with online development in terms of other HR revenues of yes, I think the key really is about the restrictions on public gatherings and offline events and how it can be held if you will I think you know we have a number of engagement.

We have contracted for but because of the disruption caused by these restrictions for public gathering and whatnot, we have not been able to.

Deliver the content or de event. If you will sell that is really something that we are just pending that restrictions being lifted a and I do think that this is something that again, well we have no control over the situation. The timing specifically, we do feel like the signs are there for things to continue open up as you.

The government is going to hold there a major event in a and me. So I do think that that's a strong sign that the government deals that things are getting back to normal and that that you know things are under control and if we followed that lead if you will.

I think that we can look forward to that kind of the gradual relaxation and restriction being lifted and so that is really you know the situation, but again because that is happening and the this month. If you well so were going to do some time in the second quarter to serve revenues in those kind of area. So and that is why we have to be a real.

Mistake and may be somewhat modest in terms of our guidance for the second quarter at this point in time.

[noise] and then finally I think you mentioned about just margins in general I think you know the guidance that we had just given a which dr. Dan the Oh, the subsidy impact as well I think you know I mean, you know I think we're trying to not overreact in terms.

The cost structure, we have and I think right now we feel that things are moving there right direction, we want to make sure that we've continued to make the right investments to bring new products and new services back online. So we're not trying to cut away on that kind of investment at this point in time, so in a short.

Turning you know, yes, there may be small margin compression versus prior years, certainly because of the reduce revenue levels, but I think that it is something that we feel comfortable with and that the overall levels or after she still very strong and industry, leading if you also I think that's where we feel that would be the right level.

So to continue the investments in these 10 area. So I think that's kinda up you know where we see the you know things at this point in time.

Great. Thank you had you mean.

Thank you Alicia.

Our next question will come from Ken Chong with Jefferies. Please go ahead.

[laughter].

[laughter].

Hi, I'm management. Thank you for taking my question I want all about Oh.

I'm, sorry can I wish trip boats the expansion of the premium.

Membership by all the companies I understand the other Chinese new year. They would start you extend a team members you're calling from assessment. This has been disrupted by the fibrous Henry comment on the latest Oh situation now how has this been training and I also have my second question can you comment on the because return and Oh second half do you think on Hmm.

Our next processes. This will recover so that's all thank you.

Oh. Thank you for the question into the recruitment revenues I think yeah, obviously after Chinese new year. There is a kind of a pause if you will show a I think that is something where you know a lot of people did not rushing to signing large contracts or has it had just kind try tracks in general if you.

Well so it is something that.

Oh, we've seen the year over year decline because of that and I think that trickled over to some degree still in the second quarter and as we mentioned earlier you know were still not at comparable levels of last year at this point in time. So if you look at the number of postings companies are putting out and there they're hiring demand overall it is.

After the last year at this point in time, but again you know we came from their low levels in February when everything really kind of whole Ted if you will because you know people couldn't even a return to office. It was very difficult and so you know and not all industry could rely on a contact list approach to higher and you know.

Bring on employee used to do the work so there's got to be a period of disruption. There. So that is the situation. This.

And then you know in terms of how that looks in terms of the other HR revenues I think for the other HR read news what is the key for us in the second quarter won't be really about someone they restrictions on public gatherings and the ability to use a whole some events offline, especially with what we talked about with training and other.

Things, where a lot of the delivery historically has been offline. So that is really the one thing that we're looking to the government just see and take you know didn't see where things lead but as I I'm, just I'm sad to Alicia as well I think the you know we believed that the signs are that things are improving in China and that they China.

He's government is actually going to be holding their major event later on this month. So again, we'll take out as a C. O. I think that you know we hope that after that you know the restriction will become a lift in more and more across China and as you know in China. Some pictures are not national they're kind of you know by city or by province, So again different pay.

Yes, that's going on.

Okay.

Oh sure. Thank you very much.

Thank you.

Again, if you have a question. Please press Star then one.

<unk>.

Our next question will come from Dan Chase with Wasatch. Please go ahead.

Yeah. Thanks for taking my question you mentioned earlier that your domestic routes and customers are.

Doing better than before where customers can you give us a sense of what the mix of revenues from first to category.

Oh I missed it you know it's difficult to kind of break that out specifically because some people have a mix of domestic and foreign business. If you want but what we're seeing is that some of the n. sees in general will be asking more slowly because they think they're more concerns on a global basis and so if they're taking some head up sort.

The direction or some guidance on the headquarters Shibulal given that the pandemic kinda outbreak, a what's actually happening a in the U.S. in Europe at a later period of time burst is China. If you will so that kind of rolled into you know the March and April timeline for some of these companies to make.

Their decisions I'm. So I think that's kind of what it is for the online recruitment. So I will be frame been commenting on the specific percentages because I think it's difficult to kind of break that out specifically, but I would say that you know they are actually quite a lot at a large accounts that were also and then see in nature, but that.

Some of that smaller accounts.

And some of the local Chinese company or a little bit protected against what's going on globally. So that is Ah you know the situation.

Okay. Thanks to ask a follow.

Sure.

Yes, if I heard you correctly, you were going on no longer reports the number of units employers.

The online business is that correct.

Yes, no on the quarterly basis, where knows all reporting that number because we do not feel like that's a good way section or a good indication of how the business is doing overall, because our strategy is not to pursue number.

Customers as the major way to grow.

Understood, but I think in or the average revenue per unique employer.

Well done much what the drop in terms of.

Your ability to.

Got price from Morgan your larger customers.

I'm sorry, just encourage you to.

Do you think that Paul because it.

Yes, it's been a useful metric to track.

Well, thank you sort of be back we'll take that into consideration.

Thank you.

<unk>.

Our next question will come from Thomas Chong with Jefferies. Please go ahead.

Hi, our friends management.

My question and I have a follow up.

Oh on P. with questions all recapping our online.

Okay management comments about the mix between them.

Oh and a lot yeah and my second question. Good also about the.

[music].

Oh, how should we think about.

Activities in Milwaukee isn't these others. Its first you said he's given that.

Right.

In the lower.

And then.

A question about and.

<unk>.

Contracts or permanent drops off but.

Okay. Thanks.

Sorry, I didn't quite understand the last question can repeat that first.

Oh.

Yeah. My last question about the drop offerings are we seeing.

And Paul Yes.

Opposing the permanent drops or having more contract drops occupancy uncertainties RBC. Thank you.

Okay. Let me answer that question first I think that you know.

I don't think that accompany can all of sudden change its kind of way to offer positions to employee or potential employee should be well so that they immediately convert a job from that and long term you know.

Time job to a contracting basis, if you will because I think that done there are differences in how that will get done and how they would compensate employees I think the challenge today right now is really that up.

You know given the pandemic disruption that everyone is operating at a lower level. If you will so that the demand is actually just lower in general So I don't think that the push for a seeking alternative way of employment is really driving the change in the marketplace I do think that in terms of what you mentioned about cloud.

Contracting and maybe using part time staffing I think that is they option that I'm you know companies always try to see for for some flexibility in their own kind of workforce management and that happens, but I think that's for the most par for most companies that is still ace.

All percentage of total head count and that they would be sort of I wouldn't say nonessential, but certainly noncore in terms of deep workforce that they manage so I think at this point in time I would say that I'm you know the softness in the market is not because people are trying to seek alternative employment.

But that longer term may be something that you know people would want the flexibility, but I don't think that's really kind of driving the situation and then in terms of you know demand oh across different geographies, yeah, you're right I mean, I think that because of the way things unfold. It if you will be relaxed.

In addition, Oh I'm sorry.

Some of the policies on what cities Kinda got the phase opening at what time to return to work I mean, that's actually not being 100% inline across all cities nationally. So some cities opened up a little bit earlier, so they're probably I'm a little bit ahead to the Kirby fuel Wow some cities.

Or you get a late in opening for whatever reason and so that took a little bit more time, and I mean to be honest I mean, even our own office in one or just really opened up in April. So I mean, it was and later opening that you know somebody cities a in our own kind of a network of offices. So I think.

That you know the the timing to opening and the industries that accompanies our in really then we'll drive how they're doing right now where they are in the stage <unk> recovery.

And so it's not I'm you know.

It's hard to have a one size fits all kind of a answer for that so.

That's kind of where things stand, but again I think what we want to emphasize and to let people know is that you know I think that it feels like the worst as it behind us in China I think that you know obviously everything bottomed out and you know February on there was great uncertainty in March I think that we were gaining more confidence into April and.

I continue to believe that there are signs that things are going to return to some semblance of normal more and more and that dog restrictions are being relaxed or lifted a in different parts of China and that that yeah. We I think we're on the path.

In the right direction certainly so.

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

Thank you for joining us today, we look forward to speaking with fuel next quarter and we value you'll continue supporting five in job has a good day and night.

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

[noise].