Q2 2020 51job Inc Earnings Call
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Good day and welcome to the five one job Inc. second quarter Twentytwenty conference Cold and wet cost all participants will be in listen only mode should you need assistance. Please signal a conference specialist bypassing the stocky solid I zero.
After today's presentation that will be an opportunity to ask questions to ask a question. He may press Star then one on the touch try and fine to withdraw your question. Please press Star then true.
Please note. This event is being recorded I would now like to turn the conference over to Mr., Linda Chen head of Investor Relations. Please go ahead.
Thank you Rachel and thank you all for attending this teleconference to discuss unaudited financial results for the second quarter ended June Thirtyth Twentytwenty with me for today's call for rig can president and Chief Executive Officer, and Kathleen Chien, Chief operating officer, and acting Chief Financial Officer April.
It's really containing second quarter 2020 result was issued earlier today and a copy may be obtained through our website at <unk> IR Dot five one dot dot com.
Before we begin please note that today's discussion will contain forward looking statements made under the safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995 Oh.
All forward looking statements are based upon management's expectations at the time of the statements and involve inherent risks and uncertainty 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 there's significant diminishment in evaluating the Companys financial performance.
Reconciliations to the most directly comparable GAAP financial measures are provided where available in the table appended to the press release. This conference call is being recorded and broadcasted on the Internet in a replay will be available through our website at <unk> IR Dot five went up that pump now I'll turn the call over to Rick.
Thank you Linda and welcome to todays call I will begin with an overview of the second quarter, followed by an assessment of current market conditions.
Then Kathleen will continue with a detailed discussion <unk> financial results, that's where a couple by all guidance for the third quarter 2020.
After an extremely difficult start to do you.
Through vigilant collective surface Mount government business and society to bed told the cobot 19 pandemic economic activity.
Been increasing.
And recovery underway in China.
For the second quarter.
There was a solid sequential rebound you know outdoor Charles surface area.
We've been paying so possibility that balance cost management and strategic investments, it's important for future growth.
Exceeding our forecast total revenues were RMB come to 29 million and non-GAAP bps was RMB 5.28 per share.
Oh, I got a Charles surfaces salmon improved significantly from the first quarter.
In Q2 revenues came in better than expected that RMB 325 million.
Yes, social gathering and travel are now generally allowed well most of the country.
Companies are becoming more comfortable with in person you Ben.
And we have been able to conduct these activities and a larger scale.
Oh training services remain the business area most affected.
Got any move by any movement restrictions.
Although the way distance behind last year, we're hosting more seminars and workshops.
And some claims have been have even begun reinstituting physical exercises such as pin building games for new worker orientation.
Well employment being a key part power people. The government. We have also capture some upside in special projects with local labor bureaus and top universities.
We have all been nice over 30 targeted recruitment campaign with districts in cities like Beijing, Guangdong, Nanjing Mohan and many others.
These events showcase the integration of our online and offline capabilities and have generated nearly 2 million drop applications for participating employers.
Oh care businesses recently, launching new parents pets careful to assist the University Korea centers with job postings and resume submissions.
And we have already signed up 96 school partners to date.
These positive developments combined with our anchor repeal business the continues to exhibit consistency and resiliency.
The other HR says it services area, it's bouncing back.
We are hopeful of more progress for the remainder of the year as long as the pandemic stays under control.
Turning now to our ordinary come in some of the loss of this years post Chinese new year peak, we come in season I swear was high lingering market uncertainty has significantly disrupt our pipeline of customer orders for 2020.
That's a result online revenues for the second quarter was RMB 503 million, a decrease of 18% compared to the ago period.
Well, we have month over month uptrend in labor market activity seems much.
Hiring tends to be a lagging indicator you know experience and under the overhang of the ongoing pandemic and geopolitical concerns the pace of recovery what square jewel in the second quarter.
Employers are still conservative with their budgets and selective netting head count.
I stay away more data points, there substantiate economic upturn as the business confidence.
We believe things are heading into right direction, but no more time and patients if needed.
Its contract signing picks up.
We would be a revenue book.
Just one underlie better we sell down the road.
Customer service remains top of mind to our clients, especially as employers navigate through complex talent management meadows irregular route and regulatory changes and this unprecedented and persistent at times.
We stay focus on our commitment to being the most trusted and reliable partner to date chalk community in China.
As such we have chosen not to make any major adjustment to our staffing levels. This year.
And continue to deploy resources to provide high quality support and guidance to our customers.
We also continue to invest in polymer innovation technology development and operational upgrade initiative.
Which we believe are critical to driving higher productivity and monetization.
Oh decision, making is guy that file conviction in the larger potential of the industry over the long run.
Robert the near term obstacles.
We are confident these investments will strengthen our competitive position to capture him opportunities and will deliver quicker potentially returns in the years ahead.
Moving onto our crew Makan assessments, while we are seeing sequential improvement in recruitment demand significant a note pieces regarding depend dynamic global economic outlook and you were trying to tensions.
With limited visibility and some factors beyond control conditions remain difficult for employers to make hiring plans and decisions.
But we have seen some favorable signs that recently that make us optimistic about more positive momentum.
First the government has continue to implement a number of measures to support companies and employment.
These include exemptions deferment in reductions for certain social welfare and tax payments to alleviate compliance and cost burden, especially for small and medium sized enterprises.
He had also there has also been a great can policy focus or new infrastructure investments such as to be well fiveg networks and data centers, which has bolstered hiring in related sectors.
Second our recent surveys so some employers have carrier I've worked salary adjustments lately.
Although not broad pace and more targeted to southern talent, notably mission critical and technology workers. This is a meaningful change in sentiments compared to earlier in the year.
Annual salary increases I expect a no for the white collar space in China, and dispose well that traditional market behavior is returning.
But.
In the labor salmon, receiving most attention from government in society. This year, we saw solid spring season for graduate recruitment all things all things considered.
By quickly developing solutions and transitioning to a contactless online approach.
We were able to minimize delays you know customers planned campus hiring programs.
We also introduced new away.
Net worth graduates such as hosting online live streaming event.
Affairs and competitions.
As we enter the BCS period for campus hiring into fall, we're encouraged by what we have seen so far.
We are well prepared with many tools and channels to keep engagement high between employers and Jobseekers.
Without a doubt the path forward to see it remains challenging and and unpredictable.
The new normal that require us to operate with nimbleness.
Yes ability and creativity to serve our users who all types of circumstances.
Although we are facing headwinds currently our experience has taught us to stem from regarding our strategy and the investments and our robust balance sheet enables us to do that.
We are confident spent five and job is well positioned competitively and financially.
And we firmly believe we will emerge from this crisis as a even stronger organization.
I'll now pass the call for the Kathleen.
Thank you Rick.
Hey, My problem presentation. Please be aware that all financial numbers, sorry, not reporting currency of the Chinese renminbi unless otherwise stated.
Our net revenues for the second quarter of 2020 were 829 million, representing a 14% decrease year over year.
In our online business revenues decreased 18% to 503 million in the second quarter.
Recruitment demand remains heavily affected by the pandemic and its economic ramifications.
In addition, with U.S., China relations, becoming more strained again employers remain cautious as they seek more clarity on the prospects of their business recovery.
Our larger sized customers continue to be more active in hiring then SMB and better performing industry recently have been real estate bio pharma medical devices and construction.
Because the models for online business is primarily subscription memberships and there is rolling revenue recognition of the contract value proportionally over the contract length. The disruptive start to 2020, plus the gradual and somewhat uneven pace of improvement thus far.
Means that we still have some catch up to do.
Bookings are picking up but we need more time to rebuild our online pipeline to pre crisis levels.
Revenues for other HR services rebounded more significantly on a sequential basis to RMB 325 million.
There are still down 8% year over year.
The most significant impact has been filled on our training business as the majority of that business is deliver in an offline format, which was severely constrained in many cities across China until may.
As Rick mentioned earlier, we are optimistic that the other HR segment can recover further this year it depended make stage controlled and no broad based restrictions on travel and offline gathering or we instituted.
Our gross margin was 67.3% in the second quarter 2020, compared with 70.1% in 2019.
The decrease in gross margins was primarily due to the lower level of revenues. This year, which was partially offset by a reduction in social welfare benefit payments and the less direct cost related to training events.
Included in cost of services in the second quarter was an increase in share based compensation expense to 6.1 million.
As we pivot under the new market norms, we are making additional investments to drive the introduction of and delivery of new services.
And so as we enter the full campus. We couldn't period, we will also be bringing on seasonal head count and purchasing support services in a band, which will somewhat increased cost of services in the third quarter.
Sales and marketing expenses decreased 7% to 293 million in the second quarter.
This is primarily due to the decrease in performance based bonuses and a reduction in social welfare benefit payments, which was partially offset by the greater expenditures on advertising and promotion activities that we didn't already committed to prepare endemic.
Included in sales and marketing in the second quarter was an increase in share based compensation expense to 5.2 million.
GNS expenses were 99 million in the second quarter.
The increase was primarily due to the higher share based compensation expense, which was 26.8 million compared with 19.7 million in 2019, and a larger provision for doubtful accounts, which we felt was prudent given current circumstances.
However, these amounts were partially offset by lower salaries and bonuses. After the voluntary management take cuts as well as a reduction in social welfare benefits pain.
Income from operations was 165 million in a second quarter of 2020.
Operating margin was 20% and excluding share based compensation expense it would have been 24.6%.
Also in the second quarter, we recognized a mark to market noncash gain of approximately.
I would be 57 million associated with a change in fair value of equity Securities investment in the quality University group, which is traded on the Hong Kong stock exchange.
Other income in the second quarter also included 145 million in local government financial subsidies compared with 123 million in the year ago quarter.
For the six month ended June Thirtyth 2020, the total amount of subsidies receipt was approximately 149 million compared with 186 million in its first half of last year.
Excluding share based compensation expense the lost some foreign currency translation and the change in the fair value of equity securities investments as well as the related tax effect of these items non-GAAP adjusted net income attributable to five one job with.
358 million in the second quarter.
Non-GAAP adjusted fully diluted EPS was 5.28 or U.S. dollars 75 cents per share.
Finally.
Turning to our guidance.
The pandemic continues to materially affect market conditions and limit our revenue visibility in the near term.
So based on what we know as of today, our net revenues target for third quarter of 2020 is in the estimated range of 822 870 million.
Well the non-GAAP fully diluted EPS target our estimated range is between 2.7 and 3.2 per share.
Please note that non-GAAP EPS does not include share based compensation expense foreign currency translation change in the fair value and equity securities investment nor the related tax effects of these items.
Total share based compensation expense is expected to be between 37, and 39 million in the third quarter of 2020.
This guidance reflects our current and preliminary view, which is subject to change and substantial uncertainty.
This includes our presentation, we'll be happy to take your questions. At this time operator. Please go ahead.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your touch trying fine.
If you were using a speaker fine please pick up your handset before pressing the case.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then too.
First question comes from Alicia Yap from Citigroup. Please.
Please go ahead.
Hi, Thank you and wanting a rate how clean and Linda Thanks for taking my questions I thought a couple of questions here number one is that giving the audit HR revenue actually rebound up better than expected in the second quarter, how should we view the TQ guidance that would imply that.
Taught rather than you know where says to online recruitment services and I think that's I mean, you mentioned just now that is a rolling a you know wrapping up the facts on the online all from the subscription side so is that implying.
We could actually continue to see the weakness in on I recall month increase Q.
And then I have a couple of follow up.
Oh, Hi, Lisa. Thank you for your question, Yes, I think to some degree yes. It's good thing you picked up on what I've said, which is that because online revenue is recognized over the time period of the contract 12 months, usually for the longer term membership the sustain impact of the disruption.
What's happening in the first half of this year is still gonna be carries through throughout the second half of this year. So there will be more impact means felt on the online revenues versus the other HR law, which tend to be things, where you saw the bigger dip in the first quarter you saw it come back faster in the stuff.
Second quarter and that you know if things continue to be moving into right direction that there is no more disruptions I think that the impact of the recover it won't be a more immediate also in the third quarter for the other HR services. So yes, the impact will be more felt on the online services for a longer period of time.
And that's what we expected.
And then second question is regarding the hiring sentiment. So maybe a recall company Oh, how would you quantified the hiring centene money that you haven't seen over the past three months worth us what you think the sentiment could be increase.
Moving well is it like you know improving Eni Lisa expectation or is it you know kind of like you know still below the expectation given the tension from the U.S. in China and then just related to that is that how will the U.S. China attention affect a hiring sentiment is it for slip.
<unk> industry specific only right if not you know every one is you talked about these pension.
Oh, all not ring.
Correct, Yeah, Yeah, I think the market sentiment has been has being cautious put it this way I think.
I would characterize that how employs a hiring.
But they're not hiring a very large number so they're hiring plans there nor did they not freezing the headcount the hiring but at a very cautious pace.
And I think the going into the pandemic is.
Generally under control in China, but you can you can see every two or three weeks. This kind of a small outbreak somewhere and I know latest one in a entirely on and also inching down so I think a steel it'd be cautious.
But the good news is you know new finally, the most affect the sector, which is supposed to be travel and entertainment isn't that it's also a coming back to normal. So now you can see on.
Even Chinese new staff. The government is encouraging domestic to a groups and also Cmos operating all kind of back in business, although not at full capacity. So I think I think if we you know we're improving but we still want to wait and see if the pandemic comes back and give us more outbreaks, whether that's under control.
In terms of U.S., China relationship I think this is a if you in China you see that maybe you know everyday on trying to news. So is actually very well broadcast and I think this stuff affect people's expectations in terms of economic growth.
And also said and you know setting these patients tend to reduce confidence so would it affect any specific sector.
I don't think so I think in general it just be just the confidence level is some is being affected so people want to be cautious you are we not stopping but we want to be moving really cautious and very slowly.
Okay, great. Thank you. Thank you Rick Thank you Kathleen.
Thank you Lisa.
Thank you Sir your next question comes from any Wang from Morgan Stanley. Please go ahead.
Hi, Thank you already Pennsylvania, and Maryland for taking my question. So my questions about your margin sorry, Oh, Yeah, you know the third quarter guidance I think if I could you know tekla correctly.
The modern yourself, you know a card Ron Mccartney levels. So it hasn't I imagine that's because we will have some even though a dozen him or her column, which could lead to a higher costs border third quarter.
Before this through the you're there I mean, you know are the reason lead to Rochester regional deal or a lower margin what is sort of quarter. Thank you.
Oh, Hi, Andy. Thank you for the question, Yes, there's a few things going on I mean, I think one of the things that we tried to highlight is the fact that you know this year has been a extraordinary you're a with the coal the 19 disruption to business, but having said that we still believe no longer to potential the growth of the.
Industry at large and that we can you do you need to want to invest in making.
Our investment in technology and products or services to introduce new services. So within you know our cost structure. If you will we have been careful not to cut away a staffing cost to maintain the current business, but then at the same time have actually accelerate or some investments in our pivots to some of them.
New product introductions and that includes things like you know obviously, we talked about the fact that historically more of our online moves or more of our training offerings have been on offline format, but we've actually been investing to introduce and create more content and services board in that segment online you know as.
They example, if somebody investments, we're making and so that is the reason why that we believed that there are some acceleration in the cost in terms of just making additional investments in people and technology to ensure that we still have the sort of the pipeline of projects coming online. So we didn't want to cut away and to not me.
Those investments now even though that in.
That means that there will be some margin implication for the company.
Got it thank you.
Thank you.
Thank you. Your next question comes from T. on how from T.H. capital. Please go ahead.
Hi, Good morning management.
[laughter] once he gets a awesome site. So car from from you guys. So from your customer friends.
We [laughter] you know SEC [laughter] sector.
Are you see ECA hiring and you know.
Aggressive or you know the job growth you know it spending and just you know much faster than others, what sectors are actually still stuck in nature, and the which sectors already back to normal. So that's number one number two.
Really cope with the cool you know post the quarter and the virus damage and just with a different sectors and you too high or to recruit.
You know the potential customers.
He did decrease kind of skill sets it she loves to up to the cells no cycle and the 30 years [laughter]. We know cannot really you know travel is what's really do before so [laughter] effectiveness allow ourselves you know do you see.
Yes, the cycle becomes longer than before so that's that's your question. Thank you.
Yeah, I think named carefully come in she already mentioned that there's some industries performing better you know like real estate mile from a medical devices and construction. So I think that this is what we've seen.
If you if you want to say, which sector or didn't perform as well as others, maybe maybe not the more milk has multinational relate to companies may be more U.S., we lead a companies because as you can you can count on the U.S. I'm trying to attentions I think U.S. companies would need to be a little bit cautious about what might what might come up.
And you know you know in the next couple of months. So so I think those other sectors see some industry sectors are doing better than in general maybe multinational companies and especially U.S. companies tends to be a little bit slower.
In terms of skills.
Fall sales team I think is you know it's the same we focus on the recruitment we how companies to higher timings. So it doesn't matter, which are we to industry. Because you know we are age and you know general General you know information platform. So I don't see any any kind of you know skewed differencing indesit. It's I think we will.
We are more than a child and recommend expert then I'm gonna industry expert put it this way on your final question in terms of Tropo, whether that would expand the the selling cycle. I also I don't think so I think there. He was a factor certainly affected into first quarter and the beginning of the second quarter.
When there's no oh, no meeting or contact can be made.
You, probably a fivex when you are doing new customer acquisition, when you're trying to get to know in new customer a face to face meeting is the most effective approach, but for existing customers with a funeral.
Hundreds of thousands of customers and some of them, we've been serving them for years.
I don't think that's that that's a key issue I don't think that you know really affects the sales cycle I'm on also for the new generation people would there were born after 95, there so used to online tools be it lead deal interviewing or just you know we tapped the you know you know.
No communication or we see very very little if any impact in terms of the they extend to selling cycle. So it's really just the confidence and be more cautious approach that we are seeing all customers are taking I don't think is affected by industry or affected by the way we talk talk.
Some of us.
Okay. Thank you. Thank you that's pretty clear.
Oh.
Thank you once again, if you wish to ask a question.
Please press star one on your fired and white FINAME to be announced.
Your next question comes from Jimmy Chen from call.
Please go ahead.
Hi, guys.
Hello.
Yes, again here you yeah.
Okay, great registered.
Question, so in some of them the recovery in online recruitment revenue I. So you should we be seem that as a loud sort of the louts number or the timing you balance sheet [laughter].
[laughter] on those two items should those.
Absolutely.
There are you talking Kristen.
So I'm not sure I heard your question correctly, something about a lag I couldn't hear you you were breaking up.
Hello.
Uh huh.
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Hello.
Hi, Carolyn took this again, so I'm just asking with Oh once the balance your line item and then some customer stocky true up we've got you call. It by has nothing to online Madrid.
Courses are those two line items basically link.
The they they have some linked to juice, it's not a direct link advances from customers actually could be from contributing factor from all other product lines as well. So I wouldn't say that's exactly the case, but in general speaking I would say that you know currently that you know.
We have had a significant disruptions in the first half the year. So it is something that we need to build back the pipeline for so well, we hope to continue see improvement and that down you know RBC. If we had more of the answers would be a better side, but that line in itself is not only related to online I would just clarify.
Got it [laughter] and then in terms of L. margin so.
There's a business does this start telling me.
And I climbed up modestly pretty hard I'm, especially have been off you every region and it's not a shared revenue.
The other HR services.
Margin hasn't has seems a compressed meaningfully.
What how does management think what a healthy liver metabolism.
Gross rents is launching a week or maybe the Sun hockey.
Sure Great Great Oh, we.
The leaving money on the table by not dropping more growth probably a bicycle blessing for margin.
I can say that the I would you know we would like to prioritize girls over margin overall, but I think I'm. Just curious situation is probably not that case that we're talking about because I think this year. The overall demand environment is more challenged.
So I wouldn't say that you know that's the trade off or trying to make.
Historically and I think we've always been I'm you know looking at the business on a very long term basis, and we want to look for sustainable growth. So we would want to think about you know having a reasonable reenter on investments that we make but this year I would say that we obviously not been too focused on trying to meet certain.
Margin levels, because we don't think that's a writer right things to focus on because this year because short term cost savings may actually have done disruptions or you know product development or new product introduction, so and that's not what we're looking for so I think it for this year, we continue to want to invest in staffing and technology and product development.
And that's what we're looking at so we have not been trying to cut away people. They could preserving margin that's what do you.
Listen on this I looking that look at this year's 70 to 90 or it looks like at least called the blended margins. It looks like no. Other HR services are generating similar the opposite level margin.
So oh platform.
25, 30% margin for a.
Basically service.
Hi, this is quite high.
So just wondering.
Yes.
Management targeting the.
5% margin business and if it's lower than that wants a suit pursued that oh.
80.
I'm not sure I guess, you can say that you know, we're a pretty unique innocent. So we have pretty high margin even with the.
The business profile, though we're in so that you know relative in a lot appears we have higher margins, but I think that if you look at the longer term as well and not just focusing on 2017 2018 tight 19, I think what we tried to look for his personally.
Healthy revenues on top line and then whatever we can achieve in terms of operating <unk>, you know savings or leverage given the overall revenue growth. That's what we're targeting so I think that's kinda me, how we would view it I'm not sure that there's any buddy out there that has similar profile to us overall in terms of the business mix.
It's difficult to make that comparison, but you're right in a sense if you take a standalone basis.
We are higher margin then most of the business services companies out there.
Okay and the last one is just about how passionate very strong cash flow a strong cash flow.
And what are we going to do with Oh, we have tried a M&A.
So 'cause sizes have been small compared to attach level.
What's the thinking how we're going to spend that cash and cash flow is the large enough acquisitions that you can find who's willing to sell Oh, we do something else with money.
I think our views and then they have not change I think we continued to look for opportunities to put money back into the business too and reinvest in the business. So I think you know, but in terms of you know what we're able to invest in or how we tested it really it's it's not a since.
Good question, what we want to do in a in of itself we need to have targets that also concede that a there is a value to the investment into the combination. If you will but we continue to be bear acted in looking at the marketplace for opportunities to spur growth.
Thank you. This concludes our question and answer session I would now like to turn the conference back or is it too risky N for any closing remarks.
Thank you for joining us today, we look forward to speaking with you next quarter and we value. Your continued support a harbinger all have a good day bye bye.
Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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