Q2 2019 Earnings Call
Good day and welcome to the five one job Inc. second quarter 2019 conference call and webcast.
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I would now like to hand, the conference I'd like to Ms. Linda Chien.
VP and head of Investor Relations.
Please go ahead.
Thank you, let's see and thank you all for attending this teleconference.
To discuss unaudited financial results for the second quarter ended June Thirtyth 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.
Especially these containing second quarter results was issued earlier today and a copy may be obtained through our website at IR dot five one job 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 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 significant gets the management in evaluating the company's financial performance.
Reconciliation.
To the most directly comparable GAAP financial measures are provided were 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 dot five one dot dot com.
Now I'll turn the call the threat.
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 of our financial results.
That's why I was pulled by our guidance for the third quarter of 2019.
In an environment of economic uncertainty and overhang.
From U.S. trying to trade relations, we are facing tough market conditions as companies.
Being cautious with their spending and recruitment activity in 2019.
Net revenues for the second quarter grew 7.6% to RMB 964 million.
Which was within our forecast range.
However on the earnings side through efficiency and cost effectiveness, we were able to increase operating income by 24% and all you have you P.S. exceeded expectations and RMB 5.9.
[noise] on the back of the mutant post Chinese new year, we come in season.
We saw continued softness in high demand in the second quarter.
And for you as well.
If in posting job positions.
We also.
The pace of the recruitment process has been slower than you and newshel with companies showing less urgency to communicate with jobseekers and feel vacancies.
[noise] these conditions impacted our online business and revenue growth moderates a two fold this in in the second quarter.
While the number of unique and probably its decrease as expected and in line with our strategic transition away from micro size transactions, we maintain progress on all key objective of driving up revenue per employee.
Our pool increased 20% in the second quarter as customers recognized the superior results and value proposition.
How many online brands and services.
We will continue to execute all high quality growth strategy in 2019.
Emphasizing all sounds assets.
On the high potential companies fall, Oh, you lead customer base, and which we believe will buy us with continued monetize monetization opportunities over the long term.
[noise] in the other HR services salmon, we saw more resiliency against market conditions and revenues grew 15% in the second quarter.
We are pleased to see that our HR outsourcing business is getting back on track. After we completed a series of operational changes earlier this year to comply with recent government regulations.
Our training and assessment services maintained its status as a stand out performer as companies are increasingly seeking solutions to identify and retain top talent improve to skew set off their workers and drive employee productivity.
[noise], one off injustice thing competitive advantages.
That's been our complete end to end suite of a child surface offerings.
With companies being hesitant to add headcount right now we believe the strength and diversity will prove to be very important during this business cycle and provide them with multiple different engagement point, you to a child value chain to serve customers.
We will not to step up promotion and adoption of other HR services and increase their contribution to growth.
[noise], turning now to all crime Bakken assessment.
Due to lingering economic concerns and soft demand for hiring we expect difficult conditions for the rest of Nok 2019.
A wait and see mentality persists in the market and many companies have taken a conservative approach and be less willing to commit to recommend plans, especially small and medium sized enterprises.
[noise] within probably yes, being indecisive and on the sidelines awaiting economic direction. These additions post near term challenges that are out of our control.
But they do not affect all covered doesn't seem five in jobs, the long term prospects or the overall a child market opportunity in China.
Just to ask we have managed PBS cycles, you know 20 plus years seen operations.
We will navigate this macro slowdown by staying focused on three main areas critical to our continue and future success.
First in the area of product development, we are making meaningful strides.
In the investing innovating and these incubating new surfaces.
Since 2015, we have introduced four new recurring membranes under the 500 jobs umbrella and significantly expanded the offerings, you know training and assessment business.
Where does through in house development acquisition or partnership we believe we have a part of the world map that will aggregate the best in class HR solutions into our ecosystem in China.
Second in the area. If you sign platform engagement, we are creating a stronger more takeda links between employers and jobseekers.
Both companies and individuals search for better mutual match in capabilities and expectations.
We are moving beyond basic Oh, nine this thing and providing advanced tools, such as a high base evaluation and personalization.
Our ability to connect the two sides, it's not only limited to online and mobile channels.
When times colorful in person into actions.
500 jobs offline surfaces have helped them probably yes.
Host more than 10000 events andone.
This July our student Telfair targeting overseas Holland attracted more than 5000 P. quantify on site participation on a rainy day in Shanghai.
[noise], although foreign job has already established lots of size and scale. We are moving forward to elevate the quality staff and coverage of user engagement in all facets to strengthen our position as the most reliable and trusted lake Charles surface as well find out in China.
[noise] finally in the area of internal processes and functions. We will continue to pursue quick operationally excellent C.
A consistent commitment that we believe is unparalleled in our industry.
Our long history of profitability stems from our own high standards for efficiency there have been at the core of five and just DNA since inception.
Yeah, no excuses when it comes.
Two introspection and that kinda ability.
We are always reviewing how we can allocate our resources.
All customers and run our businesses for improvement.
We will maintain financial discipline with regard to cost management and the ball is appropriate strategic investments with reasonable returns.
In summary, we all know there and the pricing and the pricing spending and hiring demand is inherently call related to macro outlook.
And this current period for economic uncertainty is bringing us near term obstacles.
While we need to exercise some patience to monitor how conditions take shape. We continue to take actions on these areas <unk> power Ti at a fundamental to our future.
With a clear strategic plan.
Ample resources.
And operationally experience.
We play the long game.
And we stay true to our mission to create to create a bigger and better five in July .
At least the child industry in China with high quality services and sustainable profitable growth.
I'll now pass the call for the Kathleen.
[noise]. 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.
[noise], our net revenues for the second quarter of 2019 were $964 million, representing a 7.6% increase.
Our online revenues for the first second quarter grew 3.8% to 611 million.
The girls are driven by the continuing improvement in revenue per employee, which was partially offset by a decrease in the number of unique employers.
In line with our longer term high quality customer engagement strategy, we remain focused on prioritizing our sales efforts toward more established companies in China, and increasing the employer uptake of more online products and services.
However, under these current challenging economic conditions, we expect pressure on energy prices will continue to curb their willingness to pay higher this year.
Oh, so coming off of a strong comp in 2018, we feel that our online business will likely see year over year revenue decline in the second half of 2019.
[noise] revenues for other HR services increased 14.8% to 353 million in the second quarter led by the growth of our HR outsourcing training and assessment services.
As Rick mentioned earlier, our HRS business is making progress again following recent operational adjustments, we instituted in accordance with the new tax and government regulation.
[noise] well other HR services has historically demonstrated more resiliency to market softness when compared to our online business.
A big contributor to this segment in the second half of the year is seasonal campus recruitment services, which may also experience some weakness like general hiring has so far in 2019.
[noise] beginning January 1st of 2019, we have changed the presentation of government surcharges and included these amounts into cost of services.
2018 figures were reclassified to conform to this new presentation and reflecting this change gross profit in the second quarter grew 5.4% to 676 million and gross margin was 70.1% compared with 71.6% in 2018 due to empire employee compensation expenses.
Included in cost of services in the second quarter was share based compensation expense of 4.5 million.
[noise] sales and marketing expenses decreased 6% to 314 million in the second quarter.
The decrease was due to lower advertising expenditures.
Performance based bonuses and selling expenses, which was partially offset by the higher employee salaries and social insurance tenant they Penn payments.
[noise] the year over year decline in advertising spend was mainly because last year's second quarter included many expenses related to our Twentyth anniversary celebration in 2018.
[noise], we still maintain I didnt marketing campaign to promote our many brands and new services that will be launched this year.
However in light of current market conditions, we have slowed our own sales staff hiring in 2019, and our headcount as of June Thirtyth was relatively flat compared to the end of 2018 at about 4200.
As always we stay mindful of measuring the effectiveness and returns of our sales and marketing related investments and we will continue to balance near term and long term goals and consideration.
[noise] included in sales and marketing expenses in the second quarter was share based compensation expense of 3.8 million.
[noise], our GNS expenses increased 4% to 92 million in the second quarter.
The increase was mainly due to higher employee compensation expenses, which is partially offset by lower office expenses.
Our share based compensation expense included in G.N.A. was $19.7 million.
[noise] income from operations income increased 24% to $270 million in the second quarter and operating margin was 28% compared with 24.4% in the year ago quarter.
Excluding share based compensation expense, our operating margin would have been 30.9% compared with 27.2% in the year ago quarter.
[noise] in the second quarter, we recognized a noncash loss of 333 million associated with the change in the fair value of the convertible notes.
[noise] on April 15th the notes matured and all note holders requested conversion of their holdings from debt to equity.
The principal amount of 172.5 million U.S. dollars was converted into approximately 4 million shares and this conversion has been reflected in the balance sheet and shares outstanding as of June 30.
Other income in the second quarter included 123 million in local government financial subsidies compared with 154 million in the year ago quarter.
For the six months ended June Thirtyth 2019, the total amount of subsidies received was approximately 186 million compared with 155 million in the first half of last year.
[noise], excluding share based compensation expense.
The gain from foreign currency translation.
The change in the fair value of the convertible notes as well as the related tax effect of these items.
Our non-GAAP adjusted net income attributable to five one job increased 11.5% to 400 million in the second quarter.
[noise] non-GAAP adjusted fully diluted EPS was 5.9 or U.S. dollars 86 cents per share.
[noise] as Rick discussed earlier, our outlook for the remainder of 2019 as cautious due to a difficult macro backdrop.
Broad conviction about the long term and large opportunity of the overall HR market in China is completely unchanged.
Given our long operating history.
Managing through an emerging from this cycle is not new to the five when job team.
As we roll up our sleeves hire to serve our customers and job seekers. This time around we have confidence that we are laying the groundwork to be a better and stronger organization for the future.
[noise] and finally, turning to our guidance for the third quarter of 2019 based on current market conditions. Our net revenues target is estimated range of 915 to 955 million.
Well the non-GAAP fully diluted EPS target our estimated range is between four.
Dollars and 4.30 per share.
Please note that this non-GAAP EPS target range does not include share based compensation expense.
The impact of foreign currency translation, nor their related tax effect of these items.
Our total share based compensation expense is expected to be between 32, and 33 million for the third 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 are not able to provide a reconciliation of these non-GAAP items to expect it reported 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 session.
[noise] to ask a question you May Press Star then one on your Touchtone fired if youre using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then change.
At this time, well pause momentarily to assemble our stuff.
[noise].
Your first question comes from Chad Beynon with Macquarie.
Please go ahead.
Oh.
Hi management. Thank you for taking my question. This is French with Macquarie.
Congratulation on the solid second quarter results on my first question is about macro cycle actually you went through a feel sorry coaching the past 20 years.
And I Wonder you all view, how you see psycho different from previous ones on my second question is about the strategy.
Actually the number off you Nikki employ your employer on your platform showed sequential decline four consecutive four quarters.
I I understand this is due to the initiative focusing on higher potential employers. However, how should we think of the number of employees or the number of unique employers for the rest of 2019.
When you said 10 around point of <unk>.
The employee count what's your plan for attracting or acquiring Neil you were quoted in the future.
That's all my two questions.
Hi, Thank you Frank for your questions. Let me try to answer the second question first and then go back to the macro question.
In terms of just the customer account strategy or how we go to market to acquiring new customers I think that we have been.
Pretty consistent in communicating the fact that we are going through a period.
Customer we allocation amongst our sales force. So that there is a recalibration of number of customers that each sales person will be able to serve effectively and that number is something that we're trimming down still through the course of the last few quarters. We expect this to continue till the end of the year at least so for the rest of 2019, we are not expecting that number to increase on a year over year basis. So that is something that we will not be looking at until the next year.
At the earliest.
And then going back to the question on the macro well, yes, I mean, we've been actually in operations for over 20 years. So we have seen business cycles come and go I think that there's a lot of.
Similar characteristics in terms of in the down cycle. There is a lot of uncertainty for employers, meaning that it's sometimes the most difficult part is not knowing when sort of the bottom is if you will so people are still kind of trying to figure that out and thats, what thats holding up.
Sort of activities in general I think that given that this particular cycle has the specific issue related to the U.S. and China trade tensions if you will and that it seems that the politicians on both sides.
Have.
Taken up pretty public.
Our strategy in terms of trying to launch attack at each other if you will that has actually exacerbated the situation and so a lot of the headlines and the news flow is quite negative and I think that contributes more to the uncertainty versus previous cycles, but I think that you know this is something that we have navigated through before and Thats something that we just need to kind of.
Go through given its time, but I think that we have.
Dimmer hopes for the remainder of between 19, just because I think that there is no easy and quick resolution coming in sight.
Okay. Thank you very clear.
Thank you.
Once again, if you wish to ask a question. Please press star one on your telephone and wait for your name to be announced.
Your next question comes from Alicia Yap with Citi.
Please go ahead.
Hi.
Thank you can you hear me okay.
Yes.
Any.
Yes, good morning, Rick Kathleen and Linda Thanks for taking my questions.
I have two questions if I may.
First of all on the third quarter guidance.
Understand Daddy Katzman, you mentioned shorter second half you're going to see a experienced a year over year decline on the online recruitment side would you able to quantify.
That beacon low single digit order high single digit decline that we should be seeing ads for the BPL and auto Josh So Lisa.
Given that it's more of the Selevend.
We still see the low double digit growth that we saw like the second quarter or the first half. So this is the first question.
Okay in terms of just guidance Directionally speaking I mean, we are looking at.
We have more optimism for the other HR business I think though we expect that it should be on a healthier track that certainly that.
We are looking at at this point in time that it will be.
Increased year over year basis. So the gap if you will really come from the online recruitment side in terms of what that looks like him. We've given the overall guidance, but it's going to be something that we need to monitor pretty closely because you know the the headlines that get traded every day that passes flashes across the screen does seem to make everyone a little bit more jittery, all the time and is something that we just need to see.
For now for the third quarter. We are total guidance is for flat to being down about 4%. So that's kind of the magnitude overall, we're looking at but within that we are expecting that on the other HR services that we should have some growth year over year basis.
Yeah sure.
Oh, and then for the second questions.
Can you remind us a bit on the moving parts on driving the gross margins trend I think you mentioned a bit the VHP tax component and then just any other specific.
Got you continue to see.
Oh, Yes, Oh, yes, the sequential decline and how should we think about the trend for the quarter.
I think you know to be honest I think we're just going to be running a pretty tight ship at this point in time in terms of just managing head count ourselves on managing cost I think a lot of it is going to be depending on what topline looks like because we've always talked about the fact that you know the people cost is the biggest component of course you know.
Our cost base and that is a big deal in a short period of time. If you will it's relatively fixed obviously, there's some variance when it comes to kind of a commissions and bonuses and that will then vary depending on performance. If you will but I think that overall I think we're being pretty tight in terms of head count ourselves and I think as of the end of second quarter as we mentioned a little bit earlier in the call that we're holding head count pretty close to where it was at the beginning of year at this point. So we're not expecting to add significant to our own sales force at this point in time, so hopefully that will help us also rein in some of the cost structure. If you will and so that's kind of where we stand on that.
Okay, and just lastly.
Regarding competition.
Could you comment on any change in the landscape and how do you see the overlapping or even the competitive pressure from the newly established companies like Boston, What's your view on your business model versus I don't John .
Thank you.
To be honest I mean, I think Doug you know there are new competition in our segments. All the time I think different people emerge at different points in time, and that's a continuous process. If you will so I think that's actually kind of a healthy.
Environment, I think for everyone to be in a way because they think that it does drive innovation it does drive.
Our salespeople to compete closely for customers and it does a line.
You know everyone's efforts you customer interest and customer needs. If you will so I think that's not surprising or new in a way and you know whether or not it's you know I think cost you can probably gets a lot more coverage. This year given that they've actually spent heavily in sort of on marketing front. This year and so I think it's been a lot more visible versus you know what we call. The earlier generation of players. So typically where a couple of years ago people might have talked a little bit more about the opinion or a few years ago before that you know when jochen did more marketing. So I think the public side of things I think people tend to be very kind of marketing spend driven in terms of what they see on the street, but I think overall I mean, what we're trying to do at the end of day is tried to be a full service HR service provider, which is something that no. One else out there is really doing because I think them and the people, we mention whether or not it's but European or.
Slipping historically, a little bit early on or you know, even Japan I think they tend to focus more on single product line, which is just on recruitment and so that is a slightly different view of the approach to market and I think we continue to take a different strategy to that versus everybody else in the marketplace.
Yeah, Okay, great. Thank you Kathleen Thank you wait until Lisa.
Okay.
Okay.
Yes.
[laughter].
[noise].
Operator.
Any more questions in the queue.
[noise].
[noise].
[noise].
[laughter], if they don't want.
Hi, operator are there any more questions in the queue.
[noise].
[noise] okay.
Sorry, if you want to think we're having some technical difficulty right now I think that for any other further question. If you could please follow up with.
The company directly with Linda Chen.
At IR Dot X., our IR at five one job dot com.
Sorry for the technical issues.
And thank you for joining US today, we look forward to speaking with you next quarter and we value. Your continued support of five in July have a good day bye bye.
Yeah.
It comes on.