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Edited Transcript of JOBS earnings conference call or presentation 10-Nov-17 1:00am GMT

Shanghai Nov 10, 2017 (Thomson StreetEvents) -- Edited Transcript of 51job Inc earnings conference call or presentation Friday, November 10, 2017 at 1:00:00am GMT

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Corporate Participants

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51job, Inc. - Co-Founder, Acting CFO and COO

51job, Inc. - Head of IR and VP

* Rick Yan

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

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* David Li

Citigroup Inc, Research Division - Research Analyst

* Wendy Huang

* Yiu Hung Chong

BOCI Research Limited - Former Research Analyst

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Operator [1]

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Good day, and welcome to the 51job, Inc. Third Quarter 2017 Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Ms. Linda Chien, Vice President and Head of Investor Relations. Please go ahead.

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Linda Chien, 51job, Inc. - Head of IR and VP [2]

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Thank you, operator, and thank you all for attending this teleconference to discuss unaudited financial results for the third quarter ended September 30, 2017. With me for today's call are Rick Yan, President and Chief Executive Officer; and Kathleen Chien, Chief Operating Officer and acting Chief Financial Officer. A press release containing third quarter 2017 results was issued earlier today, and a copy may be obtained through our website at ir.51job.com.

Before we begin, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. All forward-looking statements are based upon management's expectations at the time of the statements and involve inherent risks and uncertainties that may cause actual results to differ materially. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the U.S. Securities and Exchange Commission, including our annual report on Form 20-F. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements, except as required under applicable law.

Also, I would like to remind you that during the course of this call, we will discuss non-GAAP measures. Please refer to the press release for a description of these non-GAAP measures and their significance to management in evaluating the company's financial performance. Reconciliations to the most directly comparable GAAP financial measures are provided, where available, in the tables appended to the press release. This conference call is being recorded and broadcasted on the Internet, and a replay will be available through our website at ir.51job.com.

Now I'll turn the call over to Rick.

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

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Thank you, Linda, and welcome to today's call.

I will begin with a review of the third quarter, followed by Kathleen with a detailed discussion of our financial results and our guidance for the fourth quarter of 2017. Finally, we'll open the call to your questions.

Through clear and consistent execution of our strategic plan, we delivered solid results in the third quarter. Total revenues of RMB 728 million exceeded our forecast as we saw better-than-expected performance generally across the board. This top line upside, combined with the inherent scale benefits and efficiencies of our operating model, led to robust profit in the quarter, with non-GAAP EPS of RMB 3.32. Growth in our online business accelerated to 22% in the third quarter. While we are very pleased with this faster pace, the more noteworthy achievement in our minds is the meaningful contribution of both new customer additions and higher ARPU to this growth. We continue to expand our user base and the number of unique online employers increased by 46,000 compared to the year-ago quarter, a growth of about 14%. At the same time, we more than offset any impact of new customers on ARPU in the third quarter with our successful upselling efforts. Greater usage and spending by sophisticated existing employers on their larger basket of online services drove overall ARPU up by over 7% compared to the year-ago quarter.

With the sales force demonstrating a strengthened ability to balance volume increase and ARPU improvement, we widened our geographical presence for the online business to cover nearly 200 cities in China this September.

While any financial contribution from the new cities is expected to be insignificant in the near term, we are laying the foundation to serve the growing need for white-collar workers everywhere.

In the other HR services area, we are building growth momentum again. Other HR revenues increased by 22% in the third quarter, and we are seeing several positive business developments that bode well for its continued achievement -- advancement.

First of all, our testing assessment and training services have received very strong interest from employers this year as they seek tools to better identify, allocate and promote the right individuals into the right jobs.

Second, through enhanced integration of online and off-line resources, our placement services, which match, select, prescreen job candidates with employers, is showing high effectiveness and customer satisfaction.

Finally, we are upgrading our BPO services platform and piloting new modules to address more employee-related administrative tasks. We remain very excited about the potential of the other HR services area, and we will further expand -- extend our capabilities to serve more needs and aspects of the HR department.

Turning now to our current market assessment, we continue to observe a stable and constructive environment for white-collar recruitment. Hiring activity and salary data have maintained growth patterns in line with those we have seen during healthy market periods in the past. Indications from the ongoing campus recruitment season also point to solid employer demand as more and more enterprises are looking to build a sustainable pipeline of educated and skilled talent. We look forward to closing the year strongly, and we are upbeat in carrying the progress we'll make in product innovation, user engagement and sales productivity into 2018.

During the recently held National Congress of the Communist Party of China, government leader stressed that the next phase of the country's economic development will be focused on high-quality growth. We, here at 51job, could not agree more with this mandate as we have been executing a comprehensive round of strategic initiatives and investments aimed at raising our companies to new heights. Our reorganized and reenergized sales force is firing on all cylinders with measurable improved efficiency. We have widened the scope of our large HR ecosystem, with not only new in-house developed services, but also the inclusion of many partners. Namely, over the last 2 years, we have welcomed [Inde Sang for campus] recruitment, [Shujin Yaoye] for testing and assessment; Golden Finance for training programs in finance and accounting; [Micro Sun] in app for name card and content management; [Lacala] for candidate credit and background checking; and (inaudible) Lagou for technology talent recruitment.

We believe our product breadth and coverage is unparalleled in the industry for its value creation, professionalism and service integrity, and we will pursue more ideas and partners to bring top-notch services to our users under the 51job umbrella.

As we work to realize our vision to become the leading multifaceted end-to-end HR solutions provider in China, we have had, and will continue to, embrace a lot of change within our organization. Change is never easy, and I want to recognize everyone in the 51job family for showing tremendous dedication, patience and teamwork. As we soon enter our 20th year in operations, we believe that 51job is better positioned than ever to effectively and efficiently capture the enormous HR market opportunity before us in China.

I will now pass the call over to Kathleen.

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [4]

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Thank you, Rick.

In my following presentation, please be aware that all financial numbers are in our reporting currency of the Chinese renminbi, unless otherwise stated. Also, please note that all growth rates are on a year-over-year basis as compared with the corresponding period in 2016, unless otherwise indicated.

Our total revenues for the third quarter of 2017 were CNY 728 million, representing a 22% increase. Our online revenues for the third quarter grew 22% to CNY 488 million due to both new customer acquisitions and a solid [bias] in the average revenue per employer. The number of unique employers increased 14% to more than 380,000 companies compared with 334,000 in the year-ago period. Successful efforts by the sales force to increase spending by existing customers handily surpassed the dilutive effect of new customers, and we saw a healthy 7% increase in the overall online ARPU in the third quarter. We aim to continue a balanced approach as we push ahead on our dual sales objectives of increasing customer count as well as revenue per customer.

Revenues for other HR services increased 22% to CNY 240 million in the third quarter. The growth was driven by good customer uptake of several products, including our training, assessment, placement and BPO services. With the negative effect of the VAT implementation fully absorbed and behind us, we are regaining higher growth and stepping up resources to increase rollout of these value-added services to our employers.

In the fourth quarter, the other HR area will also benefit from strong seasonal activity in our campus recruitment services. Gross profit grew 24% to CNY 524 million and gross margins improved to 72.8%. Included in cost of services in the third quarter was share-based compensation expense of CNY 3.7 million. Our sales and marketing expenses increased 20% to CNY 245 million in the third quarter. The increase was primarily due to higher employee compensation expenses, headcount additions and greater advertising spend. Included in sales and marketing expenses in the third quarter was share-based compensation expense of CNY 3.2 million.

We plan to stay aggressive in our goals to strengthen our sales force to support our ongoing expansion of the customer base and to promote our wide range of product offerings and platforms. At the same time, we always closely track the return on these sales-related investments and our progress in driving sales productivity.

Our G&A expenses increased 12% to CNY 78 million in the third quarter. The increase was mainly due to the higher employee compensation expenses and some bad debt provisions. Share-based compensation expense included in G&A was CNY 16 million in the third quarter. Income from operations increased 37% to CNY 201 million, and operating margins improved to 27.9% compared with 24.9% in the year-ago quarter. Excluding share-based compensation expense, operating margin would have been 31.1% compared with 28.5% in the year-ago quarter.

We continue to capitalize on the strong economies of scale and scope in our business model, which enabled us to realize significant operating efficiency while concurrently maintaining our important investments in the key sales and product development areas.

In the third quarter, under mark-to-market accounting, we recognized a large noncash loss of CNY 351 million associated with the change in the fair value of the convertible notes. During the third quarter, the trading price of our ADSs on the NASDAQ increased significantly, which resulted in the corresponding rise in the value of the convertible notes. Now as those notes are a liability on the company's balance sheet, the increased in its fair value was recorded then as a loss on our P&L, although it has no impact on the company's cash flow or cash position.

Also in the third quarter, we recognized a noncash foreign exchange loss of CNY 2 million due to the change in the value of the RMB against the U.S. dollar and its impact on our U.S. dollar cash deposits and U.S. dollar-denominated convertible notes.

Other income in the third quarter included CNY 4 million in local governmental financial subsidies compared with CNY 23 million in the third quarter of 2016. In the first 9 months of 2017, we have received a total of CNY 75 million in subsidies compared with CNY 87 million for the comparable period in 2016.

Due to the significant impact of the change in the fair value of the convertible notes, we recorded a net loss attributable to 51job of CNY 167 million in the third quarter. Basic and fully diluted loss per share was CNY 2.76 or USD 0.41 per share. Now excluding share-based compensation expense, the loss from foreign currency translation, the change in the value -- fair value of the convertible notes as well as the related tax effect of these items, our non-GAAP adjusted net income attributable to 51job increased 22% to CNY 210 million in the third quarter. Our non-GAAP adjusted fully diluted EPS was CNY 3.32 or USD 0.50 per share, which is above the guidance range of CNY 3.1 to CNY 3.3 that we have provided back in August.

In September, we entered into an agreement to become the largest shareholder in Lagou Information Limited. We are in the process of completing the transaction. And while we expect closing before year-end, we're not including at this time, any contribution from Lagou in our fourth quarter forecast.

Turning now to our guidance. Based on current market conditions, our total revenue target for the fourth quarter of 2017 is in the estimated range of CNY 825 million to CNY 845 million. For the non-GAAP fully diluted EPS target, our estimated range is between CNY 3.90 and CNY 4.10 per share under the if-converted method.

Please note that this non-GAAP EPS target range does not include share-based compensation expense, the impact of foreign currency translation, any change in the fair value of the convertible notes, nor the related tax effect of these items. Total share-based compensation expense is expected to be between CNY 23 million and CNY 24 million for the fourth quarter of 2017.

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 gains and losses from a foreign currency translation and the change in the fair value of the convertible notes. We are not able to provide a reconciliation of these non-GAAP items to expected reported GAAP earnings per share without any reasonable 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 would be happy to take your questions at this time. Operator, please go ahead.

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Operator [1]

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(Operator Instructions) Your first question comes from Wendy Huang from Macquarie.

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I have 3 questions and I will ask one by one. First, can you remind me of the convertible notes terms. From the top of my head, it's not really a vanilla structure. So is there a pure co-option held by the noteholders? And also, can you remind us of the dilution impact on EPS and also expiration date structure?

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

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Yes, Wendy, thank you for the question. The convertible notes were issued in April 2014, and it's a 5-year term, so it comes for expiration in 2019. It is actually a total of 172.5 million that was issued at the time. And that, that would actually effectively converted to about 4 million shares ADSs. The significant impact created by this particular fair value assessment this quarter is due to the fact that because our share price has increased very significantly during the third quarter, the price of the convertible note, as it is tied to the underlying shares, has risen concurrently, and so we've had to take a fair market value loss as the value of the convertible notes has risen in line with the shares. So that is the situation.

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My second question is about your M&A strategy. Obviously, you have stepped up your investments with the cash on hand impact 2 years, but I'm actually very surprised to see that you have actually spent your largest, actually, acquisitions since IPO on a more social networking type of recruitment platform like Lagou. From what I recalled, the management comments in the past several years, I think you have been kind of saying that the banking type of social networking recruitment side actually cannot really do well in China. So what actually has changed your view on this particular small and mid digitization to make this acquisition? And also, can you give some color on the revenue in profit or loss of the Lagou and also its customer overlap with 51job? And also, can you clarify, given the comment you made in the prepared remarks about Lagou seeing that is a technology and more engineering talent recruitment platform, so is this investment also more to complement your existing recruitment verticals?

Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [5]

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Okay, I will try my best to try to maybe explain this a little bit more then. Wendy, I think that actually, our perception maybe of Lagou's current positioning maybe slightly different at this point in time, it sounds like from what you've just said. But Lagou, to us, is actually a very clear kind of a verticalized focus in terms of the strategy. If you actually go on its website or you look at its app, if you will, it is actually mainly focused on technological talents, and its customer base is really primarily for companies that are in the tech space or Internet, if you will. In fact, they kind of really have a very large position in the so-called Internet industry overall in China, which is obviously a very important one, if you will. I'm not sure that there's that much sort of kind of an SNS component to Lagou as it currently stands -- except for the fact that it is very much active in the Internet community. But in terms of its services and how the products work, it's not really quite in the same way as how a LinkedIn would work, if you will. So I think that the positioning is a little bit different from maybe what I thought you had described a little bit earlier. In terms of just it's -- how we feel that it fits in our portfolio, in a way, it is actually a very similar rationale to how we actually approach the [Inde Sang] transaction, which is that we feel like the consumers that actually are users in that particular platform have very similar characteristics, whether or not they're graduate looking for their first job which is what the Inde Sang profile looks like, or Lagou which is really technology talent or people looking for positions and work in the Internet kind of a business and industries. I think that's kind of the rationale that we went to market with when we actually approached this particular investment. And then finally, just in terms of the financials, if you will, obviously, it's a little bit early, we're still in the process of closing the transaction, but in terms of its current size versus where 51job is overall, it is still actually relatively small, and that it is something that we'll be working and collaborating with -- together to continue to push on more customers penetration going forward. 51job has a very, very large and significant sales force, and it is something that we feel that will actually be very useful as we bring Lagou into the portfolio of family of services and products that we have, and we believe that this will be a very strong synergy that we can achieve from that end.

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And just to elaborate on that, so in terms of this USD 119 million consideration you're paying for, what kind of valuation measures did you use? That's actually where I came from asking the revenue and profit size of this company.

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [7]

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Well, valuation is always a part negotiated outcome, part reference on the previous rounds of valuation or a fundraising that had done. And also, in consideration of the potential that we feel that we can achieve with the company in the long term. At the current stage, that USD 119 million investment is for 60% stake. So the implied valuation is clear from that at this point in time. So -- but the key to -- for us is really not just a short-term what it is now, but really what we believe that we could achieve together as we come together as partners.

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My last question is on your BPO. Can you give us an update on your BPO customers' ARPU and also customer count?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [9]

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We don’t actually provide any sort of ARPU on the HRO side. It's really not how we look at the business. But I think in terms of the number of customers, I think we're still making small strides forward, but relative to the overall number of customers we're serving on the recruitment side, it's still very small. Current penetration, we're talking about still probably a -- probably less than 10,000 companies still in the HRO customer count at this point. So it's still kind of 2%, 3% penetration of our total customer base that is where it is today.

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Operator [10]

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Your next question comes from Hillman Chan from Citigroup.

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Hillman Chan, Citigroup Inc, Research Division - Research Analyst [11]

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This is Hillman calling on behalf of Alicia. So my first question is regarding the 8% year-on-year increase in the ARPU. Could you share more on what products in particular we're upselling? And what type of customers? And how should we think about the ARPU trend going forward? And I have some other questions.

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [12]

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Thank you for the question. Just on the ARPU side, I mean, obviously, this isn't something that we're just working on for this quarter, in particular, but it's an effort that we've been actually undertaking for the last 2 years as we've actually gone through some sales reorganization or realignment, if you will. I think that our stated kind of a goal was that we would try to achieve growth, not just from a volume perspective, which is more customer count, but actually really try to dig deeper into the customer budget for existing customers that have worked with us over the long term. And I think that we feel that this is something that we made steady progress on over the last several quarters. It's a little bit more apparent this quarter perhaps, by the fact that we actually moderated a little bit on the customer additions. So then you can actually see the ARPU lift come through a little bit better. Last quarter, obviously, our customer count was up even higher, but that then kind of sometimes disguises the effort that our team has been making in terms of penetrating deeper into existing customer base, if you will. In terms of how that gets achieved, I mean, obviously we feel that we have a lot of product and services that we can sell to customers, and the ability for our sales force to convince customers to take on more products within the family of services is what drives this up. So a lot of the upselling is part of this equation, and so that focus of the sales team in terms of working with customers that have history with us.

Hillman Chan, Citigroup Inc, Research Division - Research Analyst [13]

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And another question is about the sales productivity. Could you share more on the total headcount and also the sales headcount as of now? And also, hiring plan for next year, in particular, the HR business lines?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [14]

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Yes, sure. On the headcount part, I think that, yes, we've actually continued to add to our sales force, and that is actually something that we will continue to plan on going forward. More specifically, our current sales and account management headcount stands at about 4,150 at this point, and that is actually up by about 250 versus last quarter, if you will, in terms of number of people. And then in terms of where we're going to head out next year, I think we're little bit early, to be honest, at this point. I think that we'll have a better sense of what the market environment looks like after Chinese New Year, and then we'll then calibrate our sales kind of addition plans. But it is definitely something that we will continue to add to. It's just a matter when that is going to be a single digit kind of a percentage increase or is it higher than that based on the market environment.

Hillman Chan, Citigroup Inc, Research Division - Research Analyst [15]

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Got it. And also, a follow-up on the Lagou acquisition. How should we think about the financial impact in 2018? I know this is like a very small piece to you. I just want to get a sense on that, on the top line impact, if possible. And should we be expecting any integration between us and them in terms of the operations and also the sales force traffic direction and so on?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [16]

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Yes, I mean, Lagou. I mean, obviously this is going to be an important part of something that kind of comes into the portfolio next year. So it's a little bit early for us to actually give more details, as we said earlier, that we haven't closed the transaction. But I think that we'll definitely be able to provide more color on this when we actually have the call for Q4 because I expect that we'll have more information, more complete information at that point in time. At this point, obviously, at the current scale, Lagou is still a small percentage of what 51job is, so -- but I think that the key again is to focus on what we could be together rather than what it is today. In terms of how we'll be working together, I mean, we will expect that the team will maintain its independence in terms of day-to-day certainly, and that product development, network and maintenance and the whole team, if you will, and operation will continue to remain independent. But we'd certainly expect that there would be synergies on the sales side, and that is something that we'll be working on to make sure that the integration and the better leverage of the combined resources of the 2 teams will then benefit both Lagou and 51job in the long term in making sure that we're serving customers overall in a more integrated manner, so that we are, again, providing the best solution in the marketplace for recruitment of talent.

Operator [17]

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Your next question comes from Thomas Chong from Crédit Suisse.

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Yiu Hung Chong, BOCI Research Limited - Former Research Analyst [18]

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I have a quick question about the ARPU trend. I just want to get a sense of how much of the ARPU increase is coming from sales force productivity? And how much of it is actually coming from our new product offerings? Just want to get a sense about, is there any new products that we launched in the third quarter that we target for specific industry segments that help to drive the ARPU growth?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [19]

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Thanks for the questions. I mean, I think that from our perspective, it's really about more uptake of the various product line rather than -- to be honest, every year, we actually introduce new products into the portfolio. But the key is really to make sure that customers are aware and actually start using the services more fully. So I think the way we look at it is that it's really about the upselling rather than we try to move prices or anything like that. So it's the ability for our sales force to guide a customers who are familiar with our baseline services of, let's say, postings and resume downloads maybe into some visibility packages or other things where it would help drive traffic to their openings and that it will help them achieve a better outcome from recruitment purposes. And then you obviously, we've talked before a little bit about this year adding on candidate background checking, we've done some internal referral products and a number of things we've continued to do at the portfolio and that's the kind of an ongoing exercise, but the key is really to make sure that we get more customers aware and uptake these newer products within the family of services, and that's what comes through in terms of ARPU.

Yiu Hung Chong, BOCI Research Limited - Former Research Analyst [20]

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May I ask a quick follow-up question about our M&A strategy? Should we expect to do more M&A next year across different verticals?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [21]

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I guess in a way, our strategy is the same in terms of how we approach the market. Whether or not there will be more or less is something that's hard for me to predict specifically. But I think that 51job, in the last 2.5 years, have, I think, demonstrated the ability to integrate partners into our portfolio and to be able to actually push product through our sort of extensive sales network, and that's where we're actually the seeing the benefit of both customers being happy and able to use newer services to kind of achieve their, whether it's recruiting purpose or employee retention versus whatever they need to make the organization better. But at the same time, to have our customers be more loyal to 51job platform overall as we actually bring more products and services online. I think that, yes, I mean, we'll continue to be very active in the M&A space, and we certainly welcome anybody to bring new ideas and thoughts to us to see how we can work together to better help our customers overall at the end achieve their needs.

Rick Yan, 51job, Inc. - Co-Founder, CEO, President, Secretary and Director [22]

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I might just add that I think our view on the market or our strategy is that the sophistication of the HR department in China is increasing, and there will be more specialized product and services, things like verticals, IT verticals like Lagou will become an important -- more important part of the market going forward. So our strategy is we need to continue to expand our portfolio of product and services, and either through internal product development or through M&A to have a more complete portfolio. I think the second angle on that is, in the past 2 years, Kat mentioned earlier, we have quite successfully integrated some of the investments we make, not only just making investments, but able to have business cooperation on the products, particularly selling their product through our sales force. And we have demonstrated a track record that we are good at doing this. So I think going forward, having a more complete portfolio of product and services in an increasingly sophisticated China HR market will be the core of our strategy, and M&A will always be a complement to our internal product development efforts.

Operator [23]

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I just had a couple. First is kind of on the unique employer addition trends. It looks like that was kind of flat this quarter. I think we added about 150 or so. I'm just kind of curious if you can kind of give us some color on what's happening on that front? I think we just mentioned a few minutes ago about the sales force and how obviously it's stepping up in size, and I would think that would translate to new customer adds. Is there something seasonal there? Or maybe any kind of just color you could share would be helpful?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [25]

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Ryan, I think we've -- our customer count is up about 14% year-over-year, so I think it's actually a fairly in line with our expectations. So I'm not sure if there is -- we've crossed the wire a little bit on this one, but I think there's nothing, in particular, this quarter that was unique. So I think that we feel that we're actually on track. With new sales people coming to the sales force, it's obviously, no, not day 1 that they become productive. So there's a little bit of a lag effect, if you will, but I think that we feel that everything is trending -- is normal kind of a way.

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Okay. Maybe just a quick follow-up on that. So then in terms of the overall, I guess on a sequential basis, should we expect this going forward kind of the adds to kind of be more seasonally heavy in the first half? Or maybe sequentially? Is that the way to look at that? Or any kind of color would be helpful.

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [27]

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Yes, we don't look at things sequentially, obviously, because I think there's seasonality of the business, if you will. Usually, for example, first quarter, there is a lot activity right after CNY, but given where CNY fall sometimes, it's a little bit. More in the first quarter, sometimes it's kind of the back end of first quarter, and then it kind of affects the balance of how things work out. But I think still it's best a look at things kind of year-over-year basis. So that's kind of the trend that we should be really focusing on a little bit more.

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Okay. And maybe just kind of switching to the outlook for Q4. Just -- could you give us a sense of -- is that maybe -- I know you guys don’t break it down by business line, but can you give us a sense, is that more -- possible more online recruitment? Or alternatively is that a BPO? Or where is that most of that growth coming from? It seemed like there was definitely an uptick.

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [29]

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If you look at our Q3 results, I think that we feel we've been pleased with actually all of our product lines this year, like everybody's really performing up to standard or above our expectations, if you will. I mean, we actually had a good beat, I think, in the third quarter, which I think was actually kind of across the board, if you will. So we hope that as -- we've always run ourselves as more of an integrated company rather than a product-specific company. So I hope that in a stable recruitment environment, where I think that there's no external factor impacting demand, if you will, that we hope that the positive effect can be translated and reflected in all business lines. And we think that actually -- the trends should not be that different between the 2 segments, if you will, in the fourth quarter either.

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Got you. And just kind of one final question. Just really on the balance sheet. It seemed like another quarter where the overall cash balance continues to kind of to move higher. Just kind of curious if management has been considering any kind of cash return to shareholders? Again, it looks like the M&A that we've been kind of getting involved with hasn't been terribly, terribly large. And it just seems like we're quite cashed up quite heavily. Just kind of curious how we're looking at that.

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [31]

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No, I think -- well, firstly, I guess the quarter end number doesn't reflect that the funds we'll need to pay for the investment in Lagou. So maybe it's slightly inflated. But regardless, I think that, obviously, there's something that's more pertinent as a point that the company is discussing. I think that this is something that we'll have more consideration, more weigh time going forward. So that is a relevant question that we're exploring.

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Got you. So just real quick. So the Lagou acquisition was about 100 -- was 150, sorry what's the number again?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [33]

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120, about, approximate.

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120. Okay. So we have 1.12 billion on the balance sheet. So that it obviously takes about 1 billion, if we were to net that off.

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Operator [35]

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Your next question comes from David Li from Lizard Investments.

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David Li, [36]

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I missed the first half. Just curious, what drove sort of the ARPU outperformance? And how much of it is tax? How much of it is the mix? And maybe just repetitive, but can you give me a sense on the acquisitions you make, how they're translating into sort of improving ARPU? And I have a couple of follow-ups.

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [37]

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Well, ARPU actually is only specific to the online product services. So that -- it really doesn't have too much impact on the current M&A situation. So the ARPU increases actually comes from the effort of our team to actually be more successful in upselling products in the portfolio of services online. So that's kind of where it is. In terms of then just maybe the M&A strategy overall, this is something that, in the last 2.5 years, we've been more active in, and I think the new product and services that we brought into the portfolio has been something that we've slowly kind of integrated into our portfolio for our salespeople to push to customers, and that is something that's been helpful. But again, that's not really where we're -- it's really the key focus of ARPU, per se, because some of these services that we're talking about may not necessarily be in the online recruitment space.

David Li, [38]

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Okay. And also, on the employer -- the unique employers, can you just give us a little perspective? It's in the teens, the volumes. What -- how should we just -- if a couple of years from now, how should we think about it over time? Is it something that could potentially accelerate at a much higher rate? Or is there something where fairly normal in the current environment? Can you just give a sense like about that?

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Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [39]

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As of end of last year, in terms of the full year customer account, we're about 460,000 customers. I think our stated goal and purpose is really to get to 1 million down the line. So we're kind of making steady kind of marches ahead toward that goal still. I think that as the number continues to get bigger in terms of the base, I don't expect that we should be accelerating the growth rate, per se, for the customer account because that's actually just a lot of customers we're dealing with, and that is not necessarily the best way for us to achieve growth. In the last 2 years, and this is why, I think, maybe the question you had earlier about ARPU is also important, that we feel the way to grow forward and that's a sustainable and healthy growth is really to focus on part customer account growth, which is volume, and then part ARPU growth, which is the ability for our salespeople to have our -- customers actually spend more with us over time. So I think that's going to be a dual-pronged focus, and it will be kind of hopefully a balanced approach. So I do not expect that the customer count, per se, in terms of growth rate to accelerate because I don't think that's really our focus and it's not really necessary healthy or profitable to do.

David Li, [40]

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Okay. And also, and just on the margin leverage, because obviously you guys have tax flows through, so I think kind of looking at the margins on a percentage gross profit, which is little bit more significant. Can you just talk about, I mean, obviously you guys are not managing on that basis, but can you just talk about what's been driving, I mean, obviously as you grow your scale pretty nicely, the margin leverage is coming back, is it -- how should we think about this kind of going forward? And I understand that your goal is not to care about particular operating leverage, but how should we think about just the incremental profitability from incremental gross profit dollars over time? And how does that vis-a-vis versus how you scaled the OpEx?

Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [41]

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Our business is really more of a service business, and that's pretty scalable in a sense that, for us, I mean, a lot of our cost is actually in people. And so every year, when we look at our budgeting process, I mean, a lot of it is really kind of setting the tone for how many people we want to have in the organization and what will be the related costs to that. We kind of set a baseline, if you will, in terms of our cost structure. And then in relation to that, we also have a sales budget, a top line. Now if we are able to grow our top line higher than what we expect, usually that flows very nicely through the bottom line because the cost structure is relatively fixed, if you will think of it that way. So that's kind of the situation. From our perspective, if you look back historically a little bit more, we expect that given that wage inflation has always been very healthy in China, we expect that we would have to do double digit in terms of growth every year totally to have any chance of having leverage, if you will. So I think that's really about how we manage our teams in terms of the cost size, and then we have to make sure that we're getting the uptick in the revenues. So it's kind of what we're kind of get the balance between the 2 numbers to squeeze out margins, if you will. And if you look at, again, what we've done in the past, I mean, more of the savings comes from the gross margin line and also some of the savings from G&A, and we're not really taking leverage on the sales and marketing side because that's something that we feel like it's very important to push for the top line growth, and we are still in investment mode on that front. So that's how the picture will look.

David Li, [42]

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Now that's perfect, sorry. Now I'm really excited to see that. Sorry, I don't mean to hold the line as it's a little bit closer to the end. And just -- I want to go back to the online product side, the ARPU, because I remember like I was looking at the presentation, the ARPU is like the first time in a while where the ARPU is taking up, can you just specifically talk about what's the upselling, like what are these new products? Is it assessment or is it recruitment -- I don't know exactly. Is there any particular product that jumps out that some initiatives finally playing out that wasn't present in the past? Can you talk a little bit more detail on that front?

Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [43]

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I don't think I would attribute it to any single product that we've introduced that's been driving this. It's really the combined effort of some of the work that we've done in terms of realigning our sales team and making sure that people are really focused on this particular point in the sales process. I think for a long, long time in 51job's history, we were very much kind of beating down everyone focus on getting new customers as the #1 metric, number of customers really, the #1 metric that we kind of always measured our team on, but that's something that changed in the last 2 years, if you will, and that's been a transition, if you will. So I think we're finally starting to see the fruit of that change, if you will, and that's kind of coming through slowly. And then last quarter, I mean, we -- I think, again, the focus has been the same, but it's just that last quarter, our customer count was actually even higher than what we had planned for in a way. And so that had a dilutive effect on ARPU and it kind of disguises that the effort had been put in. So this quarter is a little bit more balanced, if you will, but it's something that's been ongoing, and it's not attributable to a single product, per se, and it's something that will continue to push forward on for sure.

David Li, [44]

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Okay. Terrific. And maybe on the competitive environment, is there any, I mean, obviously, your other competitors, I don't know, are they going private or whatever they're doing. Are you guys seeing anything on adjacencies that's potentially sort of longer term, or in terms of irrational or -- how is competitive setting working right now in terms of -- it just seems like there's only still a couple of horses in the running, not anyone but maybe you can just help us understand like how much of the volume growth or even ARPU, some of it may be driven by the fact that the supply from you and the other guys are probably getting a little less and less over time, so it's a better environment for everybody?

Kathleen Chien, 51job, Inc. - Co-Founder, Acting CFO and COO [45]

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To be honest, I mean, I don't think anything we've done is related to what our competitor has done, and in particular, the one you mentioned, they have gone private, technically at the end of September, so there will be a little bit less visibility in the short term about their information, if you will. But I think that we feel that our strategy and our focus and our execution is something that we we've been -- it's been a consistent kind of a plan that we've been on, and we've taken that path for the last few years, and it's not really relevant what so-called competitor is doing. So that's not really what's driving us, if you will. But I think that we continue to feel that there's a lot of runway for us overall in China. We feel like in the HR industry, it's a growing industry, customers are becoming more sophisticated over time, and they have more broader set of needs overall that needs to be served. And I think that this is a great opportunity for us, and we feel that we are very well positioned for this growth, given the fact that we've been able to successfully welcome and integrate a number of new product and services, whether or not those are kind of in-house grown or are still investments in acquisitions. So I think that we feel like we're in a pretty good place. So we feel that we have a lot of room to grow, and we hope that will continue to have good result to report.

Operator [46]

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

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Rick Yan, 51job, Inc. - Co-Founder, CEO, President, Secretary and Director [47]

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

Operator [48]

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


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