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51job, Inc. (JOBS)
Q1Â 2020 Earnings Call
May 8, 2020, 9:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the 51job Incorporated First Quarter 2020 Conference Call. [Operator Instructions]
I would now like to turn the conference over to Linda Chien, Vice President and Head of Investor Relations. Please go ahead, ma'am.
Linda Chien -- Vice President, Investor Relations
Thank you, Chuck, and thank you all for attending this teleconference to discuss unaudited financial results for the first quarter ended March 31, 2020. 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 first quarter 2020 results was issued earlier today, and a copy of the press release can 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 and management in evaluating the company's 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 and a replay will be available through our website at ir.51job.com.
Now I'll turn the call over to Rick.
Rick Yan -- Chief Executive and President, Director, Co-Founder
Thank you, Linda, and welcome to today's call. I will begin with an overview of the first quarter, followed by an assessment of current market conditions. Then Kathleen will continue with a detailed discussion of our financial results as well as provide our guidance for the second quarter of 2020.
Under unprecedented circumstances brought on by the COVID-19 pandemic, I'm very proud of how the 51job team quickly rallied together and adapt to the evolving situation. Through focused creativity and efficiency, we continue to fully serve employers and job-seekers in China with innovative solutions and high quality customer service. Although our financial results were affected negatively as expected, the decrease in revenues was less than forecasted and came in at RMB791 million in the first quarter.
We also prudently managed expenses and our profitability was solid. Non-GAAP operating margin was over 26% and non-GAAP EPS for the first quarter was ahead of guidance at RMB3.27 per share. The extended Chinese New Year holiday in 2020 and the temporary office closures, travel restrictions, as well as quarantines instituted to fight the virus spread, significantly impact economy -- economic activities and recruitment market demand in the first quarter.
For our online business, this resulted in an 11% decrease in revenues with most employers naturally adjusting their hiring plans and curtailing spending in a period of crisis. After reaching a bottom in mid-February, the volume of job postings and candidate applications pick-up on our platform, as companies begin to reopen in phases across China. The first movers were stand-alone enterprises and large domestic companies, the obvious leaders, given their financial strength, available resources and focus on long-term development. They were also the main clients who were early to adopt to our contactless services, such as online assessment and video interviewing. At the heart of 5ijob's and success and longevity has been our long-standing and deep customer relationships as well as our trusted brand among job-seekers. We stand ready to assist and support our users in every possible way, especially in these extraordinary times.
Our other HR services segment felt the pandemic's immediate and abrupt fallout on people mobility and social gatherings, which decreased revenue by 18% in the first quarter. Our offline services that were most affected were in-person training seminars as well as recruitment, events often held by employers to promote and celebrate hiring in the traditional post-Chinese New Year peak season.
After establishing appropriate precautions to protect participants and employees, we have begun to offer some classes and host events in March. Concurrently, we have taken steps to transition some of these services online as applicable. The delivery of certain training content is now available through our new e-learning platform, which was already in development for some time and was accelerated to launch earlier this year.
We have also helped clients by facilitating online job fares, which includes streaming of corporate recommended videos and interactive engagement with job-seekers. As restrictions on movement ease in China, we are working closely with customers on safety protocols and to reschedule events already under contract, but more time maybe needed for them to gain comfort for in-person contact again.
Turning now to current market assessment. Although companies have resumed operations and employees have returned to work, the market tone is still cautious and uncertain due to the ongoing pandemic and its unpredictable future consequences. Hiring activity data has shown improvement at a measured pace from the lows in February, but the level remained shy of last year's comparisons. In general, employers are gradually dipping their toes back into hiring, starting with fewer job listings and being selective about candidates as they await more information and clarity about where things are headed.
On the job-seeker front, while applications are outgrowing opportunities as expected, we have received feedback that some workers have been hesitant to accept new job offers worried that leaving their current position may not necessarily leader to greener pastures. We have also observed recently a notable difference in sentiment among employers depending on their target business area. For those organizations who provide product or services predominantly to the domestic market in China, we are glad to see that business confidence is rising as the local way of life is returning.
However, for those companies who serve more on a global scale or whose customers are based mainly abroad, what has befallen such as -- such regions as Europe and the United States, these last two months have been very concerning. Regarding salary levels and employee benefits, because of the pandemic, many companies have unfortunately indicated to us that they have taken or intend to take some actions to change employment terms, reduced compensation or just their staff size and allocation this year.
Needless to say, market conditions are very difficult and many unknowns persist in the role to recovery, but we have full confidence in our proven business model, which has faced and overcome many instances of global crisis and economic downturns in the past. Our blueprint to prevail and emerge stronger each time has been consistent with these three following pillars. First we stay true to our core values to provide high quality services to customers and job-seekers to be accountable and responsible and to do right by our team members. Our biggest assets are our people and the integrity of our platforms, which we don't ever trade or sacrifice for ill-gotten short-term reward.
Second, we go back to the product basics. How can we improve the user experience and enhance the value proposition of our services. With our ample financial resources, our product development roadmap has been unaffected. And so we will continue to pursue and add new partners to the 51job HR ecosystem.
Third, we will drive greater operational excellence. With the Chinese government's recent support in an acknowledgment of certain digital processes now having legal spending and enforceability, we are actively making changes to our BPO business, which we believe will step up efficiency and convenience for our customers with a constant desire and tenacity to want to do anything and everything better for cost effectiveness. This mentality is at the foundation of 51job's robust margins and profits, which has -- which have been industry-best for decades and distinguishes us uniquely from competitors by a wide distance. We'll continue to raise the bar and challenge ourselves as leaders do.
I'm an avid fan of car racing. So allow me to use this analogy. While the role ahead may have many winding turns and formidable obstacles, 51job always takes the driver's seat and find a way to steer past the crowd to victory lane. We believe it is often the decisions we make and actions we take during the toughest time that have subsequently led to our most significant accomplishments in our 20-year track record. In these defining moments, we will set ourselves apart with confidence and commitment we'll continue to position and strengthen 51job to capture more opportunities that pave the path for sustainable profitable growth over the long-term.
I will now pass the call over the Kathleen.
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-Founder
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. Our net revenue for the first quarter of 2020 were RMB791 million, representing a 13% decrease year-over-year, but above the guidance range that we had provided back in March. As we expected, the disruptive social and economic impact of the pandemic on companies in China weighed on recruitment demand in the first quarter. And as a result, our online revenues decreased 11% to RMB547 million.
Starting in 2020, we will no longer be providing the number of unique employers using our online recruitment services on a quarterly basis. Since we transitioned our online growth strategy five years ago to primarily focus on driving the monetization of high quality accounts and moderating the pace of new customer acquisitions, the quarterly employee figure has no longer become indicative of the performance and direction of our online business. We will however, continue to provide commentary and color and highlights about the trends and behavior that we observed in the reporting period.
In the first quarter, for our larger-sized customers, they stay generally active, but highly selective in the number of positions posted and how many employees they sought to add. The environment was tougher for smaller-sized accounts as they focus on finding their footing under a new normal and prioritized attention on existing workers before adding new staff. Industries that address consumer essentials and personal well being such as e-commerce, education, biopharma has continued to see favorable worker demand. Also, the construction sector, which has been bolstered by government infrastructure investment and the real estate sector, which has seen a relaxation of restriction has fared better recently.
Although contract signings have improved since March, employers are understandably being tight on spending in this uncertain environment and we will need more time to rebuild our online revenue pipeline with customers. Revenues for other HR services decreased 18% to RMB244 million. The decline was primarily due to fewer in-person training seminars and recruitment events conducted in the first quarter of 2020 as a result of the pandemic and the consequent restrictions instituted on public gatherings.
As Rick mentioned earlier, some training classes and offline activities have restarted slightly in March, but many events that customers remain committed to are on hold as we await confirmation on when and how we can conduct them given government restriction. We believe that this is a temporary road bump, and we feel that the other HR segment overall will rebound when the scheduling issues are resolved and restrictions are lifted.
Gross margin was 67.9% in the first quarter of 2020 compared with 72.7% in 2019. The decrease in gross margin was primarily due to the lower level of revenues this year, while cost of services only increased slightly at 2%, mainly as a result of greater employee compensation expenses, which were largely offset by less direct costs related to training and recruitment events.
Included in cost of services in the first quarter was an increase in share-based compensation expense to RMB5.9 million. Sales and marketing expenses decreased 4% to RMB276 million in the first quarter. This was primarily due to a decrease in performance-based bonuses and selling expenses, which was partially offset by the greater expenditures on advertising and promotion activities for the post CNY period that we had already put in motion and committed to prior to any knowledge of the pandemic. We are staying mindful in controlling staff costs and expect to be honest with our own hiring plans this year. Per usual, we will utilize discretion in balancing the near-term spending against important investments that will optimize future growth.
Included in sales and marketing in the first quarter was an increase in share-based compensation expense to RMB5.1 million. G&A expenses were slightly higher at RMB91 million in the first quarter. While share-based compensation expense increased to RMB26.1 million in 2020 from RMB20.6 million in 2019, this amount was largely offset by a decrease in office expenses, salaries and bonuses, as well as other costs.
Our income from operations was RMB170 million in the first quarter of 2012. Operating margin was 21.5%. And excluding the share-based compensation expense, it would have been 26.2%. In the first quarter, we recognized a mark-to-market non-cash gain of approximately RMB10 million associated with a change in the fair value of equity investments in Huali University Group, which is traded on the Hong Kong Stock Exchange.
Excluding share-based compensation expense, the gain from foreign currency translation and the change in the fair value of equities securities investment as well as the related tax effect of these items, the non-GAAP adjusted net income attributable to 51job was RMB222 million in the first quarter. Non-GAAP adjusted fully diluted EPS was RMB3.27 or US$0.46 per share.
Finally, turning to our guidance of the second quarter of 2020. The pandemic and its evolving economic impact on China and globally continues to materially affect market conditions and limits our visibility of revenues in the near-term. While we will continue to provide a forecast for the fourth quarter based on information available as of today, this is subject to change an unforeseen circumstances in the future. Currently, our net revenues target for the second quarter of 2020 is in the estimated range of RMB775 million to RMB825 million.
For the non-GAAP fully diluted EPS target, our estimated range is between RMB4.35 and RMB4.85 per share. In April, we have received some local government financial subsidies and we have factored in approximately RMB120 million related to this in our second quarter earnings expectation. But please note that the non-GAAP EPS does not include share-based compensation expense, foreign currency translation, the change in the fair value in equity securities investment nor the related tax effect of these items. To note, the total share-based compensation expense is expected to be between RMB37 million and RMB39 million in the second quarter of 2020. Again, this guidance reflects our current and preliminary view, which is subject to change and uncertainty.
This concludes our presentation. We will be happy to take your questions at this time. Operator, please go ahead.
Questions and Answers:
Operator
Thank you. [Operator Instructions] And our first question will come from Alicia Yap with Citigroup. Please go ahead.
Alicia Yap -- Citi -- Analyst
Hi. Good morning, Rick. Kathleen and Linda. Thanks for taking my questions. I have couple of questions related to the guidance. So in terms of your second quarter revenue outlook, it seems this year-over-year and sequential guidance trend actually is suggesting maybe the hiring demand has yet to resume to normal. So just wondering is this mainly attributed to the timing where the employers are slow in putting together the hiring plans or is this suggesting that maybe it's beginning of the sign that potentially things are not going to recover as normal for the rest of this year where the openings and the hiring demand will remain very soft this year?
And with the breakdown, previously, I think you mentioned the other HR revenue were more affected. So is second quarter also experience the similar directions where other HR will suffer bigger decline? And then just quickly on your EPS guidance. So if we factor in the government's subsidy that you receive in April, should we assume that the net margins is actually more in line with your revenue guidance, which still have a sequential declined as well versus the first quarter margin that you achieved? Thank you.
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-Founder
Hi, Alicia. Thank you for the questions. Let me try to cover the revenue questions first, which is just in general hiring demand looking out longer term. I think it's too early to call it for 2020 at this point, because I think what we're seeing is that people have had a chance to just return to the office actually in April for almost all of China, I mean for ourselves as well. I mean, some cities were actually very late in opening up in its phases. And I think April was really finally in the time when people have across the board been able to return to the office.
And as you know, I mean, Beijing just relaxed its security level at the end of April even. So again, I think that it is just a little bit of a pause button that was on that we see have been fully released, if you will. So I think that in the second quarter, we're going to see some effect of this continuously. But we do feel like everything is moving in the right direction, and I wouldn't say that this is necessarily going to be a long-term normal for the rest of the year at this point, because we're seeing improvements every week still. But for the second quarter, I think that it is unlikely for it to recover to comparable levels of last year at this point in time. So I think we're not calling it for the year, but for the second quarter, we're not seeing the recovery that quickly because I think that there is going to be some time lag to the pipeline that we built to the business. So that is the situation with online development.
In terms of other HR revenues, yes, I think the key really is about the restrictions on public gatherings and offline events and how it can be held, if you will. I think we have a number of engagements that we have contracted for, but because of the disruption caused by these restrictions for a public gathering and whatnot, we have not been able to deliver the content or the event, if you will. So that is really something that we are just pending the restrictions being lifted. And I do think that this is something that, again, while we have no control over the situation, the timing specifically, we do feel like the signs are there for things to continue open up.
As you know, the government is going to hold their major event in end of May. So I do think that that's a strong sign that the government feels that things are getting back to normal and that things are under control. And if we follow that lead, if you will, I think that we can look forward to that kind of the gradual relaxation and restriction being lifted. And so that is really the situation. But again, because that is happening end of this month, if you will, so we are going to lose some time in the second quarter to serve revenues in those kind of area. So that is why we have to be realistic and may be somewhat modest in terms of our guidance for the second quarter at this point in time.
And then finally, I think you mentioned about just margins in general. I think the guidance that we have just given, which factored in the subsidy impact as well, I think we were trying to not overreact in terms of the cost structure we have. And I think right now we feel that things are moving in the right direction. We want to make sure that we continue to make the right investments to bring new products and new services back online. So we're not trying to cut away that kind of investment at this point in time.
So in the short-term, yes, there may be small margin compressions versus prior year certainly because of the reduced revenue levels, but I think that it is something that we feel comfortable with and that the overall levels are actually still very strong and industry leading, if you will. So I think that's where we feel that would be the right level to continue the investments in these kind of areas. So I think that's kind of where we see the things at this point in time.
Alicia Yap -- Citi -- Analyst
Great. Thank you, Kathleen.
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-Founder
Thank you, Alicia.
Operator
Our next question will come from Ken Chong with Jefferies. Please go ahead.
Ken Chong -- Jefferies -- Analyst
Hi, management. Thank you for taking my question. I want to ask about the online recruitment side. Can we share about the expansion of the premium membership by our companies? I understand after the Chinese New Year they will start to expand the membership contract with us, but this has been disrupted by the virus. Can we comment on the latest situation now how has this been trending? And I also have a second question. Can you comment on the recovery trend in the second half? Do you think online recruitment or other HR services will recover first? Thank you.
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-Founder
Thank you for the question. In terms of the recruitment revenues, I think, obviously after Chinese New Year there was kind of a pause, if you will. So I think that it is something where a lot of people did not rush into signing large contracts or hesitated to sign contracts in general, if you will. So it is something that we've seen the year-over-year declines because of that and I think that trickled over to some degree still in the second quarter. And as we mentioned earlier, we are still not at comparable levels of last year at this point in time.
So if you look at the number of postings companies are putting out and their hiring demand overall, it is softer than last year at this point in time. But again, we came from very low levels in February when everything really kind of halted, if you will, because people couldn't even return to office, it was very difficult. And so -- and not all industry could rely on a contactless approach to hire and bring on employees to do the work. So there is got to be a period of disruption there. So that is the situation as is.
And then in terms of how that looks in terms of the other HR revenues, I think for the other HR revenues, what is the key for us in the second quarter will be really about some of the restrictions on public gatherings, the ability to hold some events offline, especially with what we talked about with training and other things where a lot of the delivery historically has been offline.
So that is really the one thing that we are looking to the government to see and take -- to see where things lead. But as I just said to Alicia as well, I think we believe that the signs are that things are improving in China and that the Chinese government is actually going to be holding their major event later on this month. So again, we'll take that as a signal. I think that we hope that after that the restriction will become lifted more and more across China. And as you know, in China, some restrictions are not national, they are kind of you know by city or by province. So again, different pace that's going on.
Ken Chong -- Jefferies -- Analyst
Sure. Thank you very much.
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-Founder
Thank you.
Operator
[Operator Instructions] Our next question will come from Dan Chace with Wasatch. Please go ahead.
Dan Chace -- Wasatch Global Investors -- Analyst
Yeah, hi. Thanks for taking the question. You mentioned earlier that your domestic-oriented customers are doing better than the foreign-oriented customers. Can you give us a sense of what the mix of revenues is from those two categories?
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-Founder
It's difficult to kind of break that out specifically because some people have a mix of domestic and foreign business, if you will. But what we're seeing is that some of the MNCs in general will be acting more slowly because I think they are more concerned on a global basis. And so if they're taking some head sort of direction or some guidance from the headquarters, if you will, given that the pandemic kind of outbreak was actually happening in the U.S. and Europe at a later period of time versus China, if you will. So that kind of rolled into the March and April timeline for some of these companies to make their decisions. So I think that's kind of what it is for the online recruitment.
So I will refrain from commenting on the specific percentages because I think it's difficult to kind of break that out specifically. But I would say that there are actually quite a lot of the large accounts that were also MNC in nature, but some of the smaller accounts and some of the local Chinese company are a little bit protected against what's going on globally. So that is the situation.
Dan Chace -- Wasatch Global Investors -- Analyst
Okay, thanks. Can I ask a follow-up?
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-Founder
Sure.
Dan Chace -- Wasatch Global Investors -- Analyst
Again, if I heard you correctly, you were going to no longer report the number of unique employers on the online business, is that correct?
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-Founder
Yes. On the quarterly basis, we're no longer reporting that number because we do not feel like that's a good reflection or a good indication of how the business is doing overall, because our strategy is not to pursue number of customers as the major way to growth.
Dan Chace -- Wasatch Global Investors -- Analyst
Understood. But I think the average revenue per unique employer seems like a relevant metric to track in terms of your ability to get price from larger customers? So I just encourage you if you rethink that policy because it's -- perhaps it's been a useful metric to track?
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-Founder
Well, thank you for the feedback. We will take that into consideration.
Dan Chace -- Wasatch Global Investors -- Analyst
Thank you.
Operator
Our next question will come from Thomas Chong with Jefferies. Please go ahead.
Thomas Chong -- Jefferies -- Analyst
Hi. Thanks management for taking my questions. And I have a follow-up on previous questions. Regarding our online recruitment revenue mix, can management comment about the mix between SMB and KA last year? And my second question is also about the geographical mix. How should we think about the hiring activities in lower tier cities versus first tier cities given that we are seeing faster recovery in the lower tier cities? And then my last follow-up question is about the employer side. Are they more willing to have contracts or permanent jobs offered to candidates? Thanks.
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-Founder
Sorry. I didn't quite understand the last question. Can we repeat that first?
Thomas Chong -- Jefferies -- Analyst
Yeah. My last question is about the job offerings. Are we seeing employers posting like permanent jobs or having more contract or part-time jobs given the uncertainties these days? Thank you.
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-Founder
Okay. Let me answer that question first. I think that -- I don't think that a company can all of a sudden change its kind of way to offer positions to employee or potential employees, if you will, so that they immediately convert a job from a long-term full-time job to a contracting basis, if you will, because I think that there are differences in how that will get done and how they would compensate employees. I think that the challenge today right now is really that given the pandemic disruption that everyone is operating at a lower level, if you will, so that the demand is actually just lower in general. So I don't think that the push for seeking alternative way of employment is really driving the change in the marketplace.
I do think that in terms of what you mentioned about contracting and may be using part-time staffing, I think that it's a option that companies always try to seek for some flexibility in their own kind of workforce management and that happens. But I think that for the most part, from most companies that is still a small percentage of total headcount and that they would be sort of, I wouldn't say non-essential, but certainly non-core in terms of the workforce that they manage. So I think at this point in time, I would say that the softness in the market is not because people are trying to seek alternatives in employment, but that longer term may be something that people would want the flexibility, but I don't think that's really kind of driving the situation.
And then in terms of demand across different geographies, yeah, you're right. I mean, I think that because of the way things unfolded, if you will, the relaxation of some of the policies on what cities kind of got the phase opening at what time to return to work, I mean that's actually not been a 100% in line across all cities nationally. So some cities opened up a little bit earlier. So they're probably a little bit ahead of the curve, if you will, while some cities were late in opening for whatever reason, and so that took a little bit more time. And I mean, to be honest, I mean even our own office in Wuhan, just really opened up in April. So I mean it was kind of a later opening than some of the cities in our own kind of a network of offices.
So I think that the timing to opening and the industries that the companies are in really then will drive how they're doing right now, where they are in the stage of recovery. And so it's not -- it's hard to have a one size fits all kind of answer for that. So that's kind of where things stand. But again, I think what we want to emphasize and to let people know is that I think that it feels like the worst is behind us in China. I think obviously everything bottomed out in February. There was great uncertainty in March. I think that we were gaining more confidence into April. And I continue to believe that there are signs that things are going to return to some semblance of normal more and more and that the restrictions are being relaxed or lifted in different parts of China and that I think we're on the path in the right direction certainly.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Rick Yan for any closing remarks. Please go ahead, sir.
Rick Yan -- Chief Executive and President, Director, Co-Founder
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
[Operator Closing Remarks]
Duration: 40 minutes
Call participants:
Linda Chien -- Vice President, Investor Relations
Rick Yan -- Chief Executive and President, Director, Co-Founder
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-Founder
Alicia Yap -- Citi -- Analyst
Ken Chong -- Jefferies -- Analyst
Dan Chace -- Wasatch Global Investors -- Analyst
Thomas Chong -- Jefferies -- Analyst
