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51job, Inc. (JOBS)
Q2Â 2019 Earnings Call
Aug 6, 2019, 8:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the 51job, Inc. Second Quarter 2019 Conference Call and Webcast. [Operator Instructions].
I would now like to hand the conference over to Ms. Linda Chien, VP and Head of Investor Relations. Please go ahead.
Linda Chien -- Vice President, Investor Relations and Corporate Development
Thank you, Lexi. And thank you all for attending this teleconference to discuss unaudited financial results for the second quarter ended June 30, 2019. 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 second quarter 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 provision 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.
Rick Yan -- Chief Executive and President, Director
Thank you, Linda, and welcome to today's 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 as well as provide our guidance for the third quarter of 2019. In an environment of economic uncertainty and overhang from US-China trade relations, we are facing tough market conditions as companies have been cautious with their spending and recruitment activity in 2019. Net revenues for the second quarter grew 7.6% to CNY964 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 non-GAAP EPS exceeded expectations at CNY5.9.
On the back of a muted post-Chinese New Year recruitment season, we saw continued softness in hiring demand in the second quarter. Employers were very selective in posting job positions, and we also observed that the pace of the recruitment process has been slower than usual with companies showing less urgency to communicate with job seekers and fill vacancies. These conditions impacted our online business, and revenue growth moderated to 4% in the second quarter. While the number of unique employers decreased as expected and in line with our strategic transition away from micro-sized transactions, we maintained progress on our key objective of driving up revenue per employer. ARPU increased 20% in the second quarter as customers recognized the superior results and value proposition of our many online brands and services.
We will continue to execute our high-quality growth strategy in 2019, emphasizing our sales efforts on the high potential companies that form our elite customer base and which, we believe, will provide us with continued monetization opportunities over the long term.
In the other HR services segment, 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 maintain its status as a stand-out performer as companies are increasingly seeking solutions to identify and retain top talent, improve the skill set of their workers and drive employee productivity.
One of 51job's distinct competitive advantages has been our complete end-to-end suite of HR service offerings. With companies being hesitant to add headcount right now, we believe this strength will -- and diversity will prove to be very important during this business cycle and provide us with multiple different engagement points in the HR value chain to serve customers. We will look to step up promotion and adoption of other HR services and increase their contribution to growth.
Turning now to our current market assessment. Due to lingering economic concerns and soft demand for hiring, we expect difficult conditions for the rest of 2019. A wait-and-see mentality persists in the market, and many companies have taken a conservative approach and been less willing to commit to recruitment plans especially small and medium-sized enterprises. With employers being indecisive and on the sideline awaiting economic direction, these conditions post near-term challenges that are out of our control, but they do not affect our confidence in 51job's long-term prospects or the overall HR market opportunity in China. Just as we have managed previous cycles in our 20-plus years in operations, we will navigate this macro slowdown by staying focused on three main areas critical to our continued and future success.
First, in the area of product development, we are making meaningful strides in investing, innovating and incubating new services. Since 2015, we have introduced four new recruitment brands under the 51job umbrella and significantly expanded the offerings in our training and assessment business. Whether through in-house development, acquisition or partnership, we believe we have the product roadmap that will aggregate the best-in-class HR solutions into our ecosystem in China.
Second, in the area of user and platform engagement, we are creating stronger, more targeted links between employers and jobseekers as both companies and individuals search for a better mutual match in capabilities and expectations. We are moving beyond basic online listing and providing advanced tools such as AI-based evaluation and personalization. Our ability to connect the two sides is not only limited to online and mobile channels. When times call for in-person interactions, 51job's off-line services have helped employers host more than 10,000 events annually. This July, our student job fair overseas talent attracted more than 5,000 prequalified on-site participants on a rainy day in Shanghai. Although 51job has already established large size and scale, we are moving forward to elevate the quality, depth and coverage of user engagement in all facets to strengthen our position as the most reliable and trusted HR services provider in China.
Finally, in the area of internal processes and functions, we will continue to pursue greater operational excellency. A consistent commitment that we believe is unparalleled in our industry. Our long history of profitability stems from our own high standards for efficiency that have been at the core of 51job's DNA since inception.
There are no excuses when it comes to introspection and accountability, and we are always reviewing how we can allocate our resources, serve our customers and run our businesses for improvement. We will maintain financial discipline with regard to cost management and to balance appropriate strategic investments with reasonable returns.
In summary, we all know that enterprises -- enterprise expanding and hiring demand is inherently correlated 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 of priority that are fundamental to our future. With a clear strategic plan, ample resources and operational experience, we play the long game, and we stay true to our mission to create a bigger and better 51job that leads the HR industry in China with high-quality services and sustainable profitable growth.
I'll now pass the call over to Kathleen.
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer
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 revenues for the second quarter of 2019 were CNY964 million, representing a 7.6% increase. Our online revenues for the first -- second quarter grew 3.8% to CNY611 million. The growth was driven by the continued improvement in revenue per employer, 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 enterprises will continue to curb their willingness to hire this year. Also, coming off of strong comps in 2018, we feel that our online business will likely see year-over-year revenue decline in the second half of 2019.
Revenues for other HR services increased 14.8% to CNY353 million in the second quarter, led by the growth of our HR outsourcing, training and assessment services. As Rick mentioned earlier, our HRO business is making progress again following recent operational adjustments we instituted in accordance with the new tax and government regulations. While 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.
Beginning January 1, 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 CNY676 million, and gross margin was 70.1% compared with 71.6% in 2018 due to higher employee compensation expenses. Included in cost of services in the second quarter was share-based compensation expense of CNY4.5 million.
Sales and marketing expenses decreased 6% to CNY314 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 payments. The year-over-year decline in advertising spend was mainly because last year's second quarter included many expenses related to our 20th anniversary celebration in 2018. We still maintain active marketing campaigns 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 30 was relatively flat compared to the end of 2018 at about 4,200. 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.
Included in sales and marketing expenses in the second quarter was share-based compensation expense of CNY3.8 million. Our G&A expenses increased 4% to CNY92 million in the second quarter. The increase was mainly due to higher employee compensation expenses, which was partially offset by lower office expenses. Our share-based compensation expense included in G&A was CNY19.7 million.
Income from operations increased 24% to CNY270 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. In the second quarter, we recognized a non-cash loss of CNY333 million associated with the change in the fair value of the convertible notes. On April 15, the notes matured, and all noteholders requested conversion of their holdings from debt to equity. The principal amount of $172.5 million 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 CNY123 million in local government financial subsidies compared with CNY154 million in the year-ago quarter. For the six months ended June 30, 2019, the total amount of subsidies received was approximately CNY186 million compared with CNY155 million in the first half of last year. 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 51job increased 11.5% to CNY400 million in the second quarter. Non-GAAP adjusted fully diluted EPS was CNY5.9 or $0.86 per share. As Rick discussed earlier, our outlook for the remainder of 2019 is cautious due to a difficult macro backdrop. But our 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 and emerging from business cycles is not new to the 51job team. As we roll up our sleeves higher to serve our customers and jobseekers this time around, we have confidence that we are laying the groundwork to be a better and stronger organization for the future.
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 CNY915 million to CNY955 million. For the non-GAAP fully diluted EPS target, our estimated range is between $4 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 the related tax effect of these items. Our total share-based compensation expense is expected to be between CNY32 million and CNY33 million for the third quarter of 2019.
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 expected reported GAAP earnings per share without unreasonable efforts 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.
Questions and Answers:
Operator
Thank you. We'll now begin the question-and-answer session. [Operator Instructions]. Your first question comes from Chad Beynon with Macquarie. Please go ahead.
Frank Chen -- Macquarie -- Analyst
Hi, management. This -- thank you taking my question. This is Frank Chen with Macquarie. Congratulations on the solid second quarter results. And my first question is about macro cycle. Actually, you went through a few cycles in the past 20 years, and I wonder, in your view, how is this cycle different from previous ones?
And my second question is about the strategy. Actually, the number of unique employer on your platform showed sequential decline for consecutive four quarters. I understand this is due to the initiative on focusing on higher-potential employers. However, how should we think of the number of unique employers for the rest of 2019? When is the turnaround point of the employer count? What's your plan for attracting or acquiring new recruiter in the future? That's all my two questions.
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer
Okay. 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 acquire new customers, I think that we have been pretty consistent in communicating the fact that we are going through a period of customary allocation among our sales force so that there is a recalibration of number of customers that each salesperson 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 there 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 is a lot of -- the very similar characteristics in terms of, in the down cycles, there's 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 out that out, and that's why that's holding up sort of activities in general.
I think that given 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 a pretty public 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 this is something that we have navigated through before, and it's something that we just need to kind of go through given it's time. But I think that we have dimmer hopes for the remainder of 2019 just because I think that there's no easy and quick resolution coming in sight.
Frank Chen -- Macquarie -- Analyst
Thank you, very clear.
Operator
Thank you. [Operator Instructions]. Your next question comes from Alicia Yap with Citi. Please go ahead.
Alicia Yap -- Citi -- Analyst
Hi, thank you. Can you hear me OK?
Rick Yan -- Chief Executive and President, Director
Yes.
Alicia Yap -- Citi -- Analyst
So good morning -- yeah, good morning, Rick, Kathleen and Linda, thanks for taking my question. I have two questions, if I may. First of all, on the third quarter guidance, I understand that, I think, Kathleen, you mentioned for the second half, you're going to see -- experience a year-over-year decline on the online recruitment side. Would you be able to quantify, will that be the low single-digit or the high single-digit decline that we should be seeing? And for the BPO and other HR services, given that it's more resilient, could we still see the low double-digit growth that we saw like in the second quarter or the first half? So this is the first question.
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer
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 that we expect that it should be on a healthier track -- that certainly that -- we're looking at, at this point in time, that it will be increase year-over-year basis. So the GAAP, if you will, really comes from the online recruitment side. In terms of what that looks like? We've given the overall guidance, but it's going to be something that we need to monitor pretty closely because the headlines that get traded every day, that passes -- that flashes across the screen does seem to make everyone a little bit more jittery all the time, and it's something that we just need to see. For now, for the third quarter, we -- our 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.
Alicia Yap -- Citi -- Analyst
Sure. And then for the second question, which -- can you remind us a bit on the moving parts on driving the gross margins trend? I think, you mentioned a bit on the VAT tax component. And then just any other specific reasons that we continue to see this year-over-year and the sequential decline? And how should we think about the trends for the third quarter?
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer
I think, 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 headcount ourselves and managing cost. I think, a lot of it is going to be depending on what top line looks like because we've always talked about the fact that the people cost is the biggest component of our space, and that is a, in the short period of time, if you would, it was relatively fixed.
Obviously, there's some variance when it comes to kind of our commissions and bonuses, and that will then vary depending on performance, if you will, but I think that, overall, I think, a, we're being pretty tight in terms of headcount 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 headcount pretty close to where it was at the beginning of the 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.
Alicia Yap -- Citi -- Analyst
Okay. Just lastly, regarding competition, could you comment on any change of the landscape? And how do you see the overlapping or even the competitive pressure from the newly established company like BOSS Zhipin? What's your view on their business model versus 51job? Thank you.
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer
To be honest, I mean, I think that 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, in a way, because I think that it does drive innovation, it does drive our salespeople to compete closely for customers, and it does align everyone's effort to customer interest and customer needs, if you will. So I think that's not surprising or new in a way. And whether or not it's -- I think, first, you can probably get a lot more coverage this year given that they've actually spent heavily in -- sort of on marketing from this year, and so I think, it's been a lot more visible versus what we call the earlier generation of players, typically, where a couple of years ago might have talked a little bit more about Liepin or a few years ago before that when Zhaopin 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 the day is try to be a full-service HR service provider, which is something that no one else out there is really doing, because I think -- and the people we mentioned, whether or not it's BOSS Zhipin or it's Liepin historically, a little bit early on or even Zhaopin, 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 through that versus everybody else in the marketplace.
Alicia Yap -- Citi -- Analyst
Okay great. Thank you, Kathleen. Thank you, Rick.
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer
Thank you, Alicia.
Linda Chien -- Vice President, Investor Relations and Corporate Development
Sorry, everyone. I think, we're having some technical difficulty right now. I think that, for any other further questions, if you could please follow up with the Company directly with Linda Chien at [email protected]. Sorry for the technical issues.
Rick Yan -- Chief Executive and President, Director
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.
Duration: 31 minutes
Call participants:
Linda Chien -- Vice President, Investor Relations and Corporate Development
Rick Yan -- Chief Executive and President, Director
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer
Frank Chen -- Macquarie -- Analyst
Alicia Yap -- Citi -- Analyst
