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51job, Inc. (JOBS)
Q2Â 2020 Earnings Call
Aug 11, 2020, 9:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day and welcome to the 51job, Inc. Second Quarter 2020 Conference Call and Webcast.
[Operator Instructions]
I would now like to turn the conference over to Ms. Linda Chien, Head of Investor Relations. Please go ahead.
Linda Chien -- Vice President, Head of Investor Relations
Thank you, Rachel, and thank you all for attending this teleconference to discuss unaudited financial results for the second quarter ended June 30, 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 second quarter 2020 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.
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 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 2020.
After an extremely difficult start to the year, through vigilant collective efforts among government, business and society to battle the COVID-19 pandemic, economic activity has been increasing and recovery is under way in China. For the second quarter, there was a solid sequential rebound in our other HR services area and we maintained sound profitability that balanced costs management and strategic investments important for future growth. Exceeding our forecast, total revenues were RMB829 million and non-GAAP EPS was RMB5.28 per share.
Our other HR services segment improved significantly from the first quarter and Q2 revenues came in better than expected at RMB325 million. As social gatherings and travel are now generally allowed throughout most of the country, companies are becoming more comfortable with in-person events and we have been able to conduct these activities at a larger scale.
Our training services remained the business area most affected by any movement restrictions. And although still a distance behind last year, we are hosting more seminars and workshops, and some clients have even begun reinstituting physical exercises such as team building games for new worker orientation. With employment being a key priority for the government, we have also captured some upside in special projects with local labor bureaus and top universities. We have organized over 30 targeted recruitment campaigns with districts in cities like Beijing, Guangzhou, Nanjing, Wuhan and many others. These events showcase the integration of our online and offline capabilities, and have generated nearly 2 million job applications for participating employers.
Our campus business recently launched a new tech platform to assist university career centers with job postings and resume submissions, and we have already signed up 96 school partners to date. These positive developments combined with our anchor BPO business that continues to exhibit consistency and resiliency, the other HR services area is bouncing back. We are hopeful of more progress for the remainder of the year as long as the pandemic stays under control.
Turning now to our online recruitment segment. The loss of this year's post-Chinese New Year peak recruitment season, as well as high lingering market uncertainty, has significantly disrupted our pipeline of customer orders for 2020. As a result, online revenues for the second quarter was RMB503 million, a decrease of 18% compared to the year ago period.
While we have month-over-month uptrends in labor market activity since March, hiring tends to be a lagging indicator in our experience. And under the overhang of the ongoing pandemic and geopolitical concerns, the pace of recovery was gradual in the second quarter. Employers are still conservative with their budgets and selective in adding headcount as they await more data points that substantiate an economic upturn and spur business confidence. We believe things are heading in the right direction, but more time and patience is needed. As contract signing picks up and we rebuild our revenue book, this will underline better results down the road.
Customer service remains top of mind to our clients, especially as employers navigate through complex product management matters and regulatory changes in these unprecedented times. We stay focused on our commitment to being the most trusted and reliable partner to the HR community in China. As such, we have chosen not to make any major adjustment to our staffing levels this year and continue to deploy resources to provide high-quality support and guidance to our customers.
We have also continued to invest in product innovation, technology development and operational upgrade initiatives, which we believe are critical to driving higher productivity and monetization. Our decision making is guided by our conviction in the larger potential of industry over the long run rather than near-term obstacles. We are confident these investments will strengthen our competitive position to capture more opportunities and will deliver greater financial returns in the years ahead.
Moving on to our current market assessment. While we are seeing sequential improvement in recruitment demand, significant unknown persists regarding the pandemic, global economic outlook and U.S.-China tensions. With limited visibility and some factors beyond control, conditions remain difficult for employers to make hiring plans and decisions.
But we have seen some favorable signs recently. They make us optimistic about more positive momentum. First, the government has continued to implement a number of measures to support companies and employments. These include exemptions, deferments and reductions for certain social welfare and tax payments to alleviate compliance and cost burdens, especially for small- and medium-sized enterprises. There have also been a greater policy focus of new infrastructure investments such as the build out of 5G networks and data centers, which has bolstered hiring in related sectors.
Second, our recent surveys show some employers have carried out upward salary adjustments lately, although not brought paced and more targeted to certain talent, notably mission critical and technology workers. This is a meaningful change in sentiments compared to earlier in the year. Annual salary increases are expected norm for the white-collar space in China and this bodes well that traditional market behavior is returning.
Third, in the labor segment, receiving most attention from government and society this year, we saw a solid spring season for graduate recruitment, all things considered. By quickly developing solutions and transitioning to a contactless online approach, we were able to minimize delays in our customers planned campus hiring programs. We also introduced new ways to connect with graduates such as hosting online live streaming events, job fairs and competitions. As we enter the busiest period for campus hiring in the fall, we are encouraged by what we have seen so far. And we are well prepared with many tools and channels to keep engagement high between employers and internal [Phonetic] job seekers.
Without a doubt, the path for this year remains challenging and unpredictable under a new normal, that require us to operate with nimbleness, flexibility and creativity to serve our users through all types of circumstances. Although, we are facing headwinds currently, our experience has taught us to stand firm regarding our strategy and investments, and our robust balance sheet enables us to do that. We are confident that 51job is well positioned competitively and financially, and we firmly believe we will emerge from this crisis as an even stronger organization.
I'll now pass the call over to 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 a reporting currency of the Chinese renminbi, unless otherwise stated.
Our net revenues for the second quarter of 2020 were RMB829 million, representing a 14% decrease year-over-year. In our online business, revenues decreased 18% to RMB503 million in the second quarter. Recruitment demand remains heavily affected by the pandemic and its economic ramifications. In addition, with U.S.-China relations becoming more strained again, employers remain cautious as they seek more clarity on the prospects of their business recovery.
Our larger size customers continue to be more active in hiring than SMEs and better performing industry recently have been real estate, biopharma, medical devices and construction. Because the model for our online business is primarily subscription memberships and there is rolling revenue recognition of the contract value proportionally over the contract length, the disruptive start to 2020 plus the gradual and somewhat uneven pace of improvement thus far means that we still have some catch-up to do.
Bookings are picking up, but we need more time to rebuild our online pipeline to pre-crisis levels. Revenues for other HR services rebounded more significantly on a sequential basis to RMB325 million, but are still down 8% year-over-year. The most significant impact has been felt on our training business as the majority of that business is delivered in an offline format, which was severely constrained in many cities across China until May. As Rick mentioned earlier, we are optimistic that the other HR segment can recover further this year, if the pandemic stays controlled and no broad-based restrictions on travel and offline gatherings are reinstituted.
Our gross margin was 67.3% in the second quarter of 2020, compared with 70.1% in 2019. The decrease in gross margins was primarily due to the lower level of revenues this year, which is partially offset by a reduction in social welfare benefits payments and the less direct costs related to training events. Included in cost of services in the second quarter was an increase in share-based compensation expense to $6.1 million [Phonetic]. As we pivot under the new market norms, we are making additional investments to drive the introduction of end delivery of new services. And so, as we enter the fall campus recruitment period, we will also be bringing on seasonal headcount and purchasing support services in advance, which will somewhat increase cost of services in the third quarter.
Sales and marketing expenses decreased 7% to RMB293 million in the second quarter. This was primarily due to the decrease in performance-based bonuses and a reduction in social welfare benefits payments, which was partially offset by the greater expenditures on advertising and promotion activities that we had already committed to pre-pandemic. Included in sales and marketing in the second quarter was an increase in share-based compensation expense to $5.2 million.
G&A expenses were RMB99 million in the second quarter. The increase was primarily due to the higher share-based compensation expense which was $26.8 million [Phonetic], compared with $19.7 million [Phonetic] in 2019, and a larger provision for our doubtful accounts, which we felt was prudent given the current circumstances. However, these amounts were partially offset by lower salaries and bonuses after the voluntary management pay cuts as well as a reduction in social welfare benefits payments.
Income from operations was RMB165 million in the second quarter of 2020. Operating margin was 20% and excluding share-based compensation expense, it would have been 24.6%. Also in the second quarter, we recognized a mark-to-market non-cash gain of approximately RMB57 million associated with a change in the fair value of equity securities investment in the Huali University Group, which is traded on the Hong Kong Stock Exchange.
Other income in the second quarter also included RMB145 million in local government financial subsidies, compared with RMB123 million in the year ago quarter. For the six months ended June 30, 2020, the total amount of subsidies received was approximately RMB149 million, compared with one RMB186 million in the first-half of last year.
Excluding share-based compensation expense, the loss from foreign currency translation and the change in the fair value of equity securities investments, as well as the related tax effect of these items, the non-GAAP adjusted net income attributable to 51job was RMB358 million in the second quarter. Non-GAAP adjusted fully diluted EPS was RMB5.28 or $0.75 per share.
Finally, turning to our guidance. The pandemic continues to materially affect market conditions and limit our revenue visibility in the near term. So based on what we know, as of today, our net revenues target for third quarter of 2020 is in the estimated range of RMB820 million to RMB870 million. For the non-GAAP fully diluted EPS target, our estimated range is between RMB2.7 and RMB3.2 per share. Please note, that non-GAAP EPS does not include share-based compensation expense, foreign currency translation, change in the fair value and equity securities investment nor the related tax effect of these items. Total share-based compensation expense is expected to be between RMB37 million and RMB39 million in the third quarter of 2020. This guidance reflects our current and preliminary view, which is subject to change and substantial uncertainty.
This concludes [Phonetic] our presentation. We'll 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 Alicia Yap from Citigroup. Please go ahead.
Alicia Yap -- Citigroup -- Analyst
Hi. Thank you. Good morning, Rick, Kathleen and Linda. Thanks for taking my questions. I have a couple of questions here.
Number one is that, given the other HR revenue actually rebounded better than expected in the second quarter, how should we view the 3Q guidance that would imply the HR revenue versus the online recruitment service? And I think, Kathleen, you mentioned just now there is a rolling revenue effect on the online from the subscription side. So, is that implying we could actually continue to see the weakness in online recruitment in 3Q?
And then, I have a couple follow-up.
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-founder
Hi, Alicia, thank you for your question. Yes, I think to some degree, yes, it's a good thing you picked up on what I said, which is that because online revenue is recognized over the time period of the contract of 12 months [Phonetic] usually for the longer-term membership, the sustained impact of the disruption that was happening in the first-half of this year is still going to be carried through throughout the second-half of this year. So, there will be more impact being felt on the online revenue versus the other HR, which tend to be things where you saw that bigger dip in the first quarter, you saw it come back faster in the second quarter. And if things continue to be moving in the right direction that there is no more disruptions, I think that the impact of the recovery will be more immediate also in the third quarter for the other HR services. So yes, the impact will be more felt on the online services for a longer period of time and that's what we're expecting.
Alicia Yap -- Citigroup -- Analyst
And then, second question is regarding the hiring sentiment. So maybe, Rick or Kathleen, how would you quantify the hiring sentiment that you have been seeing over the past three months versus what you think [Phonetic] the actual sentiment could be improving? Or is it like improving in line with your expectation? Or is it, kind of like, still below the expectation, given the tension from the U.S. and China?
And then just related to that is that, how would the U.S.-China tension affect the hiring sentiment? Is it for certain industry-specific only, right, [Phonetic] if not everyone is impacted by this tension?
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-founder
I'll let Rick [Speech Overlap] go ahead, Rick.
Rick Yan -- Chief Executive and President, Director, Co-founder
Yes, I think the market sentiment has been cautious. Put it this way, I think I would characterize that employers are hiring, but they are not hiring a very large number. So they've hiring plans. They're not freezing the headcount, they're hiring but at a very cautious pace. And I think the amount of [Phonetic] pandemic is generally under control in China. But you can see every two or three weeks, there's kind of a small outbreak somewhere, latest one in Dalian and also in Xinjiang. So I think it's still [Phonetic] little bit cautious.
But the good news is, finally, the most affected sector, which is supposed to be travel and entertainment is also coming back to normal. Now you can see on even Chinese news that the government is encouraging domestic tour groups and also cinemas are operating or kind of back in business although not at the full capacity. So I think we are improving, but we still want to wait and see if the pandemic comes back even in small outbreaks whether [Phonetic] that's under control.
In terms of U.S.-China relationship, I think this is-if you're in China, you see that every day on China news. So, it's actually very well broadcast. And I think this does affect people's expectation in terms of economic growth and also certain of these tensions tend to reduce confidence. So, would it affect any specific sectors? I don't think so. I think, in general, it's just the confidence level is being affected. So people want to cautious. We're not stopping, but we want to be moving very cautious and very slowly.
Alicia Yap -- Citigroup -- Analyst
Great. Thank you. Thank you, Rick. Thank you, Kathleen.
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-founder
Thank you, Alicia.
Operator
Thank you. Your next question comes from Eddy Wang from Morgan Stanley. Please go ahead.
Eddy Wang -- Morgan Stanley -- Analyst
Hi. Thank you, Rick, Kathleen and Linda for taking my question. So, my question is about the margin side. If I look at the third quarter guidance, I think, if I have tackled it correctly [Phonetic], that the margin has been at/or on mid-20 levels. So, Kathleen had mentioned that, because we will have some seasonal addition of the headcount, which could lead to a higher cost for the third quarter. But exactly for this reason, is there any other reasons lead to relativey the lower margin for the third quarter? Thank you.
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-founder
Hi, Eddy. Thank you for the question. Yes, there's a few things going on. I mean, I think one of the things that we've tried to highlight is the fact that this year has been an extraordinary year with the COVID-19 disruption to business. But having said that, we still believe in the longer-term potential, the growth of the industry at large, and that we continue to want to invest and making investments in technology and products or services to introduce new services. So, within, our cost structure fee, while we have been careful not to cut away staffing costs to maintain the current business, but then at the same time have actually accelerated some investments in our pivots to some of the new product introductions.
And that includes things like, obviously we talked about the fact that historically, more of our online --- sorry more of our training offerings have been on offline format, but we've actually been investing to introduce and create more content and services work in that segment online as an example of some of the investments we're making. And so that is the reason why that we believe that there's some acceleration in the cost in terms of just making additional investments in people and technology to ensure that we still have the sort of the pipeline of products coming online. So we didn't want to cut away and to not make those investments now, even though that means that there will be some margin implications for the company.
Eddy Wang -- Morgan Stanley -- Analyst
Got it. Thank you.
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-founder
Thank you.
Operator
Thank you. Your next question comes from Tian Hou from T.H. Capital. Please go ahead.
Tian Hou -- T.H. Capital -- Analyst
Good morning, management. Just really want to get some job search[Phonetic] curve from you guys. So, from your customer front, which industry sector you see like are hiring aggressively or the job growth outspending and much faster than others? Which sectors are actually still stuck in late [Phonetic] and which sectors are already back to normal? So, that's number one.
Number two, to really cope with the post the coronavirus damage and just for the different sectors, and to hire to recruit the potential customers, do we need a different kind of skill set to do the sales, the sales cycle?
And then the third is, as we cannot really travel as what we did before [Phonetic] so in terms of effectiveness of our sales, do you see the sales cycle become longer than before? So, that's the two questions. Thank you.
Rick Yan -- Chief Executive and President, Director, Co-founder
Yes, I think in Kathleen's comments, she already mentioned that there are some industries performing better like real estate, biopharma, medical devices and construction. So, I think that this is what we're seeing. If you want to say which sector didn't perform as well as others, maybe more multinational-related companies, maybe more U.S.-related companies, because as you can tell from the U.S.-China tensions, I think U.S. companies will need to be a little bit cautious about what might come up in the next couple of months. So I think those are the sectors -- some industry sectors are doing better than, in general, maybe multinational companies and especially U.S. companies tends to be a little bit slower.
In terms of skills for our sales team, I think it's the same. We focus on recruitment. We help companies to hire talent. So, it doesn't matter which industry because we are a general information platform. So, I don't see any kind of skill difference in that sense. I think we are more an HR and recruitment expert than an industry expert, put it this way.
On your final question in terms of travel whether that would extend the selling cycle. Also I don't think so, I think it was a factor certainly affected in the first quarter and the beginning of the second quarter, when there's no meeting or contact can be made. It probably affects when you are doing new customer acquisition. When you try to get to know a new customer, a face-to-face meeting is the most effective approach. But for existing customers, we serve hundreds of thousands of customers and some of them we've been serving them for years. I don't think that's a key issue. I don't think that really affects the sales cycle.
Also, for the new generation people that were born after '95, they're so used to online tools, be it video interviewing or just We Chat, communication. We see very, very little, if any, impact in terms of the extended selling cycle. So, it's really just the confidence and the more cautious approach that we are seeing our customers are taking. I don't think it's affected by industry or affected by the way we talk to our customers.
Tian Hou -- T.H. Capital -- Analyst
Okay, thank you. Thank you. That's pretty clear.
Operator
Thank you.
[Operator Instructions]
Your next question comes from Jimmy Chen [Indecipherable]. Please go ahead.
Jimmy Chen
Hello. Hi, can you guys hear Me? Hello, can you hear me?
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-founder
Yes, we hear you.
Jimmy Chen
Okay, great. Thanks. I was just checking. Just couple of questions. First in terms of the recovery in online recruitment revenue, should we be seeing that as a lagged [Phonetic] number that coming out of on your balance sheet items and then from customers? Are those two items-should those two items be basically sequentially linked? All right, very boring and chunky question[Phonetic].
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-founder
Sorry, I'm not sure I heard your question correctly. Something about lag. I couldn't hear you. You were breaking up. Hello?
Jimmy Chen
Sorry, is this better? Hello?
All right. Let me try this again. So, I'm just asking whether once the balance sheet line item advance from customers start to improve, would that be followed by improvement in the online recruitment revenue in the sequential quarters? Are those two line items basically linked?
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-founder
They have some linkages, it's not a direct link. Advance from customer actually could -- be it from contributing factor from all other product lines as well. So, I wouldn't say that's exactly the case. But in general, speaking, I would say that currently, we have had significant disruptions in the first half of the year. So it is something that we need to build back the pipeline for. So we hope to continue to see improvement and that -- obviously, if we had more advances, it would be a better sign. But that line in itself is not only related to online, I would just clarify.
Jimmy Chen
Got it. And then, in terms of our margins. So, for a business service stock start-up, I find our margins to be pretty high, especially over the last few years [Phonetic] ending extended the share of revenue coming from the other HR services, although blended margin hasn't seemed to be compressed meaningfully [Phonetic].
How does management think of what a healthy level margin is? And how do we balance between growth versus margin? Are we [Indecipherable] market and our full market share and growth rates in the market? Are we leaving money on the table by not driving more growth, probably by sacrificing certain margins?
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-founder
I can say that we would like to prioritize growth over margin overall. But I think this year situation is probably not that case that we're talking about. Because I think this year, the overall demand environment is more challenged. So I wouldn't say that that's the trade-off we're trying to make historically. And I think we've always been looking at the business on a very long-term basis and we want to look for sustainable growth. So we would want to think about having a reasonable return on investments that we make.
But this year, I would say that we've obviously not been too focused on trying to maintain certain margin levels because we don't think that's the right things to focus on for this year, because short-term cost savings may actually have disruptions on our product development or new product introduction. So that's not what we're looking for. So I think for this year, we continue to want to invest in staffing and technology and product development, and that's what we're looking at. So we have not been trying to cut away people, [Indecipherable] preserving margins [Indecipherable].
Jimmy Chen
Yes, I understand with this year. When I look at the previous years, '17, '18, '19, it looks like really strong blended margin, it looks like other HR services are generating similar 25%, 30% level of margin versus [Phonetic] our platform and recruitment business 25%, 30% margin for a, basically, service, a variable service business seems quite high. So I just want to see if the management is targeting a 25% margin business. And if it's lower than that, then would we want to pursue that opportunity? Is that the thinking?
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-founder
I'm not sure -- I guess you can say that we're a pretty unique, in a sense, that we have pretty high margins even with the business profile that we're in. So that, relative to a lot of peers, we have higher margins. But I think that if you look at the longer term as well and not just focusing on 2017, 2018, 2019, I think what we tried to look for is firstly, healthy revenues on top line and then whatever we can achieve in terms of operating, savings or leverage, given the overall revenue growth. That's what we're targeting. So I think that's kind of how we would view it.
I'm not sure that there is anybody out there that has a similar profile to us overall in terms of the business mix. So it's difficult to make that comparison. But you're right in the sense that if you're taking a stand-alone basis, we are higher margin than most of the business services companies out there.
Jimmy Chen
Okay. And the last one is just about our strong cash level -- strong cash flow. And what are we going to do with that? We have tried M&A. But I think so far, the sizes have been small compared to your cash levels. What's the thinking there? How we're going to spend that cash and cash flow? Is there large enough acquisitions that you can find, who's willing to sell, or do we do something else with money?
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-founder
I think our views on M&A have not changed. I think we continue to look for opportunities to put money back into the business, to reinvest in the business. So I think-but in terms of what we're able to invest in or how we invest it, it really -- it's not a simple question of what we want to do in and of itself. We need to have targets that also concede that there is a value to the investment and to the combination, if you will. But we continue to be very active in looking at the marketplace for opportunities to spur growth.
Operator
Thank you. This concludes our question-and-answer session. I would now like to turn the conference back over to Rick Yan, for any closing remarks.
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: 38 minutes
Call participants:
Linda Chien -- Vice President, Head of Investor Relations
Rick Yan -- Chief Executive and President, Director, Co-founder
Kathleen Chien -- Chief Operating Officer, Acting Chief Financial Officer, Co-founder
Alicia Yap -- Citigroup -- Analyst
Eddy Wang -- Morgan Stanley -- Analyst
Tian Hou -- T.H. Capital -- Analyst
Jimmy Chen
