Third Quarter 2019 Financial Highlights:
Commenting on the results, Rick Yan, President and Chief Executive Officer of 51job, said:
"The diverse nature and strength of our proven, integrated HR solutions model enabled us to maintain solid profitability in the third quarter. Although near-term hiring sentiment remains weak and has negatively affected our online recruitment business, the resiliency of our other HR services area has seen consistent progress in employer engagement in these challenging market conditions of 2019. As we wrap up the year, we will continue to lay the groundwork for 51job's long-term successful development with a disciplined focus on executing our strategic plan: to deepen customer relationships across the entire talent management value chain, to improve user experience and effectiveness, and to expand our HR ecosystem with new innovative products, technology and partners."
Third Quarter 2019 Unaudited Financial Results
Net revenues for the third quarter ended September 30, 2019 were RMB989.0 million (US$138.4 million), an increase of 3.6% from RMB954.6 million for the same quarter in 2018.
Online recruitment services revenues for the third quarter of 2019 were RMB633.4 million (US$88.6 million), representing a 2.4% decrease from RMB649.3 million for the same quarter of the prior year. The decline was due to weak macroeconomic conditions and soft hiring demand by employers in China in 2019. The estimated number of unique employers utilizing the Company's online services decreased 14.1% to 313,687 in the third quarter of 2019 compared with 365,386 for the same quarter of the prior year, primarily due to reduced recruitment need or inactivity expressed by smaller-sized customer accounts. However, average revenue per unique employer increased 13.6% in the third quarter of 2019 as compared with the same quarter in 2018, driven by the Company's up-selling efforts and focus on sales opportunities with larger-sized customer accounts. The estimated number of unique employers in the third quarter of 2019 reflects those employers currently assigned a unique identification number in the Company's management information systems and does not include employers utilizing Lagou.com.
Other human resource related revenues for the third quarter of 2019 increased 16.4% to RMB355.6 million (US$49.7 million) from RMB305.4 million for the same quarter in 2018. The increase was primarily due to greater usage and growth of training, assessment and business process outsourcing services.
Gross profit for the third quarter of 2019 was RMB682.3 million (US$95.5 million) compared with RMB684.7 million for the same quarter of the prior year. Gross margin, which is gross profit as a percentage of net revenues, was 69.0% in the third quarter of 2019 compared with 71.7% for the same quarter in 2018. The increase in cost of services was primarily due to higher employee compensation expenses as well as seasonal staff additions in preparation for the upcoming peak campus recruitment period in the fourth quarter.
Operating expenses for the third quarter of 2019 increased 2.7% to RMB425.5 million (US$59.5 million) from RMB414.1 million for the same quarter in 2018. Sales and marketing expenses for the third quarter of 2019 increased 0.7% to RMB325.8 million (US$45.6 million) from RMB323.4 million for the same quarter of the prior year. General and administrative expenses for the third quarter of 2019 increased 9.9% to RMB99.7 million(US$14.0 million) from RMB90.8 millionfor the same quarter of the prior year primarily due to higher employee compensation expenses, in particular share-based compensation, as well as a larger provision for doubtful accounts.
Income from operations for the third quarter of 2019 decreased 5.1% to RMB256.7 million (US$35.9 million) from RMB270.5 million for the third quarter of 2018. Operating margin, which is income from operations as a percentage of net revenues, was 26.0% in the third quarter of 2019 compared with 28.3% for the same quarter in 2018. Excluding share-based compensation expense, operating margin would have been 29.5% in the third quarter of 2019 compared with 31.4% for the same quarter in 2018.
The Company recognized a gain from foreign currency translation of RMB31.4 million (US$4.4 million) in the third quarter of 2019 compared with a loss of RMB67.1 million in the third quarter of 2018 primarily due to the impact of the change in exchange rate between the Renminbi and the U.S. dollar on the Company's U.S. dollar cash deposits.
Other income in the third quarter of 2019 included local government financial subsidies of RMB9.3 million (US$1.3 million) compared with RMB1.2 million in the third quarter of 2018.
Net income attributable to 51job for the third quarter of 2019 was RMB300.2 million (US$42.0 million) compared with RMB785.4 million for the same quarter in 2018. Fully diluted earnings per share for the third quarter of 2019 was RMB4.44(US$0.62) compared with RMB5.16 for the same quarter in 2018.
In the third quarter of 2019, total share-based compensation expense was RMB34.8 million (US$4.9 million) compared with RMB29.2 million in the third quarter of 2018.
Excluding share-based compensation expense, gain/loss from foreign currency translation and change in fair value of convertible senior notes, as well as the related tax effect of these items, non-GAAP adjusted net income attributable to 51job for the third quarter of 2019 was RMB303.7 million (US$42.5 million) compared with RMB333.1 million for the third quarter of 2018. Non-GAAP adjusted fully diluted earnings per share was RMB4.49 (US$0.63) in the third quarter of 2019 compared with RMB5.09 in the third quarter of 2018.
As of September 30, 2019, cash and short-term investments totaled RMB10,177.9 million (US$1,423.9 million) compared with RMB8,834.2 million as of December 31, 2018.
Based on current market and operating conditions, the Company's net revenues target for the fourth quarter of 2019 is in the estimated range of RMB1,080 million to RMB1,120 million (US$151.1 million to US$156.7 million). 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 gain/loss from foreign currency translation. The Company is 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. Excluding share-based compensation expense and any gain or loss from foreign currency translation, as well as the related tax effect of these items, the Company's non-GAAP fully diluted earnings target for the fourth quarter of 2019 is in the estimated range of RMB4.45 to RMB4.75(US$0.62 to US$0.66) per share. The Company expects total share-based compensation expense in the fourth quarter of 2019 to be in the estimated range of RMB34 million to RMB35 million(US$4.8 million to US$4.9 million).
Recent Investments and Transactions
The Company has recently completed transactions to acquire minority equity interests in companies which will enhance and expand 51job's HR services ecosystem with new products and technology to employers and job seekers. These investments include approximately US$80 million for a 17.5% equity interest in CDP Holdings, Ltd., a leading provider of human capital management services delivered through a cloud-based technology platform in China, and approximately US$3 million in Fountain, a leading recruiting platform that focuses on gig and hourly service workers within the on-demand labor market in the United States.
The Company has also entered into an agreement to be a cornerstone investor in the initial public offering of Huali University Group Limited ("Huali"), a leading large-scale private higher education and vocational education group in South China. The Company will make a RMB200 million investment in Huali upon its completed listing on the Hong Kong Stock Exchange, which is expected to occur before the end of 2019.
These transactions have been or will be funded from the Company's existing cash resources.
Presentation and Reclassification of Government Surcharges
Beginning January 1, 2019, the Company's presentation of government surcharges has changed, and government surcharges have been included in cost of services. The prior year's amount of government surcharges has been reclassified to conform with the current year's presentation. This reclassification had no effect on the reported results in the consolidated statements of operations and comprehensive income.