Kanzhun Ltd Q3 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Kanzhun Limited Third Quarter 2021 Financial Results Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a Q&A session. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Wendy Wang, Head of Investor Relations. Please go ahead, ma’am.

Thank you, operator. Good evening and good morning everyone. Welcome to our third quarter 2021 earnings conference call. Joining me today are our Founder, Chairman and CEO, Mr. Jonathan Peng Zhao; and our Director and CFO, Mr. Phil Yu Zhang. Before we start, we would like to remind you that today’s discussion may contain forward-looking statements, which are based on management’s current expectations and observations that involve known or unknown risks, uncertainties, and other factors not under the company’s control, which may cause actual results, performance or achievements of the company to be materially different. The company cautions you not to place undue reliance on forward-looking statements and does not undertake any obligation to update this forward-looking information except as required by law. During today’s call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. In addition, a webcast replay of this conference call will be available on our website at ir.jpn.com. With that, I will now turn the call to Jonathan, our Founder, Chairman and CEO.

Hello, everyone. Welcome to our third quarter 2021 earnings conference call. On behalf of our entire company, I would like to express our sincere thanks to our users and investors for your trust and support. The third quarter marks the first complete reporting period since our company went public, making it a special time for us. As many of you know, we suspended new user registrations on the BOSS Zhipin app starting July 5, 2021, to comply with the cybersecurity review. This suspension has posed significant challenges to our team, but we have seized this opportunity to enhance our service for existing users and strengthen our core competencies, achieving substantial progress over the last month. I believe that while an enterprise aiming to grow might not necessarily gain strength, a company that becomes stronger has a better chance of growing bigger. Let’s start with our key numbers. We achieved solid results in the third quarter, recording total revenue of RMB1.21 billion, which is a 105% year-on-year increase, and our adjusted net income, excluding share-based compensation, was RMB385 million. Our average monthly active users on the BOSS Zhipin app reached 28.6 million, marking a year-on-year growth rate of 28.6%. The suspension of new user registration in the third quarter has impacted our business. However, we believe our business model remains robust and effective, as shown by many key performance indicators. Firstly, our monthly active users remained stable with only a slight decrease quarter-over-quarter. Secondly, both user activity and engagement remained steady, evidenced by our daily active users as a percentage of monthly active users and our retention rates. We attribute this stability to the effectiveness of our service model, which has been developed over the past seven years and delivers valuable job-seeking and recruiting services to users, particularly for SMEs and long-term job seekers, making BOSS Zhipin a more effective platform for them. I will briefly share our initiatives during the suspension of new user registration. In early July, we launched a business optimization program to enhance service for commercial customers and introduced an existing user protection plan focusing on two areas. The first target was senior job seekers with extensive work experience, who face longer job search cycles and higher costs. We dedicated more resources to support headhunter advisors working with them. The second initiative was aimed at connecting job seekers and recruiters with better opportunities. Utilizing our recommendation algorithms and industry expertise, we focused on ensuring fair resource allocation between job seekers and recruiters on our platform, with college students and small enterprises being the primary beneficiaries. This not only improved our service capabilities but also strengthened our team's unity and confidence. We also made progress in our core strategic area of blue-collar service, expanding our advantages in urban service and increasing revenue contributions from this segment. We began actively working in the manufacturing sector to enhance job posting authentication and governance, optimizing the user experience for blue-collar job seekers. We are confident that through careful management of blue-collar intermediaries and ongoing investments in technology and verification teams, we will provide a safe and reliable job-seeking platform for blue-collar users. We are continuing to invest heavily in our platform and technology infrastructure. Our offline security verification has expanded to cover 50 cities, and combined with our online algorithms, we now verify the authenticity of over 90% of enterprise listings. We have seen significant crackdowns on non-standard recruitment practices, effectively reducing user complaints. We believe protecting job seekers' safety and experience is crucial for any online platform. Now, regarding the cybersecurity review, we are actively working with the regulator and maintaining communication. We have also strengthened our data security and privacy protection efforts in line with industry standards and evolving regulations. This foundation is vital for internet platforms in any sector and essential for enterprises to responsibly serve users, society, and investors. We confidently state that during this review period, the company has heavily invested in data security and privacy, significantly enhancing our capabilities in this area. We believe this will provide sustainable value for the company’s long-term growth. This quarter represents our first reporting period following our listing. Despite being under cybersecurity review and the inability to grow our user base, we have remained committed to leveraging technology to fulfill our social responsibilities and contribute to the growth of individuals and the businesses we support. My team and I strongly believe this internal strengthening is both necessary and meaningful. I see that the effectiveness of our business model and technological capabilities continue to hold up. The recruitment and development of our technical, security, and sales teams are growing steadily, and we have strong confidence in the future. With that, I will turn to our CFO, Phil, for a review of our financials. Thank you.

Thanks, Jonathan. Hello everyone. Thank you for joining our earnings call today. I would like to give a brief overview of our third quarter 2021 financial results, and then I will discuss our outlook for the next quarter. Before I begin, please note that all amounts are in RMB and all comparisons are on a year-on-year basis, unless otherwise stated. Our performance in the third quarter once again demonstrated our effective business model and improving leverage. Despite the suspension of new user registrations, our total revenues reached RMB1.2 billion in the quarter, up 105% year-on-year, beating the high end of our guidance range. Our calculated cash billings increased by 62% to RMB1.2 billion, with online recruitment services revenue accounting for more than 99% of our total revenues. We are pleased with the rapid growth of our paid enterprise customers, which reached a new record of 4.0 million in the 12 months ended September 30, 2021. Moving on to the cost side, total operating costs and expenses were RMB903 million for the quarter, an increase of 62%, resulting in a positive operating income of RMB311 million. Our cost of revenues increased by 125% to RMB154 million in the quarter, with gross margin remaining robust at 87%. Sales and marketing expenses increased by 47% to RMB416 million in the quarter, primarily due to our increased headcount and enhanced brand advertising activities. What is noteworthy is that our sales and marketing expenses represented 34% of our revenue in the quarter, down by 13.7 percentage points year-on-year, which was partly due to our continuing improvement in marketing efficiency but also a result of reduced marketing expenses as we continue to be suspended from accepting new user registrations. Research and development expenses increased by 50% to RMB209 million. General and administrative expenses increased by 84% to RMB123 million, both primarily as a result of increased headcount and share-based compensation expenses. Our headcount for R&D and sales continued to grow sequentially in the quarter. We are firmly committed to continuing to invest in technology and top talent to further enhance our core competencies. Our net income reached RMB286 million in the third quarter compared to RMB33 million in the same quarter last year. Excluding share-based compensation, our adjusted net income was RMB385 million in the third quarter, translating to an adjusted net margin of 31.8%, representing a 23 percentage point improvement. Our numbers in the third quarter showcase the healthy and robust margin profile of our core online recruitment business that we believe our business can achieve as our operations mature. Our net cash generated from operating activities was RMB269 million this quarter. As of September 30, 2021, we had cash and cash equivalents and short-term investments of RMB11.9 billion. Our cash reserve gives us great confidence in our ability to execute our growth strategy, which we believe will yield considerable returns in the long term. Now for our business outlook for the first quarter, the last quarter of 2021, we expect our total revenue to be between RMB1.02 billion and RMB1.05 billion, representing a year-on-year growth rate of approximately 58% to 62%. The cybersecurity review has had a real impact on our revenues, as revenues correlate directly to our user base. The guidance for the next quarter is based on assumptions that the review will last at least until the end of December. As Jonathan just mentioned, our operating data shows that we still have a healthy user base and a stable paying ratio, and our paid customer retention ratio also remains stable. With the business and monetization model still affected, we are confident that we can return to our previous growth track as soon as we resume new user registrations in the future. That concludes our prepared remarks. Now we would like to answer questions. Operator, please go ahead with questions.

Thank you. Your first question comes from Eddy Wang from Morgan Stanley. Please ask your question.

Thank you for taking my question. I have two questions. Firstly, regarding the macroeconomic slowdown in China, do you think there’s any impact on the overall online recruitment segment and on our business for the fourth quarter and in 2022? Secondly, do you have any updates on when the cybersecurity investigation will be completed and when we can expect to resume our new user registration timeline?

I will first address your second question regarding the timeline for the cybersecurity review and when user registration may resume. Currently, we don't have a definitive timeline. However, we are actively cooperating with regulators to keep open communication in hopes of concluding the review as soon as possible. Additionally, we are enhancing our data security and personal privacy protection in line with recent regulations. As for your first question, the macro economy will certainly affect the recruiting business. However, I believe that China has many small and micro enterprises. With tens of millions of companies employing only a handful of people, the impact of the macro environment on them is relatively minimal, showcasing their resilience. Having worked in this industry for 15 years, I've observed the market's response during financial crises. For instance, if you hit five boxes with an 8-pound hammer, they will all sustain damage. Conversely, if you hit 1,000 ping-pong balls with the same hammer, likely only the top two will break while the rest remain intact. This analogy highlights how an economy with many small and micro enterprises responds differently to downturns compared to one with larger companies. Regarding the market, if the economy continues to decline, industries dominated by small and micro enterprises may experience a delay in recovery, resulting in a gradual downturn. Additionally, since our services cater to small and micro enterprises and their average spending on recruitment through our platform is limited—typically a few hundred RMB a month—we offer great value for money. Even in the current economic climate, we can still attract a significant number of users who are willing to invest in our services despite the desire to cut recruiting budgets. That's my perspective on this matter.

Our next question comes from Wei Xiong of UBS. Please ask your question.

Thank you, management, for addressing my questions. First, I would like to inquire about the competition. Considering that your capacity to grow new users has been affected in recent months, have there been any shifts in the competitive environment within the online recruitment market? Additionally, what strategies has management been implementing to sustain competitive advantages over the long term? Secondly, what is your outlook for user growth next year? If we expect new user growth to resume early next year, what would be your user growth target, and how will your user acquisition strategy influence margin and selling and marketing expenses next year? Thank you.

Thank you for your question. I will address the first part of your inquiry, and then Jonathan can expand on our competitive strategies. In terms of the competitive landscape, third-party data suggests there has been no significant change recently. We continue to have the highest number of monthly and daily active users, and the disparity between us and our competitors remains considerable. You can consult third-party market research for verification. Regarding user engagement, we maintain the highest levels of app usage frequency and duration compared to our peers. Despite the suspension of user registration this past quarter, our company is in a strong position. For your second question about user engagement during the cybersecurity review, I will share more details. Our user growth strategy has consistently highlighted a dual focus. Traditionally, we allocated $60 to growth and $40 to infrastructure, but since we could not grow our user base throughout the entire quarter, we redirected all $100 to infrastructure. This infrastructure investment focuses on two areas: first, we continue to enhance our data security and privacy protections through substantial investments in technology and expertise, where we have made significant progress. Secondly, we identified two groups of users at risk of losing access to our platform: those who are job-seeking for extended periods, usually posing higher switching costs and income potential, and job seekers and recruiters facing market disadvantages. In the past, we didn't prioritize resources for these populations due to our platform's rapid growth. However, during this phase, we have shifted our resources and efforts to support them. Our team's skills are now more effectively utilized to assist these user groups. This dual approach demonstrates our commitment to both economic and social objectives during this time. Regarding your second question about user growth target for next year, it is challenging to answer at this moment since we do not have clarity on when we will be allowed to grow our users again. Our ability to determine any targets relies on our normal operations. I believe we can't provide specific estimates currently. However, as we discussed, our business model remains valid and effective. During Q3, we managed to serve the largest groups of job seekers and employers, maintaining a healthy engagement level on our platform. Despite the cybersecurity review, we recorded 17 million potential user registrations that could not proceed. Therefore, it is clear that many users want to join our platform and are waiting for new user registrations to resume. While we cannot specify a timeline, we are poised to regain our user base rapidly once given the opportunity.

Your next question comes from Colin Liu of China Renaissance. Please ask your question.

I have two questions for management. The first one is about potential opportunities from senior job seekers or gold-collar workers. Is there any difference in revenue models for this segment compared to other businesses? My second question is about the possibility that if the cybersecurity review extends into the first quarter of next year, we might face practical time windows like the Chinese New Year and the Beijing Winter Olympics, which could further hinder new user acquisition. I’d like to know if management has any measures to address these potential challenges.

Thank you for your question. Regarding gold-collar workers, you have a sound understanding of our industry. We refer to senior job seekers as blue-collar workers. In terms of the revenue model, we are currently focused on optimizing how we better serve senior job seekers, headhunters, and enterprises posting senior openings to enhance our ecosystem. However, we do not have a clear revenue model established for this segment yet. Historically, and this continues, enterprises recruiting senior job seekers purchase the same standard products we offer. While we currently lack a distinct revenue model for these users, we believe that by providing good service to our users as we have done for the past seven years, we will create value that could lead to a new revenue model. Regarding your second question, the situation is indeed complex. If we do not resume new user registrations after the Chinese New Year and the Beijing Winter Olympics, we might encounter difficult times. Thus far, we have not devised any new strategies for user acquisition if the review continues. Our primary plan is to continue improving our infrastructure. Should the registration resume, we will consider investing in marketing aggressively while ensuring that we provide normal services.

Thank you, Operator. And thank you once again for joining us today. If you have any further questions, please contact our IR team directly or TPG Investor Relations. Thank you.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.