Earnings Call Transcript - BZ Q4 2021

Operator, Operator

Thank you for joining us today for Kanzhun Limited's Fourth Quarter and Full Year 2021 Financial Results Conference Call. The call is being recorded, and I will now hand it over to Ms. Wendy Wang, Head of Capital Markets and Investor Relations. Please proceed, Wendy.

Wendy Wang, Head of Capital Markets and IR

Thank you, operator. Good evening, and good morning, everyone. Welcome to our fourth quarter and full year 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 and 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.zhipin.com. With that, I will now turn the call to Jonathan, our Founder, Chairman and CEO.

Jonathan Peng Zhao, Founder, Chairman and CEO

Hello, everyone. Welcome to our fourth quarter and full year 2021 earnings conference call. On behalf of our company, I want to express our gratitude to our users and investors for your trust and support. Let's first review our performance for the fourth quarter. We reported GAAP revenue of RMB 1.09 billion, which reflects a year-on-year growth of 69%, surpassing the high end of our revenue guidance. Our adjusted net income, excluding share-based compensation expenses, reached RMB 350 million, and we have maintained profitability for the last three consecutive quarters. Although the fourth quarter is not typically a peak season for China's recruitment market, we successfully upheld stable performance through our ongoing efforts to enhance our capabilities. Despite the challenges faced during 2021, we advanced our business with improvements in key performance metrics. Our verified user base exceeded 100 million, and GAAP revenue reached RMB 4.26 billion for the year, representing a year-on-year growth of 119%. Our calculated cash billings hit RMB 5.0 billion, marking a year-on-year growth of 98%. Our adjusted net income, excluding share-based compensation expenses, amounted to RMB 850 million, achieving our first positive full-year non-GAAP profit since our establishment. We made significant strides in various areas of our business. We first improved the service capabilities of our core business platform to enhance user experience and provide more efficient job seeking and recruitment services. We worked diligently to better understand our users’ needs, allowing us to offer more relevant job recommendations and improve user satisfaction. This resulted in stable engagement levels, even with the suspension of new user registrations since the latter half of last year. Notably, peak daily active users following the 2022 Spring Festival exceeded numbers from the same period in 2021, demonstrating our strong user retention. As mentioned in prior calls, with no new registrations, our focus shifted to better serving existing users, which has proven effective. Furthermore, we are continuously refining our services for various user groups, particularly white and golden collar users, enhancing job opportunities through various recruitment channels. The percentage of high-income users among our active users has also risen, thanks to our refined operations and wage increases among existing users. We have also made strides in the blue-collar sector. In response to inquiries about irregularities in blue-collar recruitment agencies, we implemented a solution aimed at protecting job seekers' interests. By simplifying processes and collaborating with reputable agencies, we established guidelines to ensure fairness in the industry. We are proud to announce our initiative, named the Righteous Project, which seeks to create a fair recruitment environment for all stakeholders. We have leveraged technology to create a comprehensive network of agencies while establishing new service standards in the industry. Additionally, we continually strive to improve our platform's security capabilities. Compliance with laws is fundamental, but we also prioritize user protection in our growth strategy. Our efforts in 2021 led to significant improvements in personal information protection, platform safety, and overall data security, with a boost in our security-related workforce. We have also dedicated ourselves to social responsibility, supporting various community initiatives and earning recognition for our contributions. Looking forward to 2022, we remain committed to our mission while preparing for future growth. Thank you for your continued support, and our recent $150 million share repurchase plan underscores our confidence in the business's future and our commitment to delivering long-term value. Now, I will turn the call over to our CFO, Phil, for a review of our financials. Thank you.

Phil Yu Zhang, Director and CFO

Thank you, Jonathan. Hello, everyone. Thank you for joining our earnings call today. Before I start, please note that all amounts are in RMB, and all comparisons are year-on-year unless stated otherwise. We are pleased to close 2021 with strong financial results. In this quarter, our total revenues increased by 69% to RMB 1.09 billion, exceeding the upper end of our guidance range. For the full year of 2021, our total revenues grew by 119% to RMB 4.26 billion, with online recruitment and services revenue making up about 99% of our total revenues. Our calculated cash billings rose by 24% to RMB 1.17 billion in the quarter, and increased by 98% to RMB 5.02 billion in 2021. Now I would like to delve deeper into the top line, which shows sustainable and quality growth. Despite the halt on new user registrations in early July, we experienced strong user growth in the first half of 2021. From January to June, we verified 20.7 million new users, including 3.4 million enterprise users. Our total number of verified enterprise users reached 14.9 million in the first half, marking a 79% year-on-year increase. To ensure a great user experience and to better meet the needs of our existing users, we continued to innovate with our commercial products while managing our monetization pace. Thanks to our resilient model and high user retention, both customer demand and willingness to pay remain strong, resulting in 4.0 million paid enterprise users in 2021, an 82% year-over-year increase, which significantly contributed to our total revenue growth. On the cost side, let's review the fourth quarter numbers first. Excluding share-based compensation, our total operating costs and expenses rose by 25% to RMB 726 million, leading to an adjusted operating margin of 34%. Our cost of revenue increased by 89% to RMB 150 million in the quarter, while our gross margin remained stable at 86.3%, largely due to an increase in headcount, particularly in security and operations personnel, reflecting our commitment to enhance platform security and user safety. Sales and marketing expenses grew by 16% to RMB 374 million, accounting for 34% of our total revenue, a decrease of 15.5 percentage points year-on-year, continuing our trend of improving marketing efficiency since last quarter due to reduced marketing activities during the user registration suspension. Research and development expenses saw a 31% increase to RMB 199 million, mainly driven by investments in hiring R&D talent. General and administrative expenses dropped by 81% to RMB 119 million in this quarter, largely because of RMB 533 million in share-based compensation expenses related to the issuance of Class B ordinary shares to TECHWOLF LIMITED in the same quarter of 2020. Excluding share-based compensation, our adjusted G&A expenses rose by 74%, primarily due to increased headcount. Our net income reached RMB 233 million compared to a net loss of RMB 529 million in the same quarter last year. Excluding share-based compensation, our adjusted net income was RMB 349 million this quarter, reflecting an adjusted net margin of 32%, showcasing the healthy margin profile of our core business. For 2021, our total operating costs and expenses, excluding share-based compensation, grew by 51% to RMB 3.4 billion, yielding an adjusted operating margin of 21%, an increase of 36 percentage points compared to 2020, driven by better operating efficiency. Our gross margin remained solid at 87%, with the cost of revenue rising by 131%. Sales and marketing expenses increased by 44% to RMB 1.9 billion, while R&D expenses rose by 60% to RMB 822 million. G&A expenses totaled RMB 1.99 billion for the year, mainly due to one-off share-based compensation expenses of RMB 1.5 billion related to the issuance of Class B shares to TECHWOLF LIMITED. Including share-based compensation, our G&A expenses rose by 60% to RMB 310 million. Our net loss for the year was RMB 1.07 billion. Excluding share-based compensation, we recorded a non-GAAP net profit of RMB 853 million for the full year. Our net cash generated from operating activities was RMB 535 million for the fourth quarter, totaling RMB 1.6 billion for the full year. As of December 31, 2021, our cash, cash equivalents, and short-term investments summed up to RMB 12.2 billion. Our cash reserves, along with strong operating cash flows, provide a solid foundation for our long-term sustainable growth. Now regarding our business outlook for the first quarter of 2022, we anticipate our total revenues to fall between RMB 1.1 billion and RMB 1.12 billion, indicating a year-over-year growth rate of approximately 40% to 42%, further confirming the effectiveness of our business and monetization strategy. With robust user engagement data, we are optimistic about a full recovery and accelerated growth when conditions allow. That concludes our prepared remarks. We welcome your questions. Operator, please proceed.

Operator, Operator

Our first question comes from Eddy Wang from Morgan Stanley.

Eddy Wang, Analyst

My question is about the guidance for the first quarter. We've observed that the guidance has remained strong, and we still anticipate growth from one quarter to the next. I would like your thoughts on three points. First, what is the hiring sentiment in the first quarter? The hiring outlook has been impacted by macroeconomic challenges and COVID-related restrictions. Second, we have heard reports of job cuts in the technology, media, and telecommunications sector recently. Can you share if this sector has affected us? Additionally, what is the hiring sentiment among small and medium enterprises in China for the first quarter? Lastly, what incremental operational efficiencies or efforts have we implemented in the first quarter to support this solid revenue guidance?

Jonathan Peng Zhao, Founder, Chairman and CEO

Okay. I will answer your first question regarding our guidance for the first quarter of 2022. I would like to emphasize that the first quarter of every year is a big season for recruiting because, after the Chinese New Year, many employees receive their year-end cash rewards, and they begin looking for job switches. So while the fourth quarter is not a peak season, the first quarter is a very robust season for the recruiting market. Regarding your second question on the market impact, you just mentioned that we have seen many Internet news reports about substantial layoffs of employees. We have noticed that within the Internet sector, the big companies are not very active in recruiting. However, across the whole industry, we observed that middle and small-sized enterprises remain very active; they are still hiring a lot of people. From an overall perspective on the Internet industry, we did notice significant changes.

Eddy Wang, Analyst

And you talked about the impact of COVID-19. We observed that there are two impacts of this situation. The first one is an ongoing trend – that is, more and more people are coming online for their job seeking and quitting activities. They want to use the direct chat functions to enhance their hiring efficiency. The second thing is that some industries where COVID-19 has a more severe impact – in some cities where people need to maintain social distance and stay at home, we noticed that these areas have experienced reduced hiring activities, particularly in the blue-collar service sector, where many restaurants had to shut down temporarily. Overall, last year, we were not severely impacted, and this year, from the first quarter year-to-date, we are seeing some impact in several cities and industries, but no material impact to us.

Jonathan Peng Zhao, Founder, Chairman and CEO

Your second question mentioned SMEs. This is a very interesting topic. On our platform, more than 80% are SMEs, and they have a characteristic of being very resilient; they always strive to survive. When people leave their companies, they need to hire another person immediately to stay afloat. In contrast, many large enterprises may cut their headcount or even lay off people because they lose confidence in the future. This aspect is crucial, not only for the recruitment market but also for the overall Chinese economy. SMEs provide more resilience to the economy because a large number of small job openings accumulate to create significant hiring needs, and this will bring hope to the overall market. That concludes my answer, and I will pass it to Phil.

Phil Yu Zhang, Director and CFO

I can offer some additional information. First of all, our first quarter guidance does include considerations of macro impact during the last quarter of last year. We noticed some weakness in certain industries, such as in real estate and online education, which saw revenue contributions decline. Additionally, we observed some declines in sectors such as new retail and live-streaming Internet services. However, after the Spring Festival, we noticed some weakness in the retailing industry. Despite this, we see strong demand from high-quality sectors and high-quality companies, resulting in limited macro impact on our business. Overall, our broad customer base helps reduce any macroeconomic impact.

Timothy Zhao, Analyst

Congrats on the strong results. My first question is about the competitive landscape in the online recruitment industry. As we see some of our peers have launched new initiatives, including in the blue-collar segment as well as for college graduates. Could management share your view on the latest competitive landscape and how it will evolve in 2022? My second question is regarding the R&D expenses, as the absolute amount has been growing in the past two quarters, and the percentage of revenue has declined significantly. Can management share how we should look at the R&D expenses this year? What areas are we planning to invest in, and should we expect any new products or features?

Phil Yu Zhang, Director and CFO

So I can answer your second question first. Regarding the R&D expenses, we maintained steady growth with our R&D engineer headcount during the past couple of quarters. By the end of last year, our total number of R&D engineers reached 1,140. Although we were still in the cybersecurity review, we steadily increased our R&D personnel. We believe we will continue to invest in this area to maintain this pace.

Jonathan Peng Zhao, Founder, Chairman and CEO

I would also like to add something regarding our R&D expenses and how we will allocate our budget. We will continue to hire more talented engineers and product managers to improve our capabilities. As I have mentioned, we focus on switching to more refined operations to better understand the in-depth needs of our existing users and enhance their overall experience. This is a challenging but positive endeavor. We plan to continue this path.

Phil Yu Zhang, Director and CFO

Regarding the competitive landscape, we noted that there are various enterprises within our industry taking actions in both blue-collar and white-collar services during the past half year. This is a competitive industry, and we respect our competitors. Currently, we still have a significant lead in user numbers and engagement metrics compared to our peers. We believe our focus on protecting our existing users has been paying off. Although we have over 100 million users, there are still many individuals in China who we can serve better. I'd like to update the number we provided in the third quarter last year. As a result of the cybersecurity review process, we are not allowed to grow users during that time. By the end of March 15, we recorded an accumulated number of denied user registrations at around 34 million. This indicates a strong demand in the market, and once we are cleared to grow, we believe we can significantly increase our user base.

Wei Xiong, Analyst

First question, I want to ask about our plans to quickly restore the user growth momentum once the cybersecurity review is behind us. Secondly, on the margin trend, we've seen that the fourth-quarter margin is again very solid. How should we think about the margin trend in the first quarter and through 2022?

Jonathan Peng Zhao, Founder, Chairman and CEO

I will address your first question about our growth strategy following user registration restoration. Thank you for your good wishes. Once we are cleared to grow users, our first action will be to increase our marketing expenses because boosting our user base is crucial. There is a need for job seekers to notice our platform. History shows that when people arrive at our platform, their intent is serious, but we must ensure they first notice us to convert effectively.

Phil Yu Zhang, Director and CFO

I would like to add a bit more to that. As Jonathan mentioned, once we start to grow, we will definitely ramp up our marketing activities since user growth is a crucial driver for us at this stage. However, we will spend wisely to balance top-line growth with profitability. Our profit numbers already reflected good margins in the fourth quarter of 2021, which aligns with our core margin profile. For the full year of 2022, we aim to maintain our margin situation. The first quarter typically has higher spending patterns, and this year, we also have an Olympic Games marketing campaign, so we expect the margin to be lower in Q1 but to recover in following quarters.

Operator, Operator

Due to time constraints, that concludes today's question and answer session. At this time, I'll turn the conference back to Wendy for any additional or closing remarks.

Wendy Wang, Head of Capital Markets and IR

Thank you once again for joining us today, and we sincerely apologize for the signal interruption during this call. If you have any further questions, please contact our IR team directly. Thank you.

Operator, Operator

Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.