Earnings Call Transcript - BZ Q3 2023

Wenbei Wang, Head of Investor Relations

Thank you, operator. Good evening, and good morning, everyone. Welcome to our third quarter 2023 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 operations 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 the 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, CEO

Hello, everyone. Welcome to our Third Quarter 2023 Earnings Conference Call. On behalf of the company and our employees, management team, and Board of Directors, I would like to stress our sincere gratitude to our users and investors for their trust and support. First, I would like to share with you our performance for the third quarter throughout our history. We recorded GAAP revenue of RMB 1.61 billion for this quarter, up 36.3% year-on-year. We booked RMB 1.64 billion in calculated cash billings, up 32.1% year-on-year. Our adjusted net income, which excluded share-based compensation expenses, increased by 89.6% year-on-year. Our asset operating income, which excludes other income such as financing returns, was RMB 550 million, making a quarterly record high in terms of both absolute amount and margin. Our total paid enterprise customers in the 12 months reached 4.9 million, up 32.4% year-on-year and 8.4% quarter-on-quarter, with both the total paid enterprise customer number and active user paying ratio continuing to improve. In the third quarter, the average number of monthly verified active users on the BOSS Zhipin app reached 44.6 million, up by 37.7% year-on-year with approximately 12 million newly added verified users. Our cohort accumulated newly verified users for the past few quarters of this year exceeded 40 million. During our third quarter, late November last year, we forecasted that the company would add 100 million new verified users in the next 3 years, which seems to be expected at the moment. At the same time, our user activeness, which is the average as a percentage, will remain stable at a relatively high level. In the third quarter, there were more than 135 million monthly average number of neutral achievements on the platform. The third quarter is traditionally a peak season for recruitment. The continuous increase in recruitment demand, while the number of average monthly active jobs remains stable, contributed to both achieving record highs. In terms of industry breakdown, the blue-collar industry delivered the most outstanding performance, especially the blue-collar other service sector, which was the largest second contributor in the recruitment of both job postings and revenue for this quarter, with daily active job postings for the other service sector exceeding 1 million. In other blue-collar sectors, involving more young job seekers, the supply chain, logistics, and manufacturing industries set some job categories such as transportation, warehousing, and workers also boosted overall increase. These drivers raised the blue-collar industry revenue contribution to nearly 35%. Other industries such as consumer automotive, aftermarket, new energy, internet, lifestyle services, and raw materials related to machinery manufacturing sales also grew fairly on a quarter-on-quarter basis, while the overall internet industry maintained growth momentum on a quarterly basis. In contrast to the first half of the year, the recovery of demand from larger enterprises increased relatively more quickly in this quarter in terms of the number of newly added and active job positions. Future pricing with more than 2,000 inquiries is moving faster. From a city level perspective, second-tier and lower-tier cities continued to outperform. The decrease in both the number of job positions and income. In terms of corporate social responsibility, this quarter, we focused on and dedicated to improving the employment of typical groups of people, particularly workers. We provided public recruitment activities, nearly 5,000 enterprises providing more than 100,000 positions for this group of job seekers, covering more than participants. One more thing to add: with the company's Board approval, we declared a special cash dividend for the first time. This is a return to our shareholders for their firm support as our profitability continues to be stable and improve. The amount is USD 0.09 per share, which totals approximately USD 80 million as an accredited dividend amount. This is expected to be distributed in mid to late December this year. That's all for my part of the call; I will now turn it over to our CFO for the review of our financials. Thank you.

Phil Yu Zhang, CFO

Thanks, Jonathan. Hello, everyone. Now let me walk you through the details of our financial results for the third quarter 2023. We achieved strong financial performance in the past quarter with all key figures exceeding our expectations. Our revenues exceeded the high end of our guidance to RMB 1.31 billion, representing a year-on-year growth of 40%. Our calculated cash release reached RMB 1.64 billion, up 32% year-on-year and 1% quarter-on-quarter. The good results were mainly due to strong user growth and healthy user engagement as well as recovery in recruitment demand during the quarter. The number of customers for the 12 months ended September 30 reached another new high at 4.9 million, indicating an improved paying ratio level among active enterprise users. Despite a slight decline in overall ARPPU, which stands for average revenue per paying user, this was mainly dragged down by the increased revenue contribution from small-sized accounts. We are pleased to see that the ARPPU of key accounts shows a sequential growth trend, and more importantly, recruitment demand is improving among large enterprises. Moving to the cost side, total operating costs and expenses for this quarter were RMB 1.36 billion, up 40% year-on-year. Excluding share-based compensation, our adjusted operating costs and expenses were RMB 1.07 billion, relatively stable from last quarter and up year-on-year. The quarterly adjusted operating margin remains at a record high, improving from 25.7% in the same period last year to 34.2% this quarter, up by 8.5 percentage points year-on-year. This strong profitability once again proves our efficiency, effective monetization model, and powerful operating leverage. Our cost of revenues increased by 33% year-on-year to RMB 268 million this quarter, representing a gross margin of 83.3%, up by 1.5 percentage points quarter-on-quarter. Our gross margin has improved since the first quarter this year, mainly due to the recovery of the revenue growth momentum alongside effective cost control. Our sales and marketing expenses were RMB 457 million, up 15% year-on-year. Adjusted sales and marketing expenses were RMB 389 million, up 10% year-on-year, with this increase primarily due to higher sales-related employee expenses and enhanced advertising activities. Notably, the ratio of selling and marketing expenses continues to decline while our trailing 12 months paid enterprise customers and MAU continue to grow, showcasing our enhanced marketing efficiency and superior economies of scale. Our R&D expenses in this quarter increased by 43% year-on-year to RMB 440 million, and our adjusted R&D expenses were RMB 306 million, up 39% year-on-year, primarily due to further investments in talent and technology development, especially in areas related to AI technology. Our G&A expenses increased by 41% year-on-year to RMB 219 million in this quarter, with adjusted G&A expenses remaining relatively stable compared to last year. Our net income was RMB 426 million this quarter, more than doubling from the same quarter last year, and our adjusted net income set a new record at RMB 740 million with an adjusted net margin of 44%, up 12 percentage points year-on-year. Net cash provided by operating activities grew by 122% year-on-year to RMB 830 million for this quarter, mainly contributed to increased cash collection from operations. As of September 30, 2023, our cash, cash equivalents, time deposits, and short-term investments were RMB 4.8 billion, and long-term investments in wealth management products were RMB 2.3 billion, totaling RMB 15.1 billion. Supported by our ample cash reserve and outstanding cash generation capabilities, we will strive to deliver sustainable returns to our shareholders. Now for our business outlook: for the fourth quarter of 2023, we expect our total revenues to be between RMB 1.51 billion and RMB 1.55 billion, a year-on-year increase of 40% to 43%. Based on our current progress, we expect the cash balance in Q4 to continue to grow sequentially, mainly due to contributions from key accounts. With that, that concludes our prepared remarks. Now we would like to answer questions. Operator, please go ahead.

Operator, Operator

Your first question will come from Eddie Wang of Morgan Stanley.

Eddie Wang, Analyst

My first question is regarding the job market trend in the third quarter and in the fourth quarter so far. Have you seen any continued improvements in terms of the supply-demand dynamic between job seekers and employers? And what have you seen regarding the recovery of key accounts in the third quarter and so far? My second question is about the special dividend we have just announced. What considerations factored into your decision to adopt this special dividend plan at this time? And is there any further plan to increase shareholder returns in the future?

Jonathan Peng Zhao, CEO

Thank you for your question. Regarding your first question, in October and November, we observed a continual recovery in recruitment demand, which is encouraging. Typically, the third quarter is a peak season for recruitment known as 'golden September and October', and this year it performed well. Although the fourth quarter may see some pullback in demand, the overall trends remain positive. For larger companies, we've noticed an increase in job postings and their willingness to post more jobs, but their full recovery will take time. Smaller companies continue to show strong trends. It's important to note that in the third quarter, the average number of monthly active recruiters reached a record high, indicating a recovery in overall demand. Regarding your second question about the dividend payment, we have consistently received strong support from our shareholders and want to share our success with them through dividends. This decision, which reflects our robust operating cash flows, comes as we currently have over RMB 15 billion in cash and related management products. This solid financial position gives us the confidence to proceed with the dividend payment. Additionally, we've announced two share repurchase programs, where we've bought back a significant number of shares under certain conditions. This is another way to return value to our shareholders, and we will continue to pursue such initiatives.

Operator, Operator

The next question comes from Timothy Zhao of Goldman Sachs.

Timothy Zhao, Analyst

Congrats on the very strong results as well as the strong outlook. I have two questions. First, could Kanzhun share more detailed color regarding the recruitment demand for different types of individual users, including blue-collar, white-collar, and college students in the third quarter and so far in the fourth quarter? Besides on the enterprise side, how did the job postings and payment behavior perform in the quarter? And what is our outlook for the fourth quarter? My second question is regarding blue-collar; it's noted that the company has made multiple progress in the blue-collar job posting revenue year-to-date, including, as you mentioned, contributing close to 35% of revenue in the third quarter. Could management share or elaborate on your strategy to further penetrate the blue-collar sector and what potential business models are being considered?

Jonathan Peng Zhao, CEO

Yes. Thank you for your question. Regarding the first one, we have witnessed that some industries performed relatively well in the third quarter, especially in the urban service industry, which contributed to the growth of both enterprise users and revenue for blue-collar jobs. The reason behind this is quite straightforward: industries that involve face-to-face communications have had better recovery conditions compared to last year, allowing for easier customer acquisition. Other industries that have seen improvement include transportation, logistics, automotive, new energy, and environmental protection. In terms of active online job postings for the third quarter, which is a strict metric indicating how actively recruiters are recruiting, we noted that the urban service industry grew by over 13% sequentially, with restaurant and retail sectors growing over 20%. Among logistics, transportation, and warehousing industries, active online job postings grew more than 35% quarter-over-quarter. As for white-collar industries, new energy and automotive aftermarket demand has noticeably recovered. Notably, there has been an increase in job opportunities related to artificial intelligence technology, and general job positions in internet technology have shown significant growth as well. Regarding the second question about our strategy for further penetration into the blue-collar market and potential monetization models: our current coverage among blue-collar users and user satisfaction rates are satisfactory. We do not have more aggressive plans to accelerate this process, but we are continuously enhancing our service capabilities for blue-collar users. For example, we have started to provide cost-effective services for users in the manufacturing sector.

Operator, Operator

The next question comes from Wei Xiong of UBS.

Wei Xiong, Analyst

My first question is regarding the competitive landscape. Given the uncertain macro situation and the current market conditions, is it the case that existing recruiting platforms lack growth potential, while new entrants seem to be making slow progress, which strengthens our market leadership? Looking ahead to next year, how do we expect the competitive landscape to change in the online recruiting market? My second question is could management share more details on the paying ratio as well as ARPPU trends on our platform, particularly regarding key accounts? How is ARPPU growth trending recently?

Jonathan Peng Zhao, CEO

Thank you for your question. Regarding the first one about the competitive landscape, the overall situation is relatively stable, with no significant changes in the third quarter. However, in the past two years, various pressures internally have highlighted the strategic advantages of each company. We have seen our company maintain a competitive edge as we cater to enterprises' goals through our strategic plans directly. Companies adept at providing services to high-end talent are also recognized. Every enterprise possesses unique characteristics, and I believe that will continue. That answers your question regarding the competitive landscape.

Phil Yu Zhang, CFO

Okay. So regarding your second question on the ARPPU trend. In the quarter, we recorded 4.9 million of trailing 12 months paid enterprise customers. As you may recall that last quarter, the number was 4.4 million. We have seen a roughly 0.5 million increase in paid enterprise customers. The main reason for this growth is that overall user growth remains strong, and many new users prefer to purchase our services through the self-serve online portal. This trend has helped increase our overall paid enterprise customer base. In terms of the paying ratio, we have seen an upward trend among smaller accounts. We believe that as users become more familiar with our services, they will increase their usage. We have focused on converting them into heavier users of our services through offline contract sales. As a result, some online active users and paid users will continue to grow, improving our paying ratio. Moreover, the ARPPU for small and medium-sized enterprises remained stable in the quarter. In contrast, large corporates have seen increased ARPPU due to rising recruitment demand. However, smaller enterprises generate a larger revenue contribution to the overall business. Thus, while ARPU for smaller clients is good, the overall land area ARPU has seen a slight decline. This summarizes the current ARPPU situation in quarter three.

Operator, Operator

The next question comes from Robin Zhu of Bernstein.

Robin Zhu, Analyst

My first question is how does management evaluate the magnitude and major growth investments for 2024? How does the company plan to balance growth versus margin expansion as we move forward? My second question is about the state of renewal discussions with key accounts heading into next year. If possible, could management share any outlook on '24 growth in ARPPU and retention?

Phil Yu Zhang, CFO

Okay. So I'll answer the first question. We previously announced our goal to achieve 100 million new users in the next 2 to 3 years. Based on this year's progress, we are on track. By the end of October, we achieved 40 million verified new users. We aim for strong results in new user acquisition. Importantly, in the third quarter, we achieved a historical high in our operating margin. This indicates that we managed to grow profitably per our strategy. Next year, we will continue our efforts to acquire new users but will carefully balance this with our profitability goals. Our approach will focus on effective marketing spend while pursuing growth in new users.

Jonathan Peng Zhao, CEO

Yes. I will take your second question. For the outlook for renewals in 2024, referring back to our forecast of adding 100 million new verified users, we have already achieved 40 million by the end of September but are not planning to change our target at this moment. This is due to our commitment to the quality of enterprise-side users and their performance and continuing to address the job acquisition aspect to achieve a better balance in supply and demand. In terms of how the enterprise side performed, we don't have exact figures at this moment, but based on the recovery trend we observe monthly in October, we expect to maintain our leading position in daily active users and user engagement percentage in the market. Also, we anticipate larger enterprises will renew their contracts as they allocate their budgets for next year, leading to positive trends in the coming months. However, it is important to note that full recovery in the demand from larger companies will still take some time.

Operator, Operator

The next question comes from Yang Bai of CICC.

Yang Bai, Analyst

The first question is we have seen the company's gross margin has rebounded in the last 2 quarters. What are the company's expectations for future gross margin changes? The second question is could the company provide more updates on plans for new products and businesses, such as the progress regarding large language model globalization and other new initiatives?

Phil Yu Zhang, CFO

Well, I'd like to address the gross margin question. Our gross margin has improved over the past two quarters due to faster revenue growth and controlled, stable costs. In the fourth quarter, we expect that due to seasonal reasons, Q4 is traditionally a low revenue quarter, thus gross margin may be affected by this lower revenue. However, for 2024, we anticipate that, assuming revenue grows, the gross margin will recover based on this year's progress as we plan to maintain non-growth in costs while potentially achieving faster revenue growth, ensuring further recovery of the gross margin.

Jonathan Peng Zhao, CEO

Regarding new initiatives, we believe we have established an effective user service and revenue model. We aim to expand our services to other developed countries and regions, which we are currently executing, with hopes of establishing a contributor to growth that does not rely on revenue within the next 3 to 5 years. In relation to large language models, a topic of great interest among investors, we have made significant investments in this area since the beginning of this year and will continue to focus on it. Additionally, I want to mention that one of our partners recently opened the source code for this model, and we have seen significant results from this effort. We believe we are already among the top 10 players in this sector domestically.

Operator, Operator

Due to time constraints, that will conclude today's question-and-answer session. At this time, I will turn the conference back over to Wenbei Wang for any additional closing remarks.

Wenbei Wang, Head of Investor Relations

Since there are no closing remarks, that concludes today's question-and-answer session and today's conference. Thank you for attending today's presentation, and you may now disconnect.