BOSS Zhipin: Short-term Impact of Epidemic, Turning Point Comes First After Emerging From Economic Downturn

Hello everyone, I'm Dolphin Analyst!

On the evening of November 29th, Beijing time, BOSS Zhipin.US released its Q3 2022 earnings report before the US stock market opened. Overall, the revenue and operating profit slightly exceeded the expectations of core investment banks. The revenue guidance for Q4 is still expected to decrease YoY, but the decline rate will be slower than before, which is still affected by the spreading epidemic throughout the country. "However, at the same time, as the economy gradually emerges from the bottom, the recruitment demand of small and medium-sized enterprises will quickly rebound. Therefore, BOSS Zhipin's performance recovery pace will be faster than its peers."

"Core Indicators for Q3:"

"1. Strong demand for job seekers in user indicators:" MAU 3240 million in Q3, with a net increase of 5.9 million QoQ. There were 3.7 million paid corporate users, with a net loss of 100,000 QoQ."

Based on the combination of both data, the increase in MAU is mainly due to the increase in active job seekers. On the one hand, restoration of registration, on the other hand, due to the epidemic and unfavorable economic environment delaying the peak of job demand for job seekers (especially fresh graduates), coupled with the release of job demand after a large number of layoffs, peaked in Q3.

"2. Slight Revenue Recovery:" 11.79 billion in Q3, down 2.7% YoY, better than guidance and market expectations. Q4 guidance is weaker due to the further serious damage to small and medium-sized enterprises caused by the national epidemic, but it is basically in line with market expectations.

Specifically, nearly 99% of the online recruitment services (To B) have seen a slowdown in the decline in proportion. Other revenues (To C) quickly slid to -3.6% (vs Q2 20%) due to the impact of the economy on the payment power of job seekers in the context of increased activity for job seekers.

"3. Cash collection has increased:" 1.24 billion in Q3, with a YoY growth rate turning positive to 1.4%, which may be related to contracts signed with newly added corporate users, but the recognized revenue in the same period did not sharply increase QoQ, which can reflect employers' cautious and hesitant hiring decisions in the past quarter.

"4. Marketing expenses have been compressed beyond expectations, but will explode in the next quarter:" In Q3, the gross profit margin continued to decline slightly, but sales expenses continued to be restrained, while research and development, and administrative expenses declined QoQ. However, it is worth mentioning that BOSS Zhipin became one of the sponsors of the 2022 Qatar World Cup in Q4, with sponsorship fees reaching as high as 100 million, according to reports. In addition, the Chinese New Year holiday came early this year, and the "Spring Recruitment" season will also catch up in the year-end. It is estimated that the marketing expenses in Q4 will explode. However, on the other hand, this World Cup will be held just six weeks after the Chinese New Year. Therefore, the investment in "Spring Recruitment" in Q1 may not be as high, which means the profit margin in Q1 is expected to be better than in previous years.

"5. As of the end of Q3, the company had a cash balance + short-term investment of 13.9 billion yuan, with no borrowings or debts. The operating cash flow in Q3 was approximately 370 million, and the overall cash flow was relatively healthy, without the risk of diluting equity through short-term financing."

"Dolphin Analyst's Viewpoint"

In the short term, BOSS Zhipin is difficult to escape the influence of macroeconomic cycles. Moreover, because BOSS Zhipin has a higher proportion of small and medium-sized enterprise clients, the impact of the epidemic will be more severe than on other recruitment platforms (such as Liepin, which mainly serves high-end positions). But with continuous optimizations and adjustments to epidemic prevention and control measures in recent times, when the economy emerges from the bottom of the valley and moves towards a rhythm of recovery and expansion, the high flexibility of small and medium-sized enterprises' recruitment demand elasticity will be higher, and large enterprises, due to organizational structure reasons, may not adjust their business decisions as quickly. Therefore, standing at the turning point of recovery, it is an opportunity for BOSS Zhipin to obtain excess growth dividends.

In the medium and long term, the trend of recruitment online will not change, especially since the penetration rate of the blue-collar market is currently low, and the potential market in the future is broad. BOSS Zhipin's flexible pricing method is also more suitable for blue-collar recruitment, and can benefit from industry dividends. The long-term perspective mainly focuses on whether the competitive pattern of BOSS Zhipin has changed:

Traditional online recruitment platforms are not very suitable for Internet traffic games. As we mentioned in "BOSS Zhipin: The Ultimate Boss of the Recruitment Industry?", except for some algorithmic advantages, BOSS Zhipin's product features and business models are more adaptable. For example, its biggest feature, the "direct chat" function, has a business model that is more in line with its direct chat card and other props payment, while traditional players, because they do not want to give up the stable business of selling resumes, still mainly provide supporting functions when launching direct chat services, and have not directly monetized them.

In short, they still play the role of information intermediaries, but BOSS Zhipin, like Internet companies, does traffic business and provides platform functions. Therefore, the more traffic, including the recruitment needs of both parties, and the more active the market, the more dividends BOSS Zhipin can obtain.

After the registration was unfrozen in the third quarter, active users quickly rebounded. According to third-party data (Questmobile), BOSS Zhipin's user growth rate in the third quarter was significantly better than that of Zhilian Recruitment, while Liepin did not increase but instead decreased, which can reflect BOSS Zhipin's product advantages.

As an app doing traffic business, Kuaishou has begun to enter the blue-collar recruitment market this year, launching "Kuaiqin" live recruitment function. In the view of Dolphin Analyst, the short-term impact on BOSS Zhipin is limited. In the medium and long term, if Kuaishou has a higher degree of improvement in the recruitment infrastructure, it may have a certain impact on BOSS Zhipin's traffic penetration in the blue-collar market and then affect potential market share.

Q3 earnings report review

1. After the registration was unfrozen, the number of users increased significantly, and enterprise payment declined in the short term.

In the third quarter, BOSS Zhipin's MAU reached 32.4 million, with a net increase of 5.9 million on a month-on-month basis, mainly benefiting from the landing of network security reviews and the recovery of new user registrations. In addition, due to the epidemic in the second quarter, it may have delayed the job search cycle for job seekers. BOSS Direct Recruitment's paid enterprise user base weakened MoM, reflecting the impact of the economic downturn during the pandemic. However, the MoM ARPU for each enterprise user remained stable, indicating that the previous price increase's effects have been digested.

It's worth mentioning that the average spending power of individual job seekers decreased while remaining active based on income from other sources in the job market in the third quarter. Apart from users being less likely to spend money because their proficiency with the platform was not deep enough, there was also a significant correlation with the current economic environment.

Secondly, revenue exceeded expectations, but guidance for Q4 is still impacted by the pandemic.

Q3's total revenue was 11.8 billion, a YoY decrease of 2.74%, exceeding the upper limit of the guidance interval given by the company the previous quarter. Based on the poor macroeconomic recovery, the investment bank's expectations were not high.

Guidance for Q4 is between 1.05-1.09 billion, a YoY decrease of 3.73% and YoY flat respectively, basically in line with market expectations. However, in the Dolphin Analyst's opinion, given the current poor market environment, this guidance is not too bad.

With the unexpected pandemic prevention and control adjustments over the past two days, Dolphin Analyst believes that BOSS Direct Recruitment's improvement efforts for Q4 and next year are expected to exceed the guidance, especially in the early stages of economic recovery. Small and medium-sized enterprises, especially offline blue-collar enterprises with serious damage, are also one of BOSS Direct Recruitment's main clients. Due to their flexible employment arrangements, their elasticity is higher in the early stages of economic recovery. According to the phone meeting, blue-collar users account for 30% of BOSS Direct Recruitment's paying customers; blue-collar enterprise's paid revenue accounted for 26% in Q3. Among the anticipated 100 million customers to be attracted in the next three years, two-thirds will be blue-collar workers.

Q3 cash receipts were 1.238 billion, a significant increase MoM, and YoY growth returned to positive territory. This may be related to signing contracts/pre-purchasing props with newly added enterprise users. However, the revenue confirmed in the same period of Q3 did not significantly increase MoM, indicating that companies were still hesitant regarding recruitment in the past quarter. Nevertheless, this cash income reflects potential income for enterprises after the resumption of recruitment.

In terms of revenue structure, To B network recruitment services still account for as much as 99%, so the demand for enterprise recruitment is the main factor affecting BOSS Zhipin's performance. In the third quarter, the environment was that job seekers had strong demand but no money in their pockets, while recruiters were short-term cautious and hesitant, but still had plans and expectations for recruitment expansion within a year (generally annual contracts).

Three

Costs have shrunk compared to the previous quarter, and profitability continues to recover

The gross profit margin decreased slightly in the third quarter, possibly due to increased investment in bandwidth and servers. Operating expenses all decreased compared to the previous quarter, with marketing expenses also reducing year on year, with customer acquisition expenditures lower than the core investment bank's expectations.

Excluding stock incentive expenses, the Non-GAAP index shows that sales costs decreased by 28% year on year, while other costs continued to increase, reflecting ongoing personnel investment in product technology maintenance and upgrades.

However, in the fourth quarter, due to the sponsorship of the World Cup (according to news reports, sponsorship fees are about RMB 100 million), and the Chinese New Year holiday coming early this year, advertising spending is expected to increase earlier. Dolphin Analyst believes that because of the investment effect of the World Cup, BOSS Zhipin may reduce its investment in Chinese New Year advertising.

In other words, although the expenses may cause unattractive earnings in the fourth quarter, the profit margin in the first quarter may be better than usual.