Puxin Limited
Q3 2018 Earnings Call Transcript

Published: 26 Nov 2018

[Operator:]

Good day and welcome to the Puxin Third Quarter 2018 Earnings Conference Call. All participants will be in listen only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I will now like to turn the conference over to Christian Arnell. Mr. Arnell, please go ahead.

[Christian Arnell:]

Thank you. Hello everyone and thank you for joining Puxin third quarter 2018 earnings conference call. The Company’s results were released earlier today and are available on the Company’s IR website at ir.pxjy.com and through PR Newswire services. On the call today are Mr. Yunlong Sha, the Company’s Founder, Chairman and Chief Executive Officer; and Mr. Peng Wang, The Financial Officer. Yunlong will give a brief overview of the Company’s business operations and highlights followed by Peng who will go through the financials and guidance. They will both be available to answer your questions during the Q&A session that follows. Before we begin, I’d like to remind you that this call may contain forward looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management’s current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors all of which are difficult to predict and many of which are beyond the Company’s control, which may cause the Company’s actual results, performance or achievements to differ materially from those in the forward looking statements. Further information regarding these and other risks, uncertainties and factors is included in the Company’s filings with the U.S. Securities and Exchange Commission. The Company does not undertake any obligation to update any forward looking statements as a result of new information, future events or otherwise accept as required under law. With that, I will now turn the call over to Yunlong. Yunlong will go through his prepared remarks in Chinese. I will translate for him in English. Please go ahead.

[Yunlong Sha:]

Hello everyone and welcome to our third quarter earnings conference call. We delivered another quarter of solid operational and financial growth as we continue to leverage our integration expertise to consolidate China’s after-school education market and further empower our schools. Net revenues during the quarter increased 60% to approximately RMB670 million as our net loss narrowed on a year-over-year basis.

[Yunlong Sha:]

Top line growth was driven by an organic increase in student enrolments, which increased 49% to over 540,000 during the quarter and in part by revenue from Global Education which reached a historical high during the quarter, its third consecutive quarter of positive revenue growth following its acquisition in August last year. At the same time, our bottom line loss narrowed as a result of our careful control over operating expenses.

[Yunlong Sha:]

The regulatory environment continues to shift around us, creating some uncertainty, but we have weathered similar situations before. We have already begun adjusting our strategy in response and are confident that we have the experience and incorporate flexibility to continue adapting. Throughout the past nine months, the government has steadily issued a series of new regulations governing the after-school education market. The regulations strengthen regulatory supervision, heightened compliance standards and standardized operations. We support the government’s new policies and believe that enhanced regulation will create a stronger and more sustainable market environment over the long-term.

[Yunlong Sha:]

Despite making no new acquisitions during the quarter, our strong financial and operational results were driven by organic growth which demonstrates just how effective we are rapidly integrating, restructuring and building a sustainable platform for long-term growth for acquired schools. This also shows just how effective our Puxin business system is, which we use to help us analyze the school’s growth potential and formulate plans to improve their performance. Leveraging PBS, we improve operational efficiency, resource utilization efficiency as well as teaching quality, both our utilization and retention rates increased significantly during the quarter as a result.

[Yunlong Sha:]

We also continue to invest in expanding our online service offerings and product mix to diversify revenue streams and create new growth drivers. We launched a number of online products during the quarter including Puxin Youke, a blended online and offline learning system, SuperKids, an online English learning platform and HQCLASS.cn, a study of broad training websites. Staff associated with our online platforms now consists of nearly 300 people. I am confident these investments will generate value for us going forward and drive future growth.

[Yunlong Sha:]

I am pleased with the solid growth we achieved this quarter. I am confident in our strategy and believe that we are well-positioned to benefit from a well-regulated market. Leveraging our extensive experience in completing acquisitions and rapidly improving operations and management of acquired schools, we will continue to focus on increasing our market share and generating long term sustainable value for our shareholders.

[Yunlong Sha:]

We announced the share purchase program this morning where senior management including myself and Peng will purchase a maximum of $10 million over the next six months with our own personal funds. This share purchase is another vote of confidence in our long-term business prospects.

[Yunlong Sha:]

With that, I would like to now turn the call over to Peng Wang, who will go over the financials. Thank you.

[Peng Wang:]

Thanks to Mr. Sha and hello everyone. Please be reminded that all amounts quoted here will be in RMB and all percentage increases will be on a year-over-year basis, unless otherwise stated. Please also refer to our earnings release for detailed information of the comparative financial performance on a year-over-year basis. So to start. Net revenues increased by 60.1% to 669.7 million from 418.4 million in the third quarter of 2017. This increase was primarily driven by increase in student enrollments. Student enrollments increased by 48.8% from approximately 366,000 in third quarter of 2017 to 444,000 in the same period of 2018. Our retention rate increased by 9.4 percentage points from 58.8% to 60.2% in quarter. Cost of revenues increased by 44.7% to 374.6 million from 258.8 million for the same period in 2017 primarily due to an increase in rental costs and teacher compensation. Non-GAAP cost to revenues which excludes share-based compensation expenses increased by 44.1% to RMB372.5 million from RMB258.4 million in the third quarter of fiscal year 2017. Gross profit was 295.1 million, an increase of 84.9% from 159.6 million during the same period in 2017. Gross margin was 44.1% when compared with 38.1% for the same period in 2017. Total operating expenses increased by 47.8% to 356.1 million from 240.9 million in the third quarter of 2017. Selling expenses increased by 68.7% to 237.3 million from 140.7 million in the third quarter of 2017. The increase was primarily due to increase in brands promotional expenses and offsetting marketing staff compensation. General and administrative expenses increased by 18.5% to 118.8 million from 100.3 million during the same period of 2017. Total share-based compensation expenses allocated to related operating cost expenses increased by 44.9% to 19.3 million from 13.3 million in the same period of 2017. The increase was mainly due to new grand options to employees in 2018. Operating loss decreased by 25% to 61.1 million from 81.4 million in the third quarter of 2017. Operating margin was negative 9.1% in the third quarter of 2018 compared with negative 19.1% for the same period in 2017. Net loss attributable to Puxin Limited decreased by 53% to 50.2 million from 107 million during the same quarter of 2017. Basic and diluted net loss per ADS attributable to Puxin Limited were 0.62 compared to basic and diluted per ADS attributable to Puxin Limited of 2.414 during the same period last year. Non-GAAP net loss attributable to Puxin Limited was 51 million compared with 70.9 million during the same period last year. Non-GAAP basic and diluted net loss per ADS attributable to Puxin Limited were 0.62 compared with 1.42 during the same period last year. As of September 30, 2018, the Company had a total cash and cash equivalence of 684.2 million compared with 164.7 million as of December 31, 2017. Starting this quarter, we’ll begin providing net revenue guidance on the quarterly basis. For the fourth quarter of 2018, we expect net revenue to be between 513 million to 535 million which represents an increase of 20% to 25% year-over-year. These forecasts reflect the Company’s current and preliminary views on the market and operational condition, which are subject to change. This concludes our prepared remarks. I'll now turn the call to the operator and open for Q&A. Operator we are ready to take questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Yu Zhang and Natalie Wu with CICC. Please go ahead.

[Yu Zhang:]

This is Yu Zhang behalf of Natalie. We have two questions. The first one is on your Q4 guidance. I'm wondering what's implied year-over-year growth rate of your business, excluding ZMN and Global Education given we know these two businesses was fully consolidated in the Q4 from last year? And second question is on your margin outlook for 2019. I wonder also if management could share some color on the -- on your profitability of your K-12 segment, that'll be great.

[Peng Wang:]

Yes, thank you for your questions. Your first question is about the year-over-year growth excluding Global Education, right?

[Yu Zhang:]

Yes.

[Peng Wang:]

Okay, so as you may well know, we made no acquisition during the fourth quarter of 2017, also yes, that same is also true for the first and second quarter of this year. So for the Q4 guidance, it's almost 100% same-store growth, means pure organic growth because we have no new acquisition last year and we are as you can tell from the power points, we have put on the IR website, we cut down the learning centers with the current macro and a micro economy, the substances, the environment. So this is almost 100% organic growth. That's for your first question. For the second question, the margin outlook for next year as you may have noticed in the third quarter -- in this quarter, the third quarter of 2018, if we exclude Global Education and ZMN, the two newly required and loss-making institutions we bought last year, the -- all the other business, those K-12 schools in 2015 -- bought in 2015, 2016, 2017 altogether they are making profits. So with more efforts on increasing the top line of Global Education and ZMN, and also cutting loss meanwhile, we are expecting positive profits in 2019. As to the margin for the group, we are not delivering or giving such long-term guidance for these margins right now, but we can say for -- we are pretty sure that Puxin Group as a whole will make profits in 2019. Thank you.

[Operator:]

[Operator Instructions] The next question comes from [Charlotte Wie] with Citi. Please go ahead.

[Unidentified Analyst:]

Thank you, Yunlong for taking my question. My question is about the M&A strategy. Can you share with us if you have any progress in M&A strategies recently? And how do you expect the regulation uncertainty can pass off, so that you can pick up your growth strategy again?

[Peng Wang:]

Yes. As your question for the M&A and its strategy and also the impact by those recent regulations, well, first of all we will stick to our strategy I mean we’re focused on growing with two engines. The left hand we have M&A, we will -- we are in the process of M&A, but as you with the newly launched regulations and the recent policies, we are more cautious with the negotiation process. So, yes, it's little bit slower compared with last year before we kick off the IPO process. But the target in the pipeline, we are relatively bigger and we have a better profitability compared with those targets in 2015 and 2016. So, typically it would take more time to close the deal compared with those relative smaller and loss making deals. So, first of all we’ll stick to this strategy with more acquisitions which will probably be closed in the first quarter of 2019 and with those acquired schools or institutions will leverage our PBS system to realize organic growth after taking control of those schools. As to your second question, the impact of the new regulations, first of all to be honest these new regulations or these policies, they slowed the process with of our M&A because both of those founders or stakeholders and Puxin, we need more time to adapt to the new regulations, all these policies. It takes some time and but yes this regulations we believe it will not last for long time. So, we are looking at those target pipelines to be closed in the first quarter or the early second quarter of 2019.

[Operator:]

[Operator Instructions] Since there appears to be no further questions, this concludes our question-and-answer session. I would now like to turn the conference back over to Christian Arnell for any closing remarks.

[Christian Arnell:]

Thank you, operator. And on closing on behalf of the entire management team, we'd like to thank you again for your participation in today's call. Okay, actually, Mr. Peng would like to make one closing remark as well.

[Peng Wang:]

Yes, as I've been approached and then asked about the guidance or the performance of Global Education and ZMN because they are that's the two largest acquisitions we ever made and they were loss making at the time of acquisition, yes. So, with the guidance for all the -- for Global Education and ZMN, I'd like to highlight two things for your reference. First, even those two regulations were made in the third quarter of last year so relatively new acquisitions and they were kind of bleeding at the time of acquisition. We successfully turn around their business for the top line -- in terms of the top line growth, we have turned around those two companies to achieve the highest top line growth in the industry I mean double-digits. This is quite an achievement given the situation of those two institutions at the time of acquisitions, and yes, we have invested heavily with the improvement of teaching quality, the technology, the platform for example we invested about 20 million with Global Education alone for their online program, which we believe will be another driver for the top line growth of Global Education in 2019. So, we do not only cut expenses and loss and cost, we also invest heavily for the future. So, for top line growth we have realized two-digit growth, this year by the end of third quarter and we are looking at a sustainable growth in 2019. And with the bottom line, Global Education and their ZMN those two institutions, we believe by the end of 2019, the two big institutions will -- we are looking at a breakeven by the end of 2019. So, we will work on the growth and we also work on the cost and expense control, but we will work with the two institutions with on a sustainable and healthy basis. Yet, the thing that I would highlight again, thank you.

[Christian Arnell:]

Thank you, Peng. And that concludes today’s call. Thank you very much for joining. If you have any further questions or comments -- sorry operator, it appears that we have one more question in queue right now.

[Operator:]

The next question comes from [Mike Bi] with [Haitong]. Please go ahead.

[Unidentified Analyst:]

Okay. Thank you, Yunlong, for the impressive results this quarter. So my question is briefly, on the -- still on the two assets, the ZMN and the Global Education. So, is it possible to share with us the months -- quarter-on-quarter trajectory of the two assets, because we understand that from the first quarter towards the second quarter, the two assets actually are improving pretty well especially from the top line growth as well as the sales expenses? So, is it possible to share with us a bit of color on how the two assets performing in the third quarter and also the outlook of next year?

[Peng Wang:]

Okay. Well, thank you Mike. To the apples-to-apples growth for the Global Education and ZMN, in the first quarter this year, the two companies they realized a 10% growth that's apples-to-apples growth, yes, which I mentioned before this is double-digit growth. And as to the guidance for -- your question for the guidance for the fourth quarter for next year…

[Unidentified Analyst:]

No, my question is both on the -- regarding the question in the third quarter on margin especially the gross margin as well as operating profit, the profitability that’s our key focus?

[Peng Wang:]

Okay. So your question about this profitability -- the gross margin of the Global Education, right?

[Unidentified Analyst:]

As well as the operating profit because in previous quarters, we understand the two assets were making a little bit losses which is a drag to the group earnings. So, we want to see the trends that they are turning around and also, yes, that's what I need. Thank you.

[Peng Wang:]

As to the margin of Global Education and ZMN in the third quarter this year, these two companies are still making loss, but we are making less loss compared with the first quarter of last year. And if we look at the guidance for the two companies, Global Education is growing at more than 15% and as ZMN is growing at more than 10% in terms of top line. With control over the cost and expenses associated with this top line growth, we are looking at breakeven for these two companies together.

[Unidentified Analyst:]

In which quarters, this year -- in the fourth quarter or the 2019?

[Peng Wang:]

In 2019.

[Operator:]

[Operator Instructions] Since there appears to be no further questions, I would like to turn the conference back over to Christian Arnell.

[Christian Arnell:]

Thank you. Apologizes for that before. On behalf of the entire management team, we like to thank you for joining today's call. If you have any questions or comments, please don’t hesitate to reach out to any of us, we'd be happy to help. This concludes the call. Thank you very much. Have a good night and a good day.

[Operator:]

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.