Puxin Limited
Q4 2018 Earnings Call Transcript

Published: 5 Mar 2019

[Operator:]

Good day and welcome to the Puxin Limited Fourth 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 question. [Operator Instructions] Please note this event is being recorded. I will now like to turn the conference over to Christian Arnell. Please go ahead.

[Christian Arnell:]

Thank you. Hello everyone and thank you for joining Puxin’s fourth quarter 2018 earnings conference call. The Company’s results were released earlier today and are available on the IR website. On the call today are Mr. Yunlong Sha, the Company’s Founder, Chairman and Chief Executive Officer; and Mr. Peng Wang, the Chief 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. I 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 Mr. Sha. Mr. Sha will go through his prepared remarks in Chinese, I will translate for him in English. Mr. Sha, please.

[Yunlong Sha:]

[Foreign Language] Hello everyone and welcome to our fourth quarter earnings conference call. 2018 was a challenging year for China's education industry. With the announcement of several new government regulations designed to standardize and enhance compliance of the after school education institutions. As a public company, we strongly support the government's reform measures and proactively began implementing a series of internal measures to ensure our school's compliance with the new regulations. [Foreign Language] Well, China's macro economic environment softened during the quarter we were still able to generate solid top line growth during the fourth quarter. Net revenues for the quarter grew to more than RMB530 million, an increase of 24.2% year-over-year and at the high end of our guidance range of 20% to 25%. We strategically slowed the pace of acquisitions as a result of the new regulations. But despite this revenue continued to gain growth momentum on the back of strong organic growth in student enrollments which grew 45% year-over-year. We believe this demonstrates our strong operational capabilities and the enormous organic growth potential our existing schools have. For example, our utilization rates for the quarter increased to 78.8% from 70.6% during the same period of 2017, a significant improvement resulting from the continuous optimization of resource utilization efficiency. In addition, our retention rate increased further from the high levels we saw last year driven in part by organic growth across our network which serves as a cornerstone for our long-term sustainable growth. [Foreign Language] We continue to acquire schools during the quarter despite the strategic slowdown in the pace of our acquisitions early last year, prior to the IPO and the impact from new regulations. We acquired Jinan Boya School and Tiancai School during the second half of the year, after thorough due diligence under compliance with the regulations. Tiancai School in particular which we acquired in the fourth quarter has a strong market presence in Jinan, Shandong Province and will create synergies with our other K-12 schools in that city. Our acquisition strategy in 2019 remains the same and will continue to serve as one aspect of our growth strategy. [Foreign Language] Our net loss margin during the quarter continue to narrow with non-GAAP net loss margin improving by 490 basis points from a year ago, which we believe shows the effectiveness of our Puxin Business System in generating growth across our school network. We will continue to implement our strategy to improve top line growth from acquired schools as we work to further narrow our loss. [Foreign Language] In October 2018, we established a business unit fully devoted to developing online education products and strategies to acquire and retain users. At the same time, we are also developing a unique set of strategies to combine and leverage the synergies that will be created between our online and offline businesses. We will continue to increase our investment into the development of our online education business as part of our overall strategy throughout the year. [Foreign Language] Now one more important update. I'd like to share with you. In February 2019 we appointed a new Independent Director. We are honored to have Mr. Wang Neng join our Board of Directors. Dr. Wang serves as Chong Khoon Lin Professor of Real Estate & Finance at Columbia Business School. He is also the Honorary Dean and Academic Director of the School of Finance at Shanghai University of Finance and Economics, a Research Associate at the National Bureau of Economic Research and a member of the law Heine [ph] Academy. He is also the recipient of the Thousand Talents Program, one of the most prestigious awards granted by the Chinese government Dr. Wang's research interests include Consumption Finance, Corporate Finance, Entrepreneurship Finance, Macroeconomics, International Finance, Asset Pricing Theory and Financial Science and Technology. His strong academic background in finance will play a significant role in helping us formulate a financial strategy for future acquisitions. [Foreign Language] With that, I would now like to turn the call over to Peng who will go over the financials. Peng?

[Peng Wang:]

Thank you, ladies gentlemen. Thank you, Mr. Sha, and hello everyone. Please be reminded that all amounts quoted here will be 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 our comparative financial performance on a year-over-year basis. So to start. Net revenues increased by 24.2% to RMB531.4 million from RMB422 million in the fourth quarter of 2017. This increase was primarily driven by increases in student enrollments, as suggest by Mr. Sha. Student enrollments increased by 45% from approximately 360,000 in the fourth quarter of 2017 to 521,000 [ph] in the same period of 2018. Cost of revenues increased by 11.8% to RMB306.2 million from RMB273.9 million for the same period in 2017, primarily due to an increase in teacher compensation. Non-GAAP cost of revenues, which excludes SBC, share-based compensation expenses, increased by 11.6% to RMB305.2 million from RMB273.5 million in the fourth quarter in 2017. Gross margin was RMB225.2 million, an increase of 46.2% from RMB154 million during the same period in 2017. Gross margin was 42.4%, compared with 36% for the same period in 2017, which represents a more than 6% increase for the same period. Total operating expenses increased by 22.5% to RMB391.1 million from RMB319.2 million in the fourth quarter of 2017. Selling expenses increased by 33.7% to RMB236.1 million from RMB176.6 million in the fourth quarter of 2017. Non-GAAP selling and marketing expenses, which exclude share-based compensation expenses, increased by 29.5% to RMB227.6 million from RMB175.8 million in the fourth quarter of 2017. The increase was primarily due to increase in brand promotion expenses and selling and marketing staff compensation. General and administrative expenses increased by 8.8% to RMB155 million from RMB142.5 million during the same period in 2017. Non-GAAP G&A expenses, which exclude share-based compensation expenses decreased by 2.7% to RMB119.4 million from RMB12.7 (sic) RMB122.7 million in the fourth quarter of 2017. Total share-based compensation expenses allocated to related operating costs and expenses increased by 113.9% to RMB45.2 million from RMB21.1 million in the same period 2017.The increase was primarily due to new grants options employees in the fourth quarter of 2018. Operating loss slightly increased by 0.5% to RMB165.9 million from RMB165.2 million in the fourth quarter of 2017. Operating margin was negative at RMB31.2 million in the fourth quarter of 2019 (sic) 2018, compared with negative 38.6% for the same period in 2017. Non-GAAP operating margin, which excludes share-based compensation expenses, was negative 22.7%, compared with negative 33.7% in the same period of the prior year. Net loss attributable to Puxin Limited increased by 10.3% to RMB239.7 million, compared with RMB217.4 million during the fourth quarter of 2017. Basic and diluted net loss per ADS attributable to Puxin Limited were RMB2.92 compared with basic and diluted net loss per ADS attributable to Puxin Limited of RMB4.36 during the same period of 2017. Non-GAAP net loss attributable to Puxin Limited was RMB158.9 million compared with RMB148.8 million during the same period of 2017. Non-GAAP basic and diluted net loss per ADS attributable to Puxin Limited were RMB1.94 compared with RMB2.98 during the same period in 2017. Now, let me walk you through our 2018 full year financials very briefly. Net revenues increased by 73.7% to RMB2.2 billion from RMB1.3 billion in 2017. Gross margin was RMB985.2 million, an increase of 101.8% from RMB488.2 million in 2017. Gross margin was 44.2% compared with 38.1% in 2017. Total operating expenses increased by 101.1% to RMB1,624 million from RMB807.7 million in 2017. Selling expenses increased by 90.6% to RMB848.1 million (US$123.3 million) from RMB444.9 million in 2017. Non-GAAP selling and marketing expenses, which exclude share-based compensation expenses, increased by 85.4% to RMB819.2 million from RMB441.9 million in 2017. Operating loss increased by 99.9% to RMB638.7 million from RMB319.5 million in 2017. Operating margin was negative 28.7% in fiscal year 2018, compared with 24.9% in 2017. Non-GAAP operating margin, which excludes SBC was negative 11.8% compared with negative 20.6% in 2017, which is represent of selling [ph] decrease year-over-year. Net loss attributable to Puxin Limited increased by 109.8% to RMB833.4 million compared to RMB397.3 million in 2017. Basic and diluted net loss per ADS attributable to Puxin Limited were RMB11.56 compared with basic and diluted net loss per ADS attributable to Puxin Limited of RMB7.96 in 2017. Non-GAAP net loss attributable to Puxin Limited was RMB325.8 million compared with RMB271.1 million in 2017. Non-GAAP basic and diluted net loss per ADS attributable to Puxin Limited were RMB4.52 compared with RMB5.44 in 2017. As of December 31, 2018, we had total cash and cash equivalents of RMB778 million compared with RMB164.7 million as of December 31, 2017. Finally, for the first quarter of 2019 guidance, we expect net revenues to be between RMB570.2 million and RMB595 million, which represents an increase of 15% to 20% year-over-year. These forecasts reflect the Company's current and preliminary views on the market and operational conditions, which are subject to change. This concludes our prepared remarks. I will now turn the call to the operator and open for Q&A. Operator, we are ready to take questions.

[Christian Arnell:]

Thank you everyone for joining us this evening. If you have any further questions or comments please don't hesitate to reach out to any of us. That concludes the call. Thank you very much. Have a good night.

[Operator:]

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