Puxin Limited
Q1 2020 Earnings Call Transcript

Published: 13 May 2020

[Operator:]

Good day and welcome to the Puxin Limited First Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jessie Jin, Investor Relations from Institutional Capital Advisory. Please go ahead.

[Jessie Jin:]

Thank you, operator. Hello, everyone. Thanks for joining Puxin’s first quarter 2020 earnings conference call. By way of introduction, I am Jessie Jin, Investor Relations specialist from Institutional Capital Advisory, the IR consulting firm for Puxin Limited. We appreciate your time and ongoing interest in Puxin. The company’s results were released earlier today and are available on the company’s IR website at ir.pxjy.com.On the call today are Mr. Yunlong Sha, the company’s Founder, Chairman and Chief Executive Officer; and Mr. Peng Wang, the company’s 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 will 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 statement as a result of new information, future events or otherwise, except as required under law.With that, I will now turn the call over to Mr. Sha. Mr. Sha will give his remarks in Chinese and I will translate for him in English. Mr. Sha, please go ahead.

[Yunlong Sha:]

Ladies and gentlemen, good evening and good morning to you all. Thank you for joining Puxin Limited first quarter 2020 earnings conference call. It has been an unusual quarter for both Puxin and China’s education industry. We are deeply grateful to the tens of thousands of medical professionals and volunteers on the frontline who have worked tirelessly to contain the coronavirus and to all the citizens that have cooperated with the government and made tremendous sacrifices during the quarantine period, especially those in Wuhan.We are glad to see a gradual return to normalcy here in China, especially appreciated of the individuals who have kept essential services up and running during this challenging period. Puxin has also reacted quickly to the outbreak through collaboration with the Institute of Psychology, Chinese Academy of Sciences and iGet College Dedao Daxue, to provide much-needed counseling services during this stressful time.In the first quarter of 2020, we successfully transitioned the off-line courses during the winter holidays to an online format. We have not only ensured that our students can successfully complete the course work with high satisfaction, but we have also provided an opportunity for our teachers to master the skills required for teaching small group online classes. This has further enhanced the professional development of our teaching staff for our OMO strategy. We have appointed Mr. Yun Xiao, who is also a Co-Founder. As Chief Operating Officer of Puxin Limited, Mr. Yun has made great contributions to multiple roles across offline and online businesses. Mr. Yun will be responsible for implementing our OMO strategy and further integrate our internal resources.Our OMO strategy will be during this period. During this period we have achieved 80.5% retention rates, which is about the same as last year. Net revenues in the first quarter of 2020 increased by 22% year-over-year to RMB751 million. Specifically, student enrollment continued to be our primary growth engine. Total students enrollments grew to 938,000, an increase of 133.4% year-over-year compared to 402,000 in the same period of 2019.Gross profit increased by 25.3% year-over-year and gross profit margin in the first quarter reached 46.7%. We achieved positive operating profit of RMB3.65 million in the first quarter compared to the operating loss of RMB137 million in the first quarter of 2019. This is a very impressive result. Adjusted net income attributable to Puxin Limited was RMB25.4 million compared to adjusted net loss attributable to Puxin Limited of RMB73.8 million in the first quarter of 2019.For the first quarter of 2020, the net revenues of K-12 tutoring business reached RMB546 million, an increase of 43.6% and the student enrollments were 924,000. The net revenues of study-abroad services were RMB205 million, a decrease of 12.8% year-over-year. This is mainly due to the outbreak of COVID-19 in Western countries, which have led to a more cautious approach from students and parents when it comes to going abroad. In addition, the cancellation of overseas examinations during spring has also affected students’ plans to study abroad. As the coronavirus situation continues to disrupt flights in Europe and the U.S., we expect that the revenue and profit of study-abroad business will also be greatly affected in the second quarter. The net revenues of Puxin Online School in the first quarter of 2020 reached RMB23 million, an increase of 1,177.8% year-over-year. This was primarily due to the transition of offline courses to the online format.Looking ahead to the second quarter of 2020, K-12 business will fully recover as full time schools in China resume normal operations. In the next 1 to 2 years, Puxin will continue to develop its core capabilities and establish a profitable and sustainable growth model. We aim to achieve flexible deployment of assets and talent of our K-12 tutoring business, which has a business model with proven track record and transferable approach to enhancing profitability. This strategy is fundamental to the success of our company and the realization of shareholder value. The COVID-19 outbreak brought us challenges and opportunities. The education industry will evolve, and we are confident that Puxin will continue to adapt and emerge from this crisis stronger than ever.Now I will hand the call over to Mr. Wang, our CFO, who will walk you through our financial details.

[Peng Wang:]

Thank you, Jessie. Thank you, Mr. Sha. Hello, ladies and gentlemen please be reminded that all amounts posted 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.Starting with the financial results for the first quarter 2020, net revenues were RMB751.3 million, an increase of 22% from the first quarter of 2019. This increase was primarily driven by increases in students enrollment. Student enrollments increased by 133.4% to 938,000 from 402,000 in the same period 2019. Net revenue of K-12 tutoring services increased by 43.6% to $546.3 million from the first quarter of 2019. In the first quarter of 2020, the total student enrollment of K-12 tutoring services reached 922,000, which included a 358,000 student enrollments of Puxin Online School. Group class courses generated net revenue of RMB308.4 million, among which Puxin Online School contributed net revenue of RMB23 million.Personalized tutoring and full-time tutoring courses contributed net revenue of RMB158 million and RMB79.9 million in the first quarter of 2020, respectively. Although we have closed all of the learning centers in China since early February 2020 in response to the measures taken by the government to contain the spread of novel coronavirus, COVID-19, we have focused on offering in-progress and new courses online and strengthened student recruitment for online courses offered in the spring semester. As a result, our student enrollments in the first quarter of 2020 continued to increase, compared to 872,950 in the fourth quarter 2019 and 402,061 student enrollments in the first quarter of 2019. However, the school closure has adversely affected our student recruitment for courses to be held in the spring semester, which could in turn adversely affect our business, financial condition and results of operations for the remainder of 2020.Net revenues of Study Abroad tutoring services decreased by 12.8% to RMB205.0 million from the first quarter of 2019, primarily due to the impact of COVID-19 outbreak. Study Abroad tutoring services had 14,000 student enrollments in the first quarter of 2020 compared to 17,000 in the first quarter of 2019. As COVID-19 cases have recently surged outside China, student parents may postpone or even give up study abroad plans due to the worldwide outbreak of the virus, which may continue to materially adversely affect the student enrollment and results of operations of our Study Abroad tutoring business for the remainder of 2020.Cost of revenues was RMB400.3 million, an increase of 19.3% from the first quarter of 2019, primarily due to an increase in rent costs in line with the increase in our learning centers. Cost of revenues, excluding share-based compensation expenses, was RMB399.6 million, an increase of 19.6% from the first quarter of 2019. Gross profit was RMB351.1 million, an increase of 25.3% from the same period of 2019. Gross margin was 46.7% compared to 45.5% for the same period in 2019.Total operating expenses were RMB347.4 million, a decrease of 16.6% from the first quarter of 2019. Selling expenses were RMB230.5 million, an increase of 3.5% from the first quarter of 2019. Selling and marketing expenses, excluding share-based compensation expenses, were RMB226.5 million, an increase of 5.1% from the first quarter of 2019. The increases were primarily due to increase in marketing expenses.General and administrative expenses were RMB116.9 million, a decrease to 39.7% from the same period 2019. General and administrative expenses, excluding share-based compensation expenses, were RMB113.1 million, an increase 5% from the first quarter of 2019. The increases were primarily due to increases in stock compensation. Total share-based compensation expenses allocated to related cost of revenues and operating expenses, decreased by 91.1% to RMB8.4 million from RMB94.7 million in the first quarter of 2019. The decrease was primarily due to less options vested in the first quarter of 2020 compared to first quarter of 2019.Operating income was RMB3.7 million compared to the operating loss of RMB136.5 million in the first quarter of 2019. Operating margin was 0.5% compared to negative 22.2% in the same period in 2019. Operating income of K-12 tutoring services was RMB35.0 million compared to operating loss of RMB40.1 million in the first quarter of 2019, while operating margin improved to 6.4% from negative 10.5%. Adjusted operating income was RMB12.1 million compared to the adjusted operating loss of RMB41.8 million in the first quarter of 2019.Adjusted operating margin was 1.6% compared to negative 6.8% in the same period of the prior year. Net loss attributable to Puxin Limited decreased by 82.5% to RMB43.5 million. Basic and diluted net loss per ADS attributable to Puxin Limited, were RMB0.50 compared to RMB3.02 during the same period 2019. Adjusted net income attributable to Puxin Limited was RMB25.4 million compared to adjusted net loss attributable to Puxin Limited of RMB73.8 million during the same period of 2019. Adjusted basic and diluted net income per ADS attributable to Puxin Limited was RMB0.29 compared to adjusted basic and diluted net loss per ADS attributable touting leverage of RMB0.90 during the same period of 2019.EBITDA was negative RMB3.9 million compared to negative RMB191.9 million in the first quarter of 2019. EBITDA of K-12 tutoring services was RMB30.5 million compared to negative RMB74.9 million in the first quarter of 2019. EBITDA margin was negative 0.5% in the first quarter of 2020 compared to negative 31.2% in the same period in 2019. Adjusted EBITDA was RMB65.0 million compared to negative RMB16.9 million in the first quarter of 2019. Adjusted EBITDA margin was 8.6% compared to negative 2.7% in the same period in 2019.Next, we will move on to the balance sheet. As of March 31, 2020, the company had total cash and cash equivalents and the current portion of restricted cash of RMB563.9 million compared to RMB606.3 million as of December 31, 2019. The current portion of restricted cash consisted primary deposits with Chinese commercial banks as collateral for our bank borrowings within 1-year term.Finally, for guidance, the beginning of 2020 was challenging for after-school education industry due to the outbreak of the novel coronavirus. As a result of the impact of the coronavirus outbreak, we have lowered our expectations for growth in the second quarter of 2020. Based on the information available as of today of this press release, the company expects net revenue for the second quarter of 2020 to be between RMB620.3 million and RMB651.9 million, which represents a decrease of 2% to an increase of 3% year-over-year. This forecast reflects the company’s current and preliminary views on the market and operational condition, which are subject to change.This concludes our prepared remarks. I will now turn the call over to the operator and open the call up for Q&A. Operator we are ready to take questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from [indiscernible] with Citigroup.

[Unidentified Analyst:]

Okay. Let me translate my question. Regarding the Q2 revenue guidance, could the management give more color on the growth outlook by segments? For example, the K-12 Puxin Online School as well as the Study Abroad tutoring service. In the meantime, do you have more color on the ASP trend by segments as well? Thank you.

[Peng Wang:]

Okay, thank you [indiscernible] for the question. First question is to the color of the guidance of the second quarter. We expect the K-12 segment to be either breakeven, I mean the growth rate, or slightly increases compared with the second quarter of last year. But on the other hand, we also expect the Study Abroad segment to be decreasing compared to the same period last year because of – I mentioned just now, the outbreak of the virus. The academic is still there with the English-speaking countries. So that’s the general breakdown of the guidance for the second quarter. For your second question as to the ASP or the pricing, we are not expecting in-depth discount to our current customers or the customers in the coming summer programs because with the experiences of our programs offered during the first quarter, the winter vacation programs and the spring, the first half of the spring programs, we are very confident that our students, customers, they are pretty satisfied with the quality, the teaching services of Puxin, with our online small group classes. So we don’t need to give that discount. So yes, that’s all.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

[Operator Instructions] There are no further questions. I would like to turn the conference back over to Jessie Jin for any closing remarks.

[Jessie Jin:]

Okay. Thank you, operator. In closing, on behalf of the entire management team of Puxin, we would like to thank you again for your participation in today’s call. If you have any further inquiries in the future, please feel free to contact us at puxin.icaasia.com. Thank you.

[Operator:]

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