Puxin Limited
Q3 2020 Earnings Call Transcript

Published: 19 Nov 2020

[Operator:]

Good day, and welcome to the Puxin Limited Third Quarter 2020 Earnings Conference Call. . I would now like to turn the conference over to Nadia Wang , Senior Investor Relations Manager of Puxin Limited. Please go ahead.

[Unidentified Company Representative:]

Thank you, operator. Hello, everyone. Thanks for joining Puxin's Third Quarter 2020 Earnings Conference Call. This is Xiaoxi Wang, Senior Investor Relations Manager at 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, we have 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 introduction 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.

[Yunlong Sha:]

Ladies and gentlemen, good evening, and good morning to you all. Thank you for joining Puxin Limited's Third Quarter 2020 Earnings Conference Call. Although the summer break from significantly due to COVID-19, we still realized a net income of RMB 42.43 million, representing a year-over-year increase of 25.7% as well as EBITDA of RMB 77.46 million, which is a year-over-year growth of 9.4%. And now under GAAP financial measures, we have successfully achieved profitability for 2 consecutive quarters, while the achievement is 3 consecutive quarters under non-GAAP financial measures. In addition, the K-12 business has had 3 consecutive profitable quarters and its 9-month cumulative net revenue growth since the beginning of 2020 reached 15%. The 9-month cumulative net income of K-12 business was RMB 219 million, and the net income margin was 14.1%. But it was a net loss of RMB 116 million in the same period of 2019. At the meantime, the establishment of Puxin's International Education business unit in the third quarter of 2020 has successfully consolidated our language exam preparation services and studying abroad consulting services. Strategically, our competitive edge around debt and education and global education remains strong while streamlined operation not only reduce the cost but also elevated efficiency. The formation of International Education business unit has created synergy and has successfully increased our service quality and capture additional market share.

[Peng Wang:]

Thank you, Mr. Sha. Hello, ladies and gentlemen. Again, we are very glad that Puxin has survived the COVID-19 pandemic with strong growth with the bottom line of K-12 business, as Mr. Sha has mentioned just now. 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 our comparative financial performance on a year-over-year basis. And now let's start with the financial results for the third quarter of 2020. Net revenues were RMB 833.2 million, a decrease of 16.3% year-over-year. This decrease was primarily due to the adverse impact of the COVID-19 pandemic of the demand for study-abroad tutoring services. Net revenues of K-12 tutoring services increased by 1.0% to RMB 609.3 million. In the third quarter of 2020, the student enrollments of K-12 tutoring services, including group class, personalized tutoring and full-time tutoring services reached 827,685. Net revenues of Puxin Online School increased to RMB 32.5 million. Student enrollments of Puxin Online School were 203,598 in the third quarter of 2020. Net revenues on net revenues of the study-abroad tutoring services decreased by 50.4% to RMB 191.4 million. This was primarily due to a continuing impact from the global spread of COVID-19 pandemic in many major countries of the world. However, net revenues of the study-abroad tutoring services has an increase of 21.6% compared to the second quarter of 2020. Cost of revenues decreased by 14.6% to RMB 423.6 million, primarily due to the decrease in staff cost, which reflected the decreased demand for study-abroad services attributable to the COVID-19 pandemic. Cost of revenues, excluding share-based compensation expenses, decreased by 14.5% to RMB 422.1 million.

[Operator:]

. The first question today comes from Mark Li of Citi.

[Mark Li:]

May I know for your guidance for the Q4, could you break down for K-12, study-abroad and Puxin Online School for us? And also, we have seen the news of some -- maybe some consideration of potentially selling the online school to selective online tier. I don't know if you have any comment or what would be our strategy going forward?

[Peng Wang:]

Okay. Thank you, Mark, for your questions. Yes. First of all, we are under the process of spinning off our online business, online school, Puxin Online School. But as the company has not officially declared the transaction, so I'm sorry, we have to wait a while for the official announcement. But as to the breakdown of the growth in the first -- in the fourth quarter of this year, the decrease will be primarily due to the decrease of growth, of the study-abroad tutoring and study-abroad college placement services, again, which we -- as of which we're looking at around 40% decrease. And as to the K-12 segment, we are looking at a low single-digit to high single-digit decrease for the K-12, including group class and personalized tutoring. Thank you.

[Mark Li:]

A quick follow-up. May I know why our K-12 is a little bit, I think, a lap behind some off-line peers, even for Q4? What do you think is the drivers?

[Peng Wang:]

Okay. The main difference lies in the calendar of this quarter, as our fourth quarter covers November -- October, November, December. And while you may see another top player, their fourth quarter they do not have July. So for the difference of this -- the growth rate, the first reason is there is a -- most of our students they are retained students from the summer programs. And we recruited some new students during the fourth semester. But as you know, this summer, especially in some major cities like Beijing, Dalian, we experienced the second wave of COVID-19 pandemic. So we lost some students. We lost some students during the second wave for COVID-19 pandemic. So the retained students for the full semester will also comparably lower than last year. So that's the first reason. Another reason is due to -- also due to the pandemic -- the COVID-19 pandemic, we slowed down our pace of physical expansion in the major cities of Puxin education like Taiwan, like Ningguo, like Xi'an, like Jinhan, Tianjin the top K-12 branches of Puxin. So that's another major reason underlying our slow pace of K-12 growth.

[Operator:]

. The next question comes from John Chang of Citi Securities.

[John Chang:]

So I understand the company recent sell it's online school business. And I know there is no comments until now. I would like you to maybe elaborate on the company's future strategy on the online business.

[Peng Wang:]

Okay. Thank you for your question. Yes, we are still waiting for the official announcement of the transaction, but I can talk -- I can give more light on the future online strategy of Puxin education. First of all, as everybody here is well known, there is some big events -- there are some big events in the industry with some top players having funding of millions of millions of money recently. So as it has significantly changed the landscape of the online education industry, especially those group classes or our super large group classes business model. So our future strategy with the online education will be focused on the online merge offline, OMO strategy, which will leverage of current presence at the major cities across China. We have over 300 learning centers across China. And we'll leverage our current presence at those major cities into those areas, which of current learning centers could not cover in the near future, like the dual-teacher with the dual teacher model the inter week programs. So we do not give up online strategy. Instead, we spin-off of online -- the live broadcasting -- broadcast programs, and focusing on the OMO strategy. So that's our current strategy with online education.

[John Chang:]

So I understand is online merge offline. Another question is about the recent recovery on the off-line enrollment recovery. So it's been hit by the COVID-19, how has the recent recovery?

[Peng Wang:]

Okay. As almost every city across China, has regained from -- or has recovered from the COVID-19 pandemic. We -- all our probable current learning centers have -- yes, we have reopened all our current learning centers. And we see -- we are glad to see most of students, most of the students including their parents are very happy to come back to offline learning centers programs because after quite a few months, the immersed study with online programs, a lot of students and their parents come to realize that offline study has this unique advantages. Especially when we come to the person to person, in the personal communication in the personal inspiration and those one-on-one tutoring services, which are combined to guarantee the final results of the students improved performance. So we are not only glad to say students coming back to our offline learning centers, we are more glad to say the students, their parents, their realization of the unique advantage or importance of the offline programs.

[Operator:]

The next question comes from Maggie Zheng of Haitong International.

[Maggie Zheng:]

You just mentioned that you kind of attributed the growth in your K-12 tutoring business to your seas of expansion in offline. So can you share with us when do you think it's a property to accelerate the offline expansion?

[Peng Wang:]

Okay. Okay. Actually, we are -- right now, at this moment, we are already on the track of fees expansion with -- especially with our top offline branches, like Taiwan, like Xi'an, like Ningbo, Nanjing, all these major cities are the top branches this of us. After the survival of the COVID-19 pandemic, we are back to the normal rate of our fees expansion. As we shared with the investors, during the NDRs, we are -- we were planning a 20% to -- 20% capacity growth for the year 2020 by the end of 2019, as we were working on the budget. So this is the -- right now this moment, it's kind of a pickup. So we will pick up the original speed or we may even accelerate the pace of fees expansion, especially with those top branches within Puxin education as in most of the cities of our current learning centers, their utilization rate is quite high and their brand, they are especially in the city, in the various cities, they are located. They're -- the brand is quite strong. So it's time for us to expand physically, especially with those top branches.

[Maggie Zheng:]

Okay. Another question is regarding -- you just mentioned that some of the students were lost up to the second wave of pandemic in Beijing and Dalian. So do you think that this kind of student they're actually stick to online platform or they are turning to some offline competitors of yours?

[Peng Wang:]

Well, to be honest, as the case with Dalian because we shut down our offline learning centers. The next day, we started our summer vacation programs because of the second wave of COVID-19 pandemic. Most of the students who had registered with offline programs were successfully transferred to our online programs as we did during the spring semester. But to be honest, and it's unfortunate, we lost some of the students to the online players as all of us are well-known that this is a hard season. It was hard season. For this summer, it's hard season, every major player was trying or struggling to get as many students as they could. So first of all, we lost a few students to the online competitors. And on the other hand, as I mentioned just now, we are glad to say at the end of the day, that most of the students, most of the students and their parents, they come to realize that offline tutoring programs have its unique advantages when we talk about the final performance of those students. Because most of the students, they could not make its way to the final academic success without the company of teachers and students. So human are social animals. So yes, we lost some students during the summer vacation to the online competitors, but most of the students come back to us and they will stay with our offline programs.

[Maggie Zheng:]

Okay. My last question is that as you might be in the process of being of the online business. So is it possible that you kind of accelerate your schedule to turnaround the new business? Because the online business seems to be loss-making and has been a drag on your overall business?

[Peng Wang:]

Well, first of all, I have to admit that the online live broadcasting group class programs are money burning, as everyone can say for this year. And even for the next maybe 1 or 2 years. So yes, it's not our strategy to continue those live broadcasting group classes. And yes, it will be a big drag on everyone's balance sheet or the PL. Secondly, as I talked just now, we are not giving up online education or online strategy. Instead, we will continuously focus on our online merge offline strategy, trying our best to leverage our current learning centers, to send or to get those high-quality teaching resources to those clients, those areas, which we originally could not cover. That's our strategy. We'll hold on to that.

[Operator:]

. Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Nadia Wang for any closing remarks.

[Jessie Jin:]

Thank you, Operator. In closing, on behalf of the entire management team of Puxin, we'd like to thank you again for your participation today. If you have more further questions in the future, please feel free to contact us at [e-mail] or [e-mail]. Thank you.

[Operator:]

The conference has now concluded. Thank you for attending.