Puxin Limited
Q2 2019 Earnings Call Transcript

Published: 13 Aug 2019

[Operator:]

Good day and welcome to the Puxin Limited Second Quarter 2019 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 that this event is being recorded.I would now like to turn the conference over to Claire [ph]. Please go ahead.

[Unidentified Company Representative:]

Thank you, operator. Hello everyone and thank you for joining Puxin’s second quarter 2019 earnings conference call. 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 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 US 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 except as required under the law.With that, I will now turn the call over to Mr. Sha. Mr. Sha will read through his prepared remarks in Chinese, and I will translate for him in English. Mr. Sha, please go ahead.

[Yunlong Sha:]

[Foreign Language]

[Peng Wang:]

Thank you, Mr. Sha and hello everyone. Sorry, now it’s the time for interpretation.

[Yunlong Sha:]

Okay. Hello everyone and welcome to our second quarter earnings conference call. I'm pleased to report that we made solid progress during the second quarter. Net revenues grew 19.1% year-over-year to RMB632 million, which was near the upper limit of our previous outlook. The solid performance was mainly driven by organic growth, especially in student enrollment, which increased by 39.5% to a total of 725,118 students during the quarter. In terms of business lines, our through 12 education grew rapidly with a 30.4% year over year increase in revenue. We achieved this organic growth despite our modest approach to opening new learning centers during the quarter. In the meantime, what particularly was noteworthy is that our K through 12 education’s operating profit, excluding amortization, reached RMB18 million during the first half of 2019.We believe one of the key metric to [indiscernible]. During the quarter, our retention rate reached 71.4%, an increase of 9.2 percentage point year-over-year. The growth benefited significantly from our approach to raise the customer value proposition. Specifically, we dedicated our efforts to providing systematic learning plans at an early stage, along with a strong and stable teaching staff, leading to a notable rise in the quality of classroom content and learning experience. This progressive approach helped us grow our market shares in lower tier cities and the increase is especially [indiscernible] for more than two years.If you look at our P&L, our gross profit for the quarter increased by 23.6% year-over-year, while our gross margin reached 47.4%, and increased by 1.7 percentage points year-over-year. Gross profit margin reached 46.5% in the first half of 2019. Non-GAAP operating loss of 2019 Q2 decreased by 12.6% compared with the same period last year. Meanwhile, our net loss attributable to ordinary shareholders improved by 14.4%.Overall, we are particularly pleased to have narrowed our loss while achieving such solid top-line growth in the first half of 2019. Gross margin continues to stay about 45% and the pace of overall business growth is in line with our corporate strategy. Since the first quarter of 2019, Puxin has been investing heavily in online products and offerings to seamlessly integrate the online and offline learning experience. We have sufficient online learning, long term emphasis and investment [indiscernible]. In addition, new regulations in lower tier cities have provided Puxin with more quality acquisition targets. Looking ahead, we plan to stay due course and continue to push our acquisition and integration strategies, which we are confident will lead to very positive results for the second half of the year.With that, I will now like to turn the call over to Wang who will go over the financials.

[Peng Wang:]

Thank you, Mr. Sha and hello, everyone. Please be reminded that all amounts quoted here will be RMB and all percentage increases well 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.To start, net revenues were 632.9 million, an increase of 19.1% from the second quarter of 2018. This increase was primarily driven by increases in student enrollments. Student enrollments increased 39.5% to 725,000 from 520,000 during the same period of 2018.Cost of revenues was 332.8 million, an increase of 15.3% from the same period 2018, primarily due to an increase in teacher compensation. Non-GAAP cost of revenues, which excludes share-based compensation expenses, was 331.7 million, an increase of 15.8% from the second quarter of 2018. Gross profit was 300.1 million, an increase of 23.6% from the same period of 2018. Gross margin was 47.4% compared with 45.7% for the same period in 2018.Total operating expenses were 468.8 million, an increase of 42.6% from the second quarter of 2018. Selling expenses were 241.7 million, an increase of 15.1% from the second quarter of 2018. Non-GAAP selling and marketing expenses, which excludes share-based compensation expenses, were 236.4 million, an increase of 17.2% from the second quarter of 2018. The increases were primarily due to an increase in selling and marketing stock compensation.G&A expenses were 227.1 million, an increase of 91.2% from the same period last year. Non-GAAP G&A expenses, which exclude share-based compensation expenses, were 118.2 million, an increase of 13.3% from the second quarter of 2018. The increase was primarily due to increase in stock compensation. Total share-based compensation expenses allocated to related operating costs and expenses were 115.4 million, an increase of 360.4% from the same period in 2018. The increase was primarily due to new grounds for options to employees in the first quarter of 2019.Operating loss was 168.7 million, an increase of 96.1% from the second quarter of 2018. Operating margin was 26.7% compared with negative 16.2% for the same period in 2018. Non-GAAP operating loss was 53.3 million, compared with 61 million in the second quarter of 2018. Non-GAAP operating margin was negative 8.4% compared with negative 11.5% in the same period of the prior year.Net loss attributable to Puxin Limited was 194.6 million, an increase of 3.3% from the second quarter of 2018. Basic and diluted net loss per ADS attributable to Puxin Limited were 2.28 compared with 2.88 during the same period of 2018. Non-GAAP net loss attributable to Puxin Limited was 60.7 million compared was 70.9 million during the same period of 2018.Non-GAAP basic and diluted net loss per ADS attributable to Puxin Limited was 0.71 compared with 1.09 during the same period of 2018. EBITDA was negative 159.8 million, compared with negative 156.2 million in the second quarter of 2018. EBITDA margin was negative 25.2% compared with negative 29.5% for the second period in 2018. Non-GAAP EBITDA was negative 25.8 million, compared with negative 38.7 million in the second quarter of 2018. Non-GAAP EBITDA was negative 4.1% compared with negative 7.3% during the same period last year.Next, we'll move on to the balance sheet. As of June 30, 2019, we had total cash and cash equivalents of 500.6 million compared with 778 million as of December 31, 2018.Finally, for guidance, for the third quarter of 2019, we expect net revenues to be between 937.5 million to 971 million and RMB971 million, which represents an increase of 40% to 45% year-over-year. This forecast reflects the company's current and preliminary views on the market and operational conditions, which are subject to change.This concludes our prepared remarks and I'll turn the call over to the operator and open the call up for Q&A. Operator, we are ready to take questions.

[Operator:]

[Operator Instructions] The first question comes from Sharon Lang [ph] of CICC. The next question comes from Tommy Wong of China Merchant Securities.

[Tommy Wong:]

I just have two questions. First question, can you talk about the gap between the enrollment growth for second quarter and also the revenue growth? So, we just used the math to understand, it seems like the pricing has had an [indiscernible].And then second question relating to the expenses, can you just give us a little bit more color on the elevated G&A expense, because I had the impression that we had a high expense in the first quarter and then second quarter, maybe come down like we saw last year. And if we have an elevated expense for the second quarter, is that going to sustain for the second half. Thank you.

[Peng Wang:]

Okay, so thank you for the question. You have two questions. The first is -- could you repeat the first question, the second is about the G&A expenses increase?

[Tommy Wong:]

Yeah. Correct. So the first question is just the gap between the enrollment growth and also the revenue growth. So the enrollment growth seems to be very fast and the revenue growth is just a little bit slower on a year over year basis.

[Peng Wang:]

Okay. Okay. For your first question is to the gap between the enrollments growth and the revenue growth, there are two underlying reasons for that. First is, we are still implementing like promotional classes for those schools we newly acquired to increase exposure of those schools to prospective parents and students. So that makes up a large portion of those, the gap. And the second reason is we stick to the strategy of enrolment first, ASP second, means in a highly fragmented market, we focus on grabbing more market share instead of increasing the ASP in an aggressive way. So that explains why we have the faster growth rate of enrollment compared with the revenue.For your second question about the G&A expenses, G&A expenses, the increase of G&A expenses is mainly attributable to our investments in R&D. We have been investing heavily with our curriculums improvements, of our IT technology. Mr. Sha mentioned just now about the PBS system, the Puxin business system of which there are a dozen of modules to be launched after acquiring or taking control of those schools. So we implemented or launched our technology platforms, essential to curriculum and those systems one by one. During the process, it takes a lot of time and energy and also money to fully implement those technology -- those systems. That's why we saw an increase in the G&A expenses.

[Operator:]

The next question comes from Sharon Lang with CICC. Please go ahead.

[Unidentified Analyst:]

[Foreign Language] So let me briefly translate the questions. I have two questions regarding the upcoming quarters. So first question is regarding the development plans for the third quarter. And also I wonder, are we able to achieve positive net profit in the upcoming quarter? And also, besides, could you please talk about the online education products the company offers? And also, what do you think of the competitive landscape of the online education market and does it have any impact on the company? Thank you.

[Peng Wang:]

Thank you for questions, and we also consider to put it up in bilingual ways. For your first question about the guidelines for -- guidance for the third quarter profits or the bottom line, we are looking at a positive bottom line by the end of third quarter. I cannot give you the exact number of the profits of third quarter, but we are looking at the positive one, scalable one, a meaningful profit in the third quarter. That's for the first -- for your first question.The second question is about the online strategy or online programs of Puxin. As Mr. Sha said just now, we take online programs, or online platform as a strategic platform or a strategic investment within Puxin. So, first of all, we launched our online platform about two quarters -- three quarters ago, and we are very patient in several ways, first of all, our online platform, the ultimate goal is to serve our clients, parents, students, in a better way to find the balance, the delicate balance between the offline service and the online programs. So, that's our ultimate goal. So we are not rushing for profits or revenues.Secondly, for the online programs, we think, one of the key differences in our programs is we are not looking at 100% online programs or curriculum. Instead, we believe that as a great portion of our students are in their primary schools or middle or high Schools, they are not that disciplined to take purely online programs all by themselves or without the guidance of their parents. So, our program -- online program starts with an initiative to merge online curriculum with offline service.Thirdly, and finally, as to the possible influence or the competitive landscape of the industry, yes, I have to admit that online programs are competing with offline programs in terms of the same venue, the same subjects or the same learning period. But there are two things we'd like to highlight is, first is, online programs or online learning is not the enemy of offline. In contrast to that, online programs, offline programs, they are both tools for learning for the improvement of students. So instead of competing with each other in the long term, they are complementary to each other.Secondly, we believe that online programs, in order to be really effective, they need to find a way to cooperate or kind of merge with the offline programs, given the fact that a lot of students in the, after school tutoring are teenagers or even younger. So that's a very standing of the landscape.

[Unidentified Analyst:]

Okay. Thank you for the detailed information. And I would like to add one more question regarding the global education. Could you please give us a description, firstly, introduction on the current situation of global education? Thank you.

[Peng Wang:]

Yes. Sure. As you may well know, we bought global location from Pearson in the third quarter of 2017, roughly two years ago, the time that positions, Global Education’s top line was around RMB600 million with a net loss of 120 million or even plus. It's kind of set at a time. After two years, we are looking at a 20% plus growth rate in terms of top line for global education this year and more meaningfully, we are expecting a next to breakeven of global education by the end of 2019, meaning that compared with RMB90 million net loss last year, we are looking forward to the next breakeven performance of global education by the end of this year. Yeah, of course, there is a lot of efforts during the process, but luckily we are turning around this trend.

[Operator:]

I would now like to turn the conference back over to Claire. Please go ahead.

[Unidentified Company Representative:]

Okay, we received some questions from investors before conference call today and management team would like to take this opportunity to answer them. So the question is, how do you explain the improvement in non-GAAP profit and loss this quarter.

[Peng Wang:]

Okay. Should I answer your question one-by-one or one for all?

[Unidentified Company Representative:]

Just this one question.

[Peng Wang:]

So about the non-GAAP improvement.

[Unidentified Company Representative:]

Yes. I will repeat the question again. How do you explain the little improvement in non-GAAP profit and loss this quarter?

[Peng Wang:]

Okay. Actually, our gross profit increased by 20% year-over-year for the first quarter and by 23.6% for the second quarter. As Mr. Sha mentioned just now, gross Margin reached 47.4% in the second quarter, and for the first half of the year, it's 46.5%. Total operating expenses in the first quarter decreased of 24% year-over-year, or 12.6% for the second quarter of this year. Accordingly, the net loss attributable to Puxin Limited narrowed by 14.4% in the second quarter. Given that our revenue grows steadily, we have already seen a key improvement in operating loss, means, we narrowed the net loss, while we increased other revenue steadily over the previous quarters. So in non-GAAP terms, our EBITDA was only negative 25 million in the second quarter of this year. If we look at the investment we made in our online school business, which is over to 20 million, in other words, our non-GAAP EBITDA, excluding the investment in online business, is all about negative 5 million or next to break even. Yeah. I think that explains the improvement in non-GAAP profits.

[Unidentified Company Representative:]

Okay. Thank you for answering. We have one more question. What is the general situation of your study abroad programs?

[Peng Wang:]

Okay, the study abroad business? Yes. Okay. Yeah. As I have explained to the question raised by CICC analyst, the study abroad business, including -- mainly including study Global Education and ZMN, which in Chinese [Foreign Language], they contributed to a great portion, if not all, of the net loss of our study abroad business line, because at the time of acquisition in 2017, those two institutions or companies added up to almost RMB200 million in net loss. Yeah, as to, for Global Education, we have talked about that in detail just now.We are looking at a 20 plus increases in terms of clients and the next to breakeven in terms of bottom line. For ZMN, though it is still making laws by now and will be making loss by the end of this year, we are happy to say its cash revenue has been steadily growing. For example, as we disclosed in the first quarter earnings release, the ZMN saw a 34% increase in revenues. But its revenue grow only by 1% due to the business nature of ZMN, because in essence, ZMN is the high end university or college placement consulting firm. So its revenue could be recognized over a period of two or sometimes 2.5 years, if students usually come to us as great 9 or great 10.But the service could be only completed or finished by great 12 before their entrance into colleges or universities in the United States or Commonwealth countries. So in that way, ZMN especially, its revenue could be recognized at lower speed, much slower speed or slower rate compared with cash revenue. So Global Education, which has been the largest acquisition we ever made, will be a breakeven or next to breakeven by the end of this year and 20 plus increase in the top line, while our ZMN will be still making loss by the end of this year. But we are expecting a breakeven or above in terms of the bottom line of ZMN in the year 2020, because its cash revenue will be steadily recognized on its P&L. So, that's the general -- the whole picture, the general picture of our study abroad business line. Thank you.

[Operator:]

This concludes our question-and-answer session. I would now like to turn the conference back over to Claire for any closing remarks. Please go ahead.

[Unidentified Company Representative:]

Thank you, operator. In closing, on behalf of the entire management team, I’d 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. Thank you.

[Operator:]

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