Puxin Limited
Q3 2019 Earnings Call Transcript

Published: 18 Nov 2019

[Operator:]

Good day and welcome to the Puxin Limited Third Quarter 2019 Earnings Conference Call and Webcast. 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. Please go ahead.

[Unidentified Company Representative:]

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

[Yunlong Sha:]

[Foreign Language]Hello, ladies and gentlemen. Welcome to the Puxin Limited earnings conference call for the third quarter of 2019.

[Yunlong Sha:]

[Foreign Language]In the third quarter of 2019, Puxin Limited has achieved overall profitability for the first time. Net income reached RMB33.742 million compared to a net loss of RMB50.219 million. Gross profit margin was 50.3% which has shown a steady increase, potentially making us on track for continued profitability in the future. First, net revenue grew 48.7% year-over-year to RMB996 million beating previous expectation. We have continued implementing our execution and integration growth strategy and successfully acquired eight schools. In addition increasing student enrollment continues to see a key driver for our success. In the third quarter, Puxin student enrollment increased by 50.2% reaching a total number of 871,896 enrollments.[Foreign Language]As we take a closer look at our business, the K-12 service line performed exceptionally well. Net revenues increased by 86.4% year-over-year. This can be attributable to our acquisition and integration strategy. We have emphasized the acquisition of K-12 focus core as well as excellent organic growth of our existing portfolio.On organic growth, our quarterly highlights affirm the improved operational efficiency as Puxin business system continues to expand into lower tier cities. For example, our retention rate reached 70.3% and has exceeded 70% for three consecutive quarters. Such exceptional retention rate has solidified Puxin’s position as a top tier education service provider.In particular, the operating profit of K-12 service line excluding financial impact from online school and headquarters increased by 667.1% year-over-year, to over RMB90 million as we continue to scale up.[Foreign Language]We're also happy to announce Puxin study-abroad business turned profitable for the first time this quarter since the acquisition of Global Education and ZMN Education in the third quarter of 2017. This was another testament to our acquisition and integration strategy. The strategy proved its effectiveness in study-abroad business and led to positive results after eight quarters.[Foreign Language]Puxin has seen competitive and rapid revenue growth and turned profitable in the third quarter 2019. We're very optimistic about the future as we implement our acquisition and integration strategy and continue to be on solid organic growth.[Foreign Language]With that, I would now like to turn the call over to Peng, who will go over the financials.

[Peng Wang:]

Thank you, Ms. [indiscernible] and hello ladies and gentlemen. 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 RMB996 million, an increase of 48.7% from the third quarter of 2018. This increase was primarily driven by an increases in student enrollments. Student enrollments increased 60.2% to 872,000 from 544,000 during the same period of 2018.Cost of revenues was RMB494.6 million, an increase of 32% from the same period of 2018, primarily due to an increase in teaching staff compensation. Cost of revenues, excluding share based compensation expenses, was RMB493.6 million, an increase of 32.5% from the third quarter of 2018. Gross profit was RMB501.5 million, an increase of 70% from the same period 2018. Gross margin was 50.3% compared to 44.1% for the same period in 2018.Total operating expenses were 459.9 million an increase 29.1% from the third quarter of 2018. Selling expenses were 304.8 million, an increase of 28.5% from the third quarter of 2018. Selling expenses, excluding share-based compensation expenses were 299.9 million an increase of 31.8% from third quarter of 2018. The increases were primarily due to increases in marketing expense and marketing staff compensation.General and administrative expenses were 155.1 million, an increase 30.5% from the same period last year. General and administrative expenses, excluding share-based compensation expenses were 150.3 million an increase of 35% from the third quarter of 2018. The increases were primarily due to increases in staff compensation and daily operating expense.Total share based compensation expenses allocated to related operating costs and expenses decreased to 10.7 million from 19.3 million for the same period 2018, primarily due to less grants of options to employees in 2019. Operating income was 41.5 million compared to the operating loss of 61.1 million in the third quarter of 2018.Operating margin was 4.2%, compared to 9.1% in the same period in 2018. Adjusted operating income was 52.2 million, compared to an adjusted operating loss of 41.8 million in the third quarter of 2018. Adjusted operating margin was 5.2%, compared to 6.2% in the same period of the prior year.Net income attributable to Puxin Limited was 33.7 million, compared to net loss attributable to Puxin Limited of 50.2 million during the third quarter of 2018. Basic and diluted net income per ADS attributable to Puxin Limited were 0.38 compared to basic and diluted net loss of 0.62 during the same period of 2018.Adjusted net income attributable to Puxin Limited was 43.5 million, compared to adjusted net loss attributable to Puxin Limited of RMB51.0 million during the same period of 2018. Adjusted basic net income per ADS attributable to Puxin Limited was 0.50, compared to adjusted basic net loss of 0.62 during the same period of 2018. Adjusted diluted net income per ADS attributable to Puxin Limited was 0.49, compared to adjusted net loss of 0.62 during the same period of 2018.EBITDA was 70.8 million, compared to negative 19.5 million in the third quarter of 2018. EBITDA margin was 7.1% compared to net 2.9% for the same period in 2018. Adjusted EBITDA was RMB80.46 million compared to negative RMB20.3 million in the third quarter of 2018. Adjusted EBITDA margin was 8.1% compared to net of 3% during the same period of prior year.Now let's move on to the balance sheet. As of September 30, 2019, we have total cash, cash equivalents of RMB332 million compared to RMB778 million as of December 31, 2018. The decreases were primarily due to acquisitions of K-12 schools.Finally, for guidance. For the fourth quarter of 2019, we expect net revenue to be between RMB770.6 million and RMB797.2 million which represents an increase of 45% to 50% year-over-year. This forecast reflects the company’s current and preliminary views of market and operational conditions which are subject to change.This concludes our prepared remarks. I will now the call over to the operator and open the call up for Q&A. Operator, we are ready to take questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mark Lee with Citi. Please go ahead.

[Mark Lee:]

Hi, management. Congratulations on the results. May I ask, what is our target for 2020 in terms of the revenue growth for both the K12 and study abroad? And also any margin color? And what will be our focus for M&A? Thanks.

[Peng Wang:]

Thank you Mark for the questions. As to the 2020, we are looking at a high-double digit growth in terms of the top-line growth. And out of which the main driver will be the K-12 segment. And as you may well know that the study abroad segment is growing little slower than the K12. So for 2020, we are in general, we are looking at the high-double digit growth, driven by the K12 both from the acquisition and the organic growth, both together. So as to the margin, as shown in this earnings release, the overall gross margin for Puxin has risen to over 60%. But as a reminder of as a reference, we are looking at plenty of expansion in the high tier cities across China. So, for, in terms of organic growth, we are looking at a higher gross margin rates, but in order to balance the top line and bottom line, we are going to expand our learning centers in the higher tier cities. So gross margin is not the top priority of Puxin. Instead we're looking at a balanced growth with the top line expansion and also the bottom line. Thank you.

[Mark Lee:]

Thanks. May I follow-up? So for the organic growth expansion or M&A like any region particularly we would focus more on?

[Peng Wang:]

In terms of organic growth, we are looking at a 30% plus organic growth rate. Mainly by the same store growth. As shown by the second and third quarter results of 2019. Again we are also looking to opportunities in a feasible expansion in the higher tier cities of China. So, of the other growth opportunity in 2020 we are expecting a growth driven by, mainly driven by the organic growth accompanied by expansion feasible expansion of learning centers in the high tier cities.

[Operator:]

Our next question comes from Zhoudon Zhang with CICC. Please go ahead.

[Zhoudon Zhang:]

[Foreign Language]So let me firstly translate my questions. So my first question is regarding the study-abroad business. So what's the trends the profitability right now, are we still targeting at increase the profitability of the study-abroad segments? And my second question is regarding the K-12 segments. So what's the general mergers and acquisition environment of this segment? And what's the level of valuation right now is for the segment?

[Peng Wang:]

Okay, thank you for two questions. First, in terms of the growth for study-abroad segments. First of all I like to highlight that our study-abroad segment is growing at the very top in the industry as shown by the result in third quarter of this year. Our segment has grow for globalization, as an example, has grown over 30% and in the past eight quarters with a great reduction in the operating loss of the business, so we are looking at the next to 20% increase in the fourth quarter of this year, which ranks us at the high end of the industry. To the landscape of the M&A firstly, driven by the regulatory movements more and more stakeholders of the state, the small and medium sized o office -- school tutoring companies, they are more ready to cooperate with Puxin.And secondly, the valuation is relatively the consideration or valuation is ranked higher, because as Puxin is growing bigger and bigger and pushing the bottom-line Puxin is becoming stronger and stronger. We are looking at relatively bigger and relatively more profitable target in the pipeline. So yes, the reason we are looking at, is raised higher compared with those targets in the pipeline prior to the IPO. But, again, we look rushing for those deals. So we are trying our best to get the reasonable deal.

[Operator:]

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

[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.