Puxin Limited
Q4 2019 Earnings Call Transcript

Published: 5 Mar 2020

[Operator:]

Good morning and welcome to the Puxin Limited Fourth Quarter and Fiscal Year 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 Yung. Please go ahead.

[Claire Yung:]

Thank you, operator. Hello everyone and thank you for joining Puxin’s fourth quarter and fiscal year 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 give his remarks in Chinese and I will translate for him in English. Mr. Sha, please go ahead.

[Yunlong Sha:]

[Foreign Language] Hello ladies and gentlemen. Welcome to Puxin Limited earnings conference call for the fourth quarter and fiscal year of 2019. 2019 was a very inspiring year for the education industry. Online children market has displayed rapid growth and leaders in the offline market have also achieved outstanding progress in the past year.Following the Online-Merge-Offline trend in after-school tutoring market, Puxin has put forth significant efforts in both online and offline markets. In the offline space, we have not only re-engaged M&As activities, but we have also leveraged Puxin Business System's capabilities to maintain [indiscernible] organic growth rate for our K-12 business.Our online business has also been growing quickly. Therefore, as with our previous results, the fourth quarter earnings continued to be very encouraging. Net revenues this quarter are RMB 859.3 million an increase of 61.7% year-over-year. Specifically, user enrollments remained our primary growth engine. Although student enrollments grew to 873,000 in the fourth quarter of 2019, which is an increase of 67.5% compared to 521,000 in the same period of 2018.Fourth quarter increased by 74.5% year-over-year, and gross profit margin in the fourth quarter remains about 45%. In this earnings report, we have provided net revenue breakdown of our three line businesses, K-12, Study Abroad and our online core business for the first time. This will allow everyone to see a clear picture of our performance and to have a better understanding of our operating conditions.In the fourth quarter, net revenues of K-12 business grew 95.3%. Study Abroad services increased by 18.8% year-over-year. For the fiscal year of 2019, the consolidated net revenue reached RMB 3.104 billion with a very noteworthy increase of 39.3% year-over-year.Puxin Online School, our strategic project of online K-12 group class courses initiated in November 2018, has achieved substantial development in 2019. We have also attained an enrollment total of over 2.87 million for the year, an increase of 55.6% showing strong organic growth. In addition, we managed to reduce the operating loss by 44%.As we are all aware, the coronavirus situation has put a strain on almost all industries. The spread of the coronavirus is especially challenging for our offline business, which puts pressure on our results for the first quarter in 2020.Puxin Online tutoring services achieve its initial success as we brought forward the deployment of our Online-Merge-Offline strategy prior to the incident. We have also implemented the necessary technology, as well as student excellent teaching and execution of which enabled a 93% offline to online conversion rate.Overall we remain optimistic as we continue to evolve. The coronavirus outbreak will become history one day. The outlook is now very promising as once we take the necessary steps to manage our business.With that, I will now like to turn the call over to Peng, who will go over the financials.

[Peng Wang:]

Thank you, Mr. Sha.Hello, ladies and gentlemen. Good morning. 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.Starting with our financial results for the fourth quarter of 2019, net revenues were RMB 859.3 million, an increase of 61.7% from the fourth quarter of 2018. This increase was primarily driven by increases in student enrollments. Student enrollments increased by 67.5% to 873,000, from 521,000 in the same period of 2018.K-12 tutoring, study-abroad services and Puxin Online School each contributed 676,000, 16,000 and 181,000 in terms of student enrollments in the fourth quarter of 2019. Net revenues of K-12 tutoring services were RMB 581.9 million, an increase of 95.3% from the fourth quarter of 2018.Group class, personalized tutoring, and full-time tutoring courses contributed net revenues of RMB 302.4 million, RMB 114.8 million and RMB 164.7 million in the fourth quarter of 2019, respectively. Both internal organic growth and M&As contributed to the solid revenue achievements in the fourth quarter and full year of 2019.Net revenues of study-abroad tutoring services were RMB 277.4 million, an increase of 18.8% from the fourth quarter of 2018. Net revenues of Puxin Online School, providing K-12 tutoring services, were RMB 4.4 million in the fourth quarter of 2019.Cost of revenues was RMB 466.4 million, an increase of 52.3% from the fourth quarter of 2018, primarily due to an increase in teaching staff's compensation. Cost of revenues, excluding share-based compensation expenses was RMB 465.6 million, an increase of 52.6% from the fourth quarter of 2018.Gross profit was RMB 392.9 million, an increase of 74.5% from the fourth quarter of 2018. Gross margin was 45.7%, compared to 42.4% for the same period in 2018. Total operating expenses were RMB 486.7 million, an increase of 24.4% from the fourth quarter of 2018.Selling expenses were RMB 314.6 million, an increase of 33.2% from the fourth quarter of 2018. Selling and marketing expenses, excluding share-based compensation expenses, were RMB 310.1 million, an increase of 36.3% from the fourth quarter of 2018. The increases were primarily due to increases in marketing expense and marketing staff compensation.General and administrative expenses were RMB 172.1 million, an increase of 11% from the same period of 2018. General and administrative expenses, excluding share-based compensation expenses, were RMB 167.8 million, an increase of 40.6% from the fourth quarter of 2018. The increases were primarily due to increases in staff compensation and daily operating.Total share-based compensation expenses allocated to related operating costs and expenses decreased by 78.6% to RMB 9.7 million. The decrease was primarily due to the fully vested restricted shares granted in the fourth quarter of 2018 while there were no new restricted shares or options granted in the fourth quarter of 2019.Operating loss was RMB 93.8 million, a decrease of 43.4% from the fourth quarter of 2018. Operating margin was negative 10.9%, compared to negative 31.2% for the same period in 2018. Operating loss of K-12 tutoring services decreased by 36.4% to RMB 28.2 million while operating margin improved to negative 4.9% from negative 14.9%.Operating loss of study-abroad services decreased by 46% to RMB 65.6 million while operating margin improved to negative 23.7% from negative 52%. Adjusted operating loss was RMB 84.2 million, a decrease of 30.3% from the fourth quarter of 2018. Adjusted operating margin was negative 9.8%, compared to negative 22.7% for the same period of the prior year.Net loss attributable to Puxin Limited was RMB 108.8 million, a decrease of 54.6% from the fourth quarter of 2018. Basic and diluted net loss per ADS attributable to Puxin Limited were RMB 1.26 compared to RMB 2.92 during the same period of 2018.Adjusted net loss attributable to Puxin Limited was RMB 92.5 million, a decrease of 41.8% from the fourth quarter of 2018. Adjusted basic and diluted net loss previous per ADS attributable to Puxin Limited was RMB 1.06 compared to RMB 1.94, during the same period of 2018.EBITDA was negative RMB 68.1 million compared to negative RMB 176.2 million in the fourth quarter of 2018. EBITDA of K-12 tutoring services was negative RMB 11.1 million, compared to negative RMB 49.5 million in the fourth quarter of 2018.EBITDA margin was negative 7.9% in the fourth quarter of 2019 compared to negative 33.2% in the same period in 2018. Adjusted EBITDA was negative RMB 51.8 million compared to negative RMB 95.4 million in the fourth quarter of 2018. Adjusted EBITDA margin was negative 6% compared to negative 18% in the same period in 2018.Now as for the financial results for the fiscal year 2019, net revenues were RMB 3,104 million, an increase of 39.3% from 2018. This increase was primarily driven by increase in student enrollment. Student enrollments increased by 55.6% to RMB 2.87 million from RMB 1.85 million in 2018. K-12 tutoring, study-abroad services and Puxin Online School each contributed 2,607,000, 72,000 and 193,000 in terms of student enrollments in 2019.Net revenues of K-12 tutoring services were RMB 1,943.9 million, an increase of 64.4% from 2018. Group class, personalized tutoring and full-time tutoring courses contributed net revenues of RMB 1,103.6 million, RMB 553.7 million and RMB 286.6 million in 2019, respectively.Net revenues of study-abroad tutoring services were RMB 1,160.1 million, an increase of 10.9% from 2018. Net revenues of Puxin Online School, providing K-12 tutoring services, were RMB 16.5 million in 2019.Cost of revenues were RMB 1,629.4 million, an increase of 31.1% from 2018. Cost of revenues, excluding share-based compensation expenses, increased by 31.4% to RMB 1,625.1 million. Gross profit was RMB 1,474.5 million, an increase of 49.7% from 2018. Gross margin was 47.5%, compared to 44.2% in 2018. Total operating expenses were RMB 1,832.1 million, an increase of 12.8% from 2018.Selling expenses were RMB 1,083.8 million, an increase of 27.8% from 2018. Selling and marketing expenses excluding share-based compensation expenses, increased by 29.6% to RMB 1,061.9 million. General and administrative expenses decreased by 3.6% to RMB 748.3 million. General and administrative expenses, excluding share-based compensation expenses, increased by 24.7% to RMB 544 million.Total share-based compensation expenses allocated to related operating costs and expenses decreased by 38.5% to RMB 230.4 million. Operating loss decreased by 44% to RMB 357.5 million. Operating margin was negative 11.5% in 2019, compared to negative 28.7% in 2018.Operating loss of K-12 tutoring services decreased by 48.3% [ph] to RMB 119.9 million, while operating margin improved to negative 6.2% from negative 20%. Operating loss of study-abroad services decreased by 40.9% to RMB 237.6 million while operating margin improved to negative 20.5% from negative 38.5%. Adjusted operating margin was negative 4.1%, compared to negative 11.8% in 2018.Net loss attributable to Puxin Limited decreased by 37.8% to RMB 518.5 million, compared to RMB 833.4 million in 2018. Basic and diluted net loss per ADS attributable to Puxin Limited were RMB 6.06 compared to RMB 11.56 in 2018. Adjusted net loss attributable to Puxin Limited was RMB 183.5 million, compared to RMB 325.8 million in 2018. Adjusted basic and diluted net loss per ADS attributable to Puxin Limited was RMB 2.14, compared to RMB 4.52 in 2018.EBITDA was negative RMB 349.3 million, compared to negative RMB 680.9 million in 2018. EBITDA of K-12 tutoring services was negative RMB 114.2 million, compared to RMB 256.8 million in 2018. EBITDA margin was 11.3% in 2019, compared to negative 30.6% in 2018. Adjusted EBITDA was negative RMB 14.3 million, compared to negative RMB 173.3 million in 2018. Adjusted EBITDA margin was negative 0.5%, compared to negative 7.8% in 2018.Next we’ll move on to the balance sheet. As of December 31, 2019, the company had total cash and cash equivalents and the current portion of restricted cash of RMB 606.3 million, compared to RMB 778.0 million as of December 31, 2018. The current portion of restricted cash consisted primarily of deposits with Chinese commercial banks as collateral for our bank borrowings within one-year term.Finally for guidance, for the first quarter of 2020, we expect net revenues to be between RMB 708 million and RMB 738.8 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 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 will come from Mark Lee with Citi.

[Mark Lee:]

Hi Sha, Wang, thanks for the time. So, may I ask, if you could share more color on the measures you have taken for the coronavirus incident and how much impact on the financials besides the revenue, maybe also the margin you can share with us? And I also want to know what is our target and the strategy for our online education revenue this year? Thank you.

[Peng Wang:]

Thank you, Mark. As to your first question, I will break down into the courses in the winter vacation primary in January and February, and also that impact the novel virus on the March, which is the starting month for the spring semester. So as for the winter courses, the winter vacation courses, luckily with the help of our OMO strategy, with the practices, the timings, we obtained from the initiatives we took starting from November 2018, we successfully transferred over 93% of our students, those offline students to other online group classes, and we have roughly about 2% of students who refunded their courses.So the virus, its impact on our the winter courses is relatively small and our performance is quite satisfactory to the management, but as to its impact on the spring semester, say for example, this March up until now, I could not quantify its impact, but I can say that it did have quite significant impact on the recruitment of students for the spring semester. So I'm sorry, I could not quantify its impact, but I would like to shed some light on the retention rates of our spring semester. I mean from the winter courses, is around 80%.So the retention rate is still quite satisfactory, but we need maybe one, two, or three weeks to say if the quantify impact of the virus on the spring semester until those days whose boarding schools, the students go back to their schools. And for your second question, we with our OMO strategy we have three sub strategies.As we, our CEO, Mr. Sha mentioned last earnings release, we – our strategies to cover those lower tier cities, I mean tier four, five, six, with online programs, mainly from pushing online schools, and with those higher tier cities, tier one, two, three, we would like to leverage some of our students offline to online, a blended learning process. And we also have the third sub-strategy to expand physically with the help of OMO meaning may be we will expand into the relatively suburban areas of the cities we currently set footprints with those dual teacher programs. So that's basically the three sub-strategies, that's our OMO strategy. Thanks Mark.

[Mark Lee:]

Thank you.

[Operator:]

The next question will come from [indiscernible] of CICC,

[Unidentified Analyst:]

[Foreign Language] I will translate my questions by myself. So I have three questions for the management. The first one is regarding the Puxin Online School, what's your strategy in terms of the fierce competition in the market? And my second question is related to the summer courses, because due to the outbreak of the coronavirus, in China right now, there is saying that this summer might have very shortened the time. So what is the impact on that financials, if the management can provide detailed explanation?And the third question is regarding to the teaching staff. As we may know that there are a lot of online players right now and we also, Puxin have these OMO strategy, so if there are any problem or any pressure from the hiring teaching staff? Thank you.

[Peng Wang:]

Okay, thank you [indiscernible] for your questions. For the first question, as to the strategy of Puxin Online School, our strategy is quite simple and clear. We focus on the lower tier cities. We cover our students, clients there with online, large group classes. This business model has been proven by the top leaders, top players in the field like GSS. So, I won't explain that strategy into details. So, there are two take away elements, first the lower tier cities. Second, large group classes. Yes, because – again - as like now the question raised by Mark just now for the tier one, two, three cities, the high tier cities, we will still focus on the OMO strategy with the help of our current Offline Learning Centers.Per your second question, as to the potential cutting of the summer vacation and the delayed opening of those day schools, yes, it does have an impact probably significant impact on the performance of Puxin and I think also only the other players in the field, because we have to spend more time with our students with the online programs. And we are still not sure whether we can restart our offline programs.So, yes, for one thing, it will have in - it is impacting, and it will have impact on our performance of the semester. But unfortunately, by now I couldn't quantify, could not quantify either this impact on the financials of the spring semester or those financials in the summer, because by this - right at this moment, there is only one province across China, who has just confirmed this reopening only for the 9th and 12th graders led on the other grades. So sorry, I could not quantify this impact, but it won't take long, maybe two weeks or three weeks, we can maybe catch up with this quantified impact.Per your third question as to the supply of teachers with OMO strategy, we have several tactics to deal with it. First, with the higher tier cities like tier one, two, three, we already have 5000 full time teachers across 34 cities. They are well trained, and they have practiced OMO strategy during the winter vacations. So we already have over 5000 teachers by hand, and as to recruit new teachers, we have launched our campaign spring recruit campaigns together with top players, not only in our industry, but also across industries with the top companies across China indeed. What will cover the 211 the 985 universities, colleges. So yes, haven't launched the campaign and we already have 5000 teachers by hand. So thank you for questions again.

[Unidentified Analyst:]

All right, thank you.

[Operator:]

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

[Claire Yung:]

Thank you, operator. In closing, on behalf of the entire management team, we'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:]

Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.