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Edited Transcript of NEW.N earnings conference call or presentation 5-Mar-19 1:00pm GMT

Q4 2018 Puxin Ltd Earnings Call

Apr 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Puxin Ltd earnings conference call or presentation Tuesday, March 5, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Peng Wang

Puxin Limited - CFO

* Yunlong Sha

Puxin Limited - Founder, Chairman & CEO

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Conference Call Participants

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* Christian Arnell

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Presentation

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Operator [1]

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Good day and welcome to the Puxin Limited Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Christian Arnell. Please go ahead.

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Christian Arnell, [2]

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Thank you. Hello, everyone, and thank you for joining Puxin's Fourth Quarter 2018 Conference Call.

The company's results were released earlier today and are available on the IR website. 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 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 go through his prepared remarks in Chinese. I will translate for him in English. Mr. Sha, please?

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Yunlong Sha, Puxin Limited - Founder, Chairman & CEO [3]

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(foreign language)

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Christian Arnell, [4]

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[Interpreted] Hello, everyone, and welcome to our fourth quarter earnings conference call. 2018 was a challenging year for China's education industry. With the announcement of several new government regulations designed to standardize and enhance compliance of the after-school education institutions. As a public company we strongly support the government's reform measures and practically began implementing a series of internal measures to ensure schools compliance with the new regulation.

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Yunlong Sha, Puxin Limited - Founder, Chairman & CEO [5]

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(foreign language)

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Christian Arnell, [6]

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[Interpreted] While China's macroeconomic environment softened during the quarter, we were still able to generate solid top line growth during the fourth quarter. Net revenues for the quarter grew to more than CNY 530 million, an increase of 24.2% year-over-year and at the high end of our guidance range of 20% to 25%. We strategically slowed the pace of acquisitions as a result of the new regulations, but despite this revenue continued to gain growth momentum on the back of strong organic growth in student enrollments, which grew 45% year-over-year. We believe this demonstrates our strong operational capabilities and the enormous organic growth potential our existing schools have. For example, our utilization rates for the quarter increased to 78.7% from 70.6% during the same period of 2017, a significant improvement resulting from the continuous optimization of resource utilization efficiency. In addition, our retention rate increased further from the high levels we saw last year driven in part by organic growth across our network, which serves as a cornerstone for our long-term sustainable growth.

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Yunlong Sha, Puxin Limited - Founder, Chairman & CEO [7]

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(foreign language)

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Christian Arnell, [8]

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[Interpreted] We continued to acquire school during the quarter despite the strategic slowdown in the pace of our acquisitions early last year prior to the IPO and the impact from new regulations. We acquired Jinan Boya School and Tiancai School during the second half of the year after thorough due diligence on the compliance with the regulations. Tiancai School in particular, which we acquired during the fourth quarter has a strong market presence in Jinan, Shandong province and will create synergies with our other K-12 schools in that city. Our acquisition strategy in 2019 remains the same and will continue to serve as one aspect of our growth strategy.

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Yunlong Sha, Puxin Limited - Founder, Chairman & CEO [9]

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(foreign language)

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Christian Arnell, [10]

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[Interpreted] Our net loss margin here in the quarter continued to narrow with non-GAAP net loss margin improving by 490 basis points from a year ago, which we believe shows the effectiveness of our Puxin business system in generating growth across our school network. We will continue to implement our strategy to improve top line growth from acquired schools as we want to further narrow our loss.

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Yunlong Sha, Puxin Limited - Founder, Chairman & CEO [11]

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(foreign language)

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Christian Arnell, [12]

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[Interpreted] In October 2018, we established a business unit fully devoted to developing online education products and strategies to acquire and retain users. At the same time we are also developing a unique set of strategies to combine and leverage the synergies that will be created between our online and offline businesses. We will continue to increase our investment into the development of our online education business as part of our overall strategy throughout the year.

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Yunlong Sha, Puxin Limited - Founder, Chairman & CEO [13]

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(foreign language)

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Christian Arnell, [14]

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[Interpreted] Now one more important update I'd like to share with you. In February 2019, we appointed a new Independent Director. We are honored to have Mr. Wang Neng join our Board of Directors. Dr. Wang serves as Chong Khoon Lin Professor of Real Estate and Finance at Columbia Business School. He is also the Honorary Dean and Academic Director of the School of Finance at Shanghai University of Finance and Economics. A Research Associate at the National Bureau of Economic Research and a member of the [Loah Han] Academy. He is also the recipient of the Thousand Talents Program, one of the most prestigious awards granted by the Chinese Government. Dr. Wang's research interests include consumption finance, corporate finance, entrepreneurship finance, macroeconomics, international finance, asset pricing theory and financial science and technology. His strong academic background in finance will play a significant role in helping us formulate the financial strategy for future acquisitions.

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Yunlong Sha, Puxin Limited - Founder, Chairman & CEO [15]

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(foreign language)

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Christian Arnell, [16]

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[Interpreted] With that, I would now like to turn the call over to Peng, who will go over the financials. Peng?

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Peng Wang, Puxin Limited - CFO [17]

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Thank you, ladies and gentlemen. Thank you, Mr. Sha, and hello, everyone. Please be reminded that all amounts quoted here will be CNY 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.

So to start. Net revenues increased by 24.2% to CNY 531.4 million from CNY 422 million (sic) [428 million] in the fourth quarter of 2017. This increase was primarily driven by increase in student enrolments as introduced by Mr. Sha. Student enrolments increased by 45% from approximately 360,000 in the fourth quarter of 2017 to 551,000 in the same period of 2018. Cost and revenues increased by 11.8% to CNY 306.2 million from CNY 273.9 million for the same period in 2017 primarily due to an increase in teacher compensation.

Non-GAAP cost of revenues, which excludes SBC share-based compensation expenses increased by 11.6% to [CNY 305.2] million from CNY 273.5 million in the fourth quarter in 2017. Gross margin was CNY 225.2 million, an increase of 26.2% from CNY 154 million during the same period in 2017. Gross margin was 42.4% compared with 36% for the same period in 2017, which represents a more than 6% increase for the same period. Total operating expenses increased by 22.5% to CNY 391.1 million from CNY 319.2 million in the fourth quarter of 2017.

Selling expenses increased by 33.7% to CNY 236.1 million from CNY 176.6 million in the fourth quarter in 2017. Non-GAAP selling and marketing expenses, which excludes our share-based compensation expenses increased by 29.5% to CNY 227.6 million from CNY 175.8 million in the fourth quarter of 2017. The increase was a primary due to increase in brand promotional expenses and selling and marketing staff compensation.

General and administrative expenses increased by 8.8% to CNY 155 million from CNY 142.5 million during the same period in 2017. Non-GAAP G&A expenses, which excludes share expense -- share-based compensation expenses decreased by 2.7% to CNY 119.4 million from CNY 102.7 million in the fourth quarter of 2017.

Total share-based compensation expenses allocated to related operating costs and expenses increased by 113.9% to CNY 45.2 million from CNY 21.1 million in the same period of 2017. The increase was highly due to new grant options to employees in the fourth quarter of 2018.

Operating loss slightly increased by 0.5% to CNY 165.9 million from CNY 165.2 million in the fourth quarter of 2017. Operating margin was negative 31.2 million (sic) [31.2%]in the fourth quarter of 2019 compared with negative 38.6% for the same period in 2017.

Non-GAAP operating margin, which excludes our share-based compensation expenses was negative 22.7% compared with negative 33.7% in the same period of the prior year.

Net loss attributable to Puxin Limited increased by 10.3% to CNY 239.7 million compared with CNY 217.4 million during the fourth quarter of 2017. Basic and diluted net loss per ADS attributable to Puxin Limited were CNY 2.92 compared with basic and diluted net loss per ADS attributable to Puxin Limited of CNY 4.36 during the same period of 2017. Non-GAAP net loss attributable to Puxin Limited was CNY 158.9 million compared with CNY 148.8 million during the same period of 2017. Non-GAAP basic and diluted net loss per ADS attributable to Puxin Limited were CNY 1.94 compared with CNY 2.98 during the same period in 2017.

Now let me walk you through our 2018 full year financials very briefly. Net revenues increased by 73.7% to CNY 2.2 billion from CNY 1.3 billion in 2017. Gross margin was CNY 985.2 million, an increase of 101.8% from CNY 488.2 million in 2017. Gross margin was 44.2% compared with 38.1% in 2017.

Total operating loss increased by 101.1% to CNY 1,624 million from CNY 807.7 million in 2017. Operating loss increased by 99.9% to CNY 638.7 million from CNY 319.5 million in 2017. Operating margin was negative 28.7% in fiscal year 2018 compared with 24.9% in 2017.

Non-GAAP operating margin which excludes SBC was negative 11.8% compared with negative 20.6% in 2017, which represents [Semic] integrated phase year-over-year. Net loss attributable to Puxin Limited increased by 109.8% to CNY 833.4 million, compared with CNY 397.3 million in 2017.

Basic and diluted net loss per ADS attributable to Puxin Limited were CNY 11.56 compared with basic and dilute net loss per ADS attributable to Puxin Limited of CNY 7.96 in 2017. Non-GAAP net loss attributable to Puxin Limited was CNY 325.8 million, compared with CNY 271.1 million in 2017.

Non-GAAP basic diluted net loss per ADS attributable to Puxin Limited were CNY 4.52, compared with CNY 5.44 in 2017. Through December 31, 2018, we have total cash and cash equivalents of CNY 778 million compared with CNY 164.7 million as of December 31, 2017.

Finally, for the first part of the 2019 guidance, we expect net revenue to be between CNY 570.2 million to CNY 595 million, which represent increase of 15% to 20% year-over-year. This forecast reflects the company's current and preliminary views on market and our operating conditions, which are subjected to change.

This concludes our prepared remarks. I would now turn the calls to operator and open for Q&A. Operator, we are ready to take questions.

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Operator [18]

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(Operator Instructions)

We have no questions at this time. So I'd like to turn the conference back over to Christian Arnell for any closing remarks.

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Christian Arnell, [19]

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Thank you, everyone, for joining us this evening. If you have any further questions or comments, please don't hesitate to reach out to any of us. That concludes the call. Thank you very much. Have a good night.

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Operator [20]

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Thank you for attending today's presentation. You may now disconnect.