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Edited Transcript of NEW.N earnings conference call or presentation 20-May-19 12:00pm GMT

Q1 2019 Puxin Ltd Earnings Call

Jun 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Puxin Ltd earnings conference call or presentation Monday, May 20, 2019 at 12:00:00pm 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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* Frank Lu

Axiom Investors, L.P. - Research Associate Emerging markets equity generalist

* Tip Fleming

Christensen & Associates - MD

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Presentation

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Operator [1]

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Good day and welcome to the Puxin Limited First Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Tip Fleming of Christensen. Mr. Fleming, please go ahead.

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Tip Fleming, Christensen & Associates - MD [2]

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Thank you, operator. Hello, everyone, and thank you for joining Puxin's First Quarter 2019 Earnings Conference Call.

The company's results were released earlier today and are available on the company's IR website at http.ir.pxjy.com.

On the call today are Mr. Yunlong Sha, the company's Founder, Chairman and Chief Executive Officer; and Mr. Peng Wang, his 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 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 read through his prepared remarks in Chinese. I will translate for him in English. Mr. Sha, please go ahead.

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

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(foreign language)

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Tip Fleming, Christensen & Associates - MD [4]

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[Interpreted] Hello, everyone, and welcome to our first quarter earnings conference call.

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

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(foreign language)

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Tip Fleming, Christensen & Associates - MD [6]

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[Interpreted] I'm pleased to report that we made solid progress in the first quarter. Net revenues grew 24.2% year-over-year to RMB 616 million, exceeding the top end of our guidance by 4.2%. The solid performance was mainly driven by organic growth, especially in student enrollments, which increased by 54.1% to 402,061 during the quarter.

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

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(foreign language)

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Tip Fleming, Christensen & Associates - MD [8]

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[Interpreted] In terms of business lines, our K-12 education segment grew rapidly with a 38% year-over-year rise in revenue. This organic growth was impressive, indeed, given that we took a prudent approach to opening new learning centers during the quarter.

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

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(foreign language)

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Tip Fleming, Christensen & Associates - MD [10]

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[Interpreted] We believe one of the most important metrics for after-school tutoring institutions is the retention rate. During the quarter, our retention rate reached 81.3%. Student retention largely reflects students' and parents' perception of the quality of a school's teaching and services. We believe our high retention rate demonstrates the solid integration of the schools that we've acquired over the past few years. We've worked very hard to ensure that at each of the acquired schools, we improve and standardize both the teaching content and approach in all of our classrooms. The approach has clearly been well received by parents, and they can see the results based on their children's academic performance.

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

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(foreign language)

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Tip Fleming, Christensen & Associates - MD [12]

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[Interpreted] If you look at our P&L, our gross profit for the quarter increased by 26% year-over-year while our gross margin rose above 45%. Meanwhile, our total operating expenses decreased by about RMB 130 million or 24% year-over-year. Net loss attributable to ordinary shareholders improved by 29.9% compared with the first quarter of 2018. We achieved these results by standardizing products at what we call our central kitchen. And by developing a carefully refined management structure, it has helped us avoid burning money, which is often seen in the K-12 industry. This has truly helped us drive healthy and sustainable organic growth. We've further created value for shareholders by implementing cost controls over our operating expenses related to human resources, administration and marketing.

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

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(foreign language)

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Tip Fleming, Christensen & Associates - MD [14]

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[Interpreted] Overall, we are particularly pleased to have narrowed our loss while achieving such solid top line growth in the first quarter. With our unique acquisition-plus-integration model, we've proven that we can successfully acquire and then renovate and integrate newly acquired schools in about 8 quarters. In addition, upon the launch of our online education business in the fourth quarter of last year, we are looking forward to further exploring what is known as an OMO model, or Online-Merge-Offline model, in the education market in China.

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

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(foreign language)

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Tip Fleming, Christensen & Associates - MD [16]

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

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Peng Wang, Puxin Limited - CFO [17]

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Thank you, Mr. Sha and Tip, and hello, everyone.

Please be reminded all amounts quoted here will be RMB, and all percentages 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 were CNY 615.7 million, an increase of 24.2% from the first quarter of 2018. As Mr. Sha has mentioned just now, this increase was primarily due to the increase in student enrollment. Student enrollment increased 54% to 402,000 from 261,000 in the same period of last year.

Cost of revenues was CNY 335.6 million, an increase of 22.7% from the same period of 2018 primarily due to an increase in teacher compensation. Non-GAAP cost of revenues, which excludes share-based compensation expenses, was CNY 334.2 million, an increase of 22.6% from the first quarter of 2018.

Gross profit was CNY 280.1 million, an increase of 26% from the same period of 2018. Gross margin was 45.5% compared with 44.8% for the same period in 2018.

Total operating expenses was CNY 416.6 million, a decrease of 24% from the first quarter of 2018. Selling expenses were CNY 222.6 million, an increase of 35.2% from the first quarter of 2018. Non-GAAP selling and marketing expenses, which exclude share-based compensation expenses, were CNY 215.5 million, an increase of 32.7% from the first quarter of 2018. The increases were primarily due to the rise in selling and marketing staff compensation.

I'd like to add a few words about the selling expenses increase. The driver for this selling expenses increase was mainly the increase of selling expenses in the study-abroad test prep business line. For other study-abroad test prep business line, the cash revenue was increasing in the first part of this year quite rapidly. But due to the nature of the business, the revenue of this line grow at a mild pace. So in terms of selling expenses associated with compensation for our staff, we give incentives based on the cash revenue. So if we look at the selling expenses based on the revenue, the increase was significant. But if we compare the selling expenses to the correspondent cash revenue, those numbers will be much -- be mild.

G&A expenses were CNY 194 million, a decrease of 49.4% from the same period last year. The decrease was primarily due to a decline in share-based compensation expenses. Non-GAAP G&A expenses, which excludes share-based compensation expenses, were CNY 107.8 million, an increase of 6.5% from the first quarter of last year.

Total share-based compensation expenses allocated to related operating cost expenses was CNY 94.7 million, a decrease of 66.8% from the same period of 2018. The decrease was primarily because fewer options were granted to employees in the first quarter of '19.

Operating loss was CNY 136.5 million, a decrease of 58.1% from the first quarter of 2018. Operating margin was negative 22.2% compared with negative 65.7% for the same period in 2018. Non-GAAP operating loss was CNY 41.8 million compared with CNY 40.4 million in the first quarter of 2016 -- 2018. Non-GAAP operating margin was negative 6.8% compared with negative 8.1% in the same period of the prior year.

Net loss attributable to Puxin Limited was CNY 248.8 million, a decrease of 29.9% from the first quarter of 2018. Basic and diluted net loss per ADS attributable to Puxin Limited were CNY 3.02 compared with CNY 6.10 during the same period of 2018.

Non-GAAP net loss attributable to Puxin Limited was CNY 73.8 million compared with CNY 45 million during the same period of 2018. Non-GAAP basic and diluted net loss per ADS attributable to Puxin Limited was CNY 0.90 compared with CNY 0.78 during the same period of 2018.

EBITDA was negative CNY 191.9 million, a decrease of 41.7% from the same -- from the first quarter of 2018. EBITDA margin was negative 31.2% compared with negative 66.4% on the same period in 2018. Non-GAAP EBITDA was negative CNY 16.9 million compared with negative CNY 19 million in the first quarter of 2018. Non-GAAP EBITDA was negative 2.7% compared with negative 3.8% in the same period of the prior year.

Next, we'll move on to the balance sheet. As of March 31, 2019, we had total cash and cash equivalents of CNY 666.6 million compared with CNY 778 million as of December 31, 2018.

Finally, for guidance. For the second quarter of 2019, we expect net revenue to be between CNY 611 million to CNY 637.6 million, which represents an increase of 15% to 20% 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. I will now turn to -- hand the call to the operator and open the call for Q&A. Operator, we are ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Frank Lu with Axiom Investments (sic) [Investors].

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Frank Lu, Axiom Investors, L.P. - Research Associate Emerging markets equity generalist [2]

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Congrats on a good quarter. I just have a quick couple of questions. First, can we -- can you folks update the time line for overseas profitability? Just when should we start seeing profitability in the overseas unit? And then also, maybe update on just outlook for K-12 growth maybe for next semester and also the rest of the year? And maybe just say a couple of things more on your online strategy.

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Peng Wang, Puxin Limited - CFO [3]

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Okay. As to the profitability of the test -- study-abroad test prep, as -- Frank, as you have known, we acquired the 2 large institutions of test prep, study-abroad test prep, Global Education and ZMN in the third quarter of 2017. At that time, both companies were losing money. For Global Education, its revenue was CNY 600 million and net loss at CNY 120 million. For ZMN, the net loss rate was even higher. So as we have mentioned in the IPO at the prospectus, it nearly took us 8 quarters to turn around the underperforming school or the company. So we are looking at a breakeven or next to breakeven situation for Global Education. And due to the business nature of ZMN, which is kind of a high-end consulting firm, instead of after-school tutoring, its revenue, as I mentioned just now, are above the selling expenses. For ZMN, we are expecting a lower pace of breakeven not in this year, probably in the first half of last year -- of next year. So in one word, the study-abroad test prep will not make profits in this year. But given the fact that Global Education were making a big loss in the year of 2017, we expect the Global Education to be either breakeven or next to breakeven, which is still a big progress. So that's the -- my response to the first question you mentioned.

And as to the -- for the growth of our K-12 segment, we are looking at a organic growth of 30% or above. That's on a annual basis.

And as to the third question of the online business, I'm pleased to say that our online business is growing in organic way. It's not burning money, but its growth is quite impressive. We are -- instead of leveraging the offline students online, we try to expand into the lower-tier cities with our online programs, which will be very promising if we consider the possibility of OMO between the online and offline programs. So that's the -- our online business.

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Operator [4]

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The next question comes from [Kathleen Zhu] with Deutsche Bank.

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Unidentified Analyst, [5]

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This is [Matt Cheung]. I am asking question on behalf of [Kathleen Zhu]. So my first question is about what is the reason of increasing operating loss? And can you please give us more color on the OP margin guidance like for next quarter or full year?

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Peng Wang, Puxin Limited - CFO [6]

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Thank you, Matt. And your first question is -- I mentioned just now, the main driver for the increase in operating loss or the operating expenses was the selling and the marketing expenses. And if we break down the selling and marketing expenses into 2 business lines, which are K-12 and study-abroad test prep, we can say that most of the increase in the selling and marketing expenses were due to the test-prep business line. And the reason of that increase was that cash revenue of both Global Education and ZMN had been growing at a decent speed, and other compensation mechanisms for the -- for other salespersons are mainly related to their -- to the cash revenue instead of revenue. So given the fact that the revenue pace is a little bit lower than the pace of cash revenue and we pay -- we reimburse the salesperson based on the cash revenue, so if we divide the selling expense by revenue instead of cash revenue, it seems that the ratio of selling and marketing expenses has been increasing. But later on, as most of this cash revenue will become revenue, step-by-step, we are looking at a decreasing rate of selling and marketing expense in the following quarters. And accompanied by this decrease in selling and marketing expense, our operating margin will be on the track of improvement in the following quarters.

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Operator [7]

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(Operator Instructions) The next question comes from [Chris Shae] with [Cyber Atlas].

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Unidentified Analyst, [8]

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(foreign language) I will translate my question all by myself, and I have two question. And the first is that can you provide the breakdown of the growth of the business in the K-12 as well as the GEDU and (foreign language) in the Q1 and then later on? And how's the growing trend and growth trend in this year going forward? And in the -- that my second question is related with, say, the business segment margin. And since the earning was reported by the recognition in -- after revenue as well as the cost and especially for the business segment and after GEDU and (foreign language). And I want to know, say, if we look at the business separately and how's the operating margin of the K-12 and how about the cash margin of the GEDU and (foreign language), and which has the maybe longer -- even longer in revenue recognition mechanism under the new accounting treatment? (foreign language)

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Peng Wang, Puxin Limited - CFO [9]

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(foreign language), Chris. Thanks, Chris, for the two questions. I'll answer the two questions in English. First as to the growth rate of K-12 and the study-abroad test prep. For the first quarter, the growth rate for the K-12 business line was 37% plus. And the growth rate for the study-abroad test prep business line, we've seen low -- was in low single digit mainly due to the business nature of the test -- of the study-abroad test prep. The cash revenue -- in fact, the cash revenue of the study-abroad test prep business line was quite good. For GEDU, it's over 20%. And for ZMN, it's over 35% for the cash revenue. But again, the revenue was increasing at much slower pace. So that's for your first question.

If we look at the cash revenue or the cash margin of the study-abroad test prep business line, first, we can say that both GEDU and ZMN are increasing at an amazing speed in terms of cash revenue. It means it has 2 -- it has impact on 2 aspects. First of all, those cash revenue will become revenue later on, step-by-step, quarter-by-quarter. So we are expecting a increasing speed for the revenue recognition in the following quarters. And thus, we also expect those COGS, like cost and expenses, including selling and marketing expenses, will be driven down accompanied by the process. So if we look at the margin of K-12 and study abroad, K-12, our gross margin right now is almost 46%. And for the study-abroad test prep business line, the gross margin is higher. It's over 50%. And we are expecting that margin to grow for the same reason I mentioned just now. If we look at the cash margin of the study-abroad test prep business line, I can say it's over 60% for now. So that's for your second question.

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Operator [10]

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(Operator Instructions) Since there appears to be no further questions, this will conclude our question-and-answer session.

I would now like to turn the conference back over to Tip Fleming for any closing remarks.

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Tip Fleming, Christensen & Associates - MD [11]

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Thank you, operator. In closing, on behalf of the entire management team, we'd like to thank you for joining. Thank you again for your participation on today's call. If you have any further inquiries in the future, please don't hesitate to contact us or the company directly. Thank you very much.

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Peng Wang, Puxin Limited - CFO [12]

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Thank you.

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Operator [13]

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