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Puxin Limited (NYSE:NEW)
Q4 2018 Earnings Conference Call
March 8, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Puxing Limited fourth quarter 2018 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the * key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press * then 1 on your touch-tone phone. To withdraw your question, please press * then 2. Please note, this event is being recorded.

I would now like to turn the conference over to Christian Arnell. Please go ahead.

Christian Arnell -- Vice President of Investor Relations

Thank you. Hello, everyone and thank you for joining Puxing's fourth quarter 2018 earnings 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 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'll 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 take 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.

Yunlong Sha -- Founder, Chairman, and Chief Executive Officer

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 proactively began implementing a series of internal measures to ensure our schools' compliance with the new regulations.

While China's macroeconomic environment softened during the quarter, we were still able to generate solid topline growth during the fourth quarter. Net revenues for the quarter grew to more than 530 million RMB, 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 rate 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.

We continued to acquire schools 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 Boys School and Tiancai School during the second half of the year after thorough due diligence on their 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.

Our net loss margin during 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 topline growth from acquired schools as we work to further narrow our loss.

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're 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.

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 Lohan 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 finance science and technology. His strong academic background in finance will play a significant role in helping us formulate a financial strategy for future acquisitions.

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

Peng Wang -- Chief Financial Officer

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

Net revenue was increased by 24.2% to 531.4 million RMB from 422 million RMB in the fourth quarter of 2017. This increase was primarily driven by increase in student enrollments, as introduced by Mr. Sha. Student enrollments increased by 45% from approximately 360,000 in the fourth quarter of 2017 to 531,000 in the same period of 2018. Cost revenues increased by 11.8% to 306.2 million RMB from 273.9 million RMB for the same period in 2017, primarily due to an increase in teacher compensation.

Non-GAAP cost revenues, which excludes FBC share-based compensation expenses, increased by 11.6% to 345.2 million RMB from 273.5 million in fourth quarter in 2017. Gross margin was 225.2 million RMB, an increase of 26.2% from 154 million RMB 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 391.1 million RMB from 319.2 million RMB in the fourth quarter of 2017. Expenses by 33.7% to 236.1 million RMB from 176.6 million RMB in fourth quarter of 2017.

Non-GAAP market expenses, which excludes share-based compensation expenses, increased by 29.5% to 227.6 million RMB from 175.8 million RMB in the fourth quarter of 2017. This increase was primarily due to an increase in brand promotion expenses and selling marketing staff compensation.

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

Total share-based compensation expenses allocated to related operating cost and expenses, increased by 113.9% to 45.2 million RMB to 21.1 million RMB in the third period of 2017. The increase was primarily due to new branch options employees in the fourth quarter of 2018.

Operating loss slightly increased by 0.5% to 165.9 million RMB from 165.2 million RMB in the fourth quarter of 2017. Operating margin was net 31.2 million RMB in the fourth quarter of 2018 compared with 38.6% for the same period in 2017.

Non-GAAP operating margin, which excludes share-based compensation expenses was next to 22.7% compared with net 33.7% in the same period of the prior year. Net loss attributable to [inaudible] increased by 10.3% to 239.7 million RMB compared with 217.4 million RMB during the fourth quarter of 2017. This diluted net loss attributable to Puxin Limited was 2.92 RMB compared with diluted net loss per share attributable to Puxin Limited of RMB 4.36 during the same period of 2017.

Non-GAAP net loss attributable to Puxin Limited was 158.9 million RMB compared with 148.8 million RMB during the same period of 2017. Non-GAAP basic diluted net loss per share attributable to Puxin Limited were 1.94 RMB compared with 2.98 RMB 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 2.2 billion RMB from 1.3 billion RMB in 2017. Gross margin was 985.2 million, an increase of 101.8% from 488.2 million in 2017. Gross margin was 44.2% compared with 38.1% in 2017.

Total operating loss increased by 101.1% to 1,624 million RMB from 807 million RMB in 2017. Operating loss increased by 99.9% to 638.7 million RMB from 319.5 million RMB in 2017. Operating margin was 28.7% in fiscal year 2018 compared with 24.9% in 2017. Non-GAAP operating margin with [inaudible] net 11.8% compared with net 20.6% in 2017, which decreased year over year.

Net loss attributable to Puxin Limited increased by 109.8% to 833.4 million RMB compared with 397.3 million RMB in 2017. Basic diluted net loss per share attributable to Puxin Limited were 11.56 RMB compared with basic and diluted net loss per share attributable to Puxin Limited of 7.96 RMB in 2017.

Non-GAAP net loss attributable to Puxin Limited was 325.8 million RMB compared with 271.1 million RMB in 2017. Non-GAAP basic diluted net loss per share attributable to Puxin Limited were 4.52 RMB compared with 5.44 RMB in 2017.

For December 31, 2018, we had total cash and cash equivalence of 778 million RMB compared with 104.7 million as of December 31, 2017. Finally, for the first part of 2019 guidance, we expect net revenue to be between 507.2 million RMB to 595 million RMB, which represents an increase of 15% to 20% year over year. This forecast reflects the company's current and preliminary use of market operating conditions, which are subject to change.

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

Questions and Answers:

Operator

Thank you. We will now begin the question and answer session. To ask a question, you may press * then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press * then 2. At this time, we will pause momentarily to assemble our roster. Once again, that is * then 1 to ask a question. We will pause momentarily. Again, * then 1.

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

Christian Arnell -- Vice President of Investor Relations

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. Good night.

Operator

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

Duration: 24 minutes

Call participants:

Christian Arnell -- Vice President of Investor Relations

Yunlong Sha -- Founder, Chairman, and Chief Executive Officer

Peng Wang -- Chief Financial Officer

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