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Puxin Limited (NEW)
Q2Â 2019 Earnings Call
Aug 13, 2019, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the Puxin Limited's Second Quarter 2019 Earnings Conference Call. [Operator Instructions]
I will now like to turn the conference over to Claire [Phonetic]. Please go ahead.
Claire -- Investor Relations
Thank you operator. Hello, everyone, and thank you for joining Puxin's second quarter 2019 earnings conference call. The Company's results were release 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 US 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 prepared remarks in Chinese and I will translate that in English. Mr. Sha, please go ahead.
Yunlong Sha -- Founder, Chairman, and Chief Executive Officer
[Foreign Speech]
Peng Wang -- Chief Financial Officer
Thank you. Mr. Sha. And hello, everyone. Sorry, now it's time for interpretation.
Claire -- Investor Relations
Okay. Hello, everyone, and welcome to our second quarter earnings conference call. I'm pleased to report that we made solid progress during the second quarter. Net revenues grew 19.1% year-over-year to RMB632 million. This was near the upper limit of our previous outlook. The solid performance was mainly driven by organic growth, especially in student enrollments, which increased by 39.5% to a total of 725,118 students during the quarter.
In terms of business lines, our K-12 education grew rapidly with a 30.4% year-over-year increase in revenues. We achieved this organic growth despite our modest approach to opening new learning centers during the quarter. In the meantime, what's particularly worth noting here is that our K-12 education's operating profit excluding amortization reached RMB18 million during the first half of 2019.
We believe one of the key metrics for after-school tutoring institutions is the retention rate. During the quarter, our retention rate reached 71.4%, an increase of 9.2 percentage point year-over-year. The growth benefited significantly from our approach to raise the customer value propositions. Specifically, we've dedicated our efforts to provide systematic learning plans at an early stage, along with a strong and stable teaching staff leading to a notable rise in the quality of classroom content and learning experience. This productive approach helped us grow our market shares in lower tier cities and increased especially attendance in facilities that PBS has operated for more than two years.
If you look at our P&L, our gross profit for the quarter increased by 23.6% year-over-year, while our gross margin reached 47.4%, an increase by 1.7 percentage points year-over-year. Gross profit margin reached 46.5% in the first half of 2019. Non-GAAP operating loss of 2019 Q2 decreased by 12.6% compared with the same period last year. Meanwhile, our net loss attributable to ordinary shareholders improved by 14.4%.
Overall, we are particularly pleased to have narrowed our loss while achieving such solid top-line growth in the first half of 2019. Gross margin continues to stay above 45% and the pace of overall business growth is in sync with our corporate strategy.
Since the first quarter of 2019, Puxin has been investing heavily in online product and offerings to seamlessly integrate the online and offline learning experience. We have to sufficient online learning at our [Indecipherable] and investment, one that we will patiently build and grow over time.
In addition, new regulations in lower tier cities has provided Puxin with more quality acquisition targets. Looking ahead, we plan to stay the course and continue to push our acquisition and [Indecipherable] strategy, which we are confident will lead to very positive results for the second half of the year.
With that, I would now like to turn the call over to Peng, who will go over the financials.
Peng Wang -- Chief Financial Officer
Thank you, Mr. Sha, and again, to everyone. 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.
Let's start. Net revenues were RMB632.9 million, an increase of 19.1% from the second quarter of 2018. This increase was primarily driven by increases in students enrollments. Students enrollments increased 39.5% to 725,000 from 520,000 during the same period of 2018. Cost of revenues was RMB332.8 million, an increase of 15.3% from the same period of 2018, primarily due to increase in teacher compensation.
Non-GAAP cost of revenues, which excludes share based compensation expenses, was RMB331.7 million, an increase of 15.8% from the second quarter 2018. Gross profit was RMB300.1 million, an increase of 23.6% from the same period of 2018. Gross margin was 47.4% compared with 45.7% for the same period in 2018.
Total operating expenses were RMB468.8 million, an increase of 42.6% from the second part of 2018. Selling expenses were RMB241.7 million, an increase of 15.1% from the second quarter of 2018. Non-GAAP selling and marketing expenses, which exclude share-based compensation expenses, were RMB236.4 million, an increase of 17.2% from the second quarter of 2018. The increases were primarily due to increase in selling and marketing staff compensation.
G&A expenses were RMB227.1 million, an increase 91.2% from the same period last year. Non-GAAP G&A expenses, which exclude share-based compensation expenses, were RMB118.2 million, an increase of 13.3% from the second quarter of 2018. The increase was primarily due to increase in stock compensation.
Total share-based compensation expenses allocated to related operating costs and expenses were RMB115.4 million, an increase of 360.4% from the same period of 2018. The increase was primarily due to new grants for options to employees in the first quarter of 2019. Operating loss was RMB168.7 million, an increase of 96.1% from the second quarter of 2018. Operating margin was 26.7% compared with negative 16.2% for the same period in 2018.
Non-GAAP operating loss was RMB53.3 million compared with RMB61 million in the second quarter of 2018. Non-GAAP operating margin was negative 8.4% compared with negative 11.5% in the same period of the prior year. Net loss attributable to Puxin Limited was RMB194.6 million, an increase of 3.3% from the second quarter of 2018. Basic and diluted net loss per ADS attributable to Puxin Limited were RMB2.28 compared with RMB2.88 during the same period of 2018. Non-GAAP net most attributable to Puxin Limited was RMB60.7 million compared with RMB17.9 million during the same period of 2018. Non-GAAP basic and diluted net loss per ADS attributable to Puxin Limited was RMB0.71 compared with RMB1.09 during the same period of 2018.
EBITDA was negative RMB159.8 million compared with negative RMB156.2 million in the second quarter of 2018. EBITDA margin was negative 25.2% compared with negative 29.5% for the same period in 2018. Non-GAAP was negative RMB25.8 million compared with negative RMB38.7 million in the second quarter of 2018. Non-GAAP EBITDA was negative 4.1% compared with negative 7.3% during the same period last year.
Next, we'll move on to the balance sheet. As of June 30, 2019, we had a total cash and cash equivalents of RMB500.6 million compared with RMB778 million as of December 31, 2018.
Finally, for guidance, for the third quarter of 2019, we expect net revenues to be between RMB937.5 million to RMB971 million ---and RMB971 million, which represents an increase of 40% to 45% year-over-year. This forecast reflects the Company's current and preliminary views on the markets and operational conditions, which are subject to change.
This concludes our prepared remarks. I now turn the call over to the operator and open the call up for Q&A. Operator, we are ready to take questions.
Questions and Answers:
Operator
We will now begin the question-and-answer session. [Operator Instruction] The first question comes from Sharon Liang [Phonetic] of CICC. Please go ahead. Mr Liang. The next question comes from Tommy Wong of China Merchants Securities. Please go ahead.
Tommy Wong -- China Merchants Securities -- Analyst
Hi, management. Thank you for taking my call. I just have two questions. First question, can you talk about the big gap between the enrollment growth for second quarter and also the revenue growth? So, if you just used the math straight to understand, then it seems like the pricing has cut in half. I'm sure there's more to it?
And then, second question relating to the expenses. Can you just give us a little bit more color on the elevated G&A expense, because as I had the impression that we had a high expense in the first quarter and then second quarter maybe come down like we saw in last year and if we have an elevated expense for the second quarter, is that going to sustain for the second half? Thank you.
Peng Wang -- Chief Financial Officer
Okay. So thank you for asking. The first is about -- could you repeat the first question? The second is about the G&A expense increase.
Tommy Wong -- China Merchants Securities -- Analyst
Yeah. Correct. So the first question is just the gap between the enrollment growth and also the revenue growth. So the enrollment growth seems very fast and revenue growth is just a little bit slower on a year-over-year basis.
Peng Wang -- Chief Financial Officer
Okay. As for your first question as to the gap between the enrollment growth and the revenue growth, there are two underlying reasons for that. First is, we are still implementing like promotional classes for those schools we newly acquired to increase exposure of those schools to prospective parents and students. So that makes up a large portion of the gap. And the second reason is, we stick to the strategy of enrollment first, ASP second. Means, in a highly fragmented market, we focus on grabbing more market share instead of increasing the ASP in an aggressive way. So that explains why we have a faster growth rate of enrollments compared with the revenue.
Per your second question about the G&A expenses, the increase of the G&A expenses is mainly attributable to our investment in R&D. We have been investing heavily with our curriculum improvement of IT technology. Mr. Sha mentioned just now about the PBS system, the Puxin Business System, of which, there are a dozen of modules to be launched after acquiring or taking control of those schools. So we implemented or launched our technology platforms essential to curriculum in those systems one by one. During the process, it takes a lot of time and energy and also money to fully implement those technology -- those systems. That's why we saw an increase G&A expenses. Thanks for the question again.
Tommy Wong -- China Merchants Securities -- Analyst
Okay. Thanks.
Operator
The next question comes from Sharon Liang [Phonetic] with CICC. Please go ahead.
Sharon Liang -- CICC -- Analyst
[Foreign Speech] So let me briefly translate the question. I have two questions regarding the upcoming quarters. So first question is regarding the development plans for the third quarter. And also, I wonder, are we able to achieve positive net profit in the upcoming quarter? And also, besides, could you please talk about the online education products the Company offers? And also what do you think of the competitive landscape of the online education market, and does it have any effect on the Company? Thank you.
Peng Wang -- Chief Financial Officer
Thank you for your questions and you are so considerate to put it up in bilingual ways. Per your first question about the -- you have the guidelines for -- guidance for the third quarter profits or the bottom line. We are looking at a positive bottom line by the end of third quarter. I cannot give you the exact number of the profits of third quarter, but we are looking at a positive one, a scalable one, a meaningful profits in the third quarter. That's for your first question.
The second question is about the online strategy or online programs of Puxin. As Mr. Sha said just now, we take online programs or online platform as a strategic platform or a strategic investment within Puxin. So, first of all, we launched our online platform about two quarter -- three quarters ago and we are very patient in several ways. First of all, our online platform, the ultimate goal is to serve our clients, parents, students in a better way to find the delicate balance between the offline service and the online programs. So that's our ultimate goal. So we are not rushing for profits or revenues.
Secondly, for the online programs, we think one of the key difference in our programs is we are not looking at a 100% online program or curriculum. Instead, we believe that as a great portion of our students are in their primary schools or middle high schools, they are not that disciplined to take purely online programs all by themselves or without the guidance of their parents. So our program, online program starts with an initiative to merge online curriculum with offline service.
Certainly and finally, as to the possible influence or other competitive landscape of the industry, yes, I have to admit that online programs are competing with offline programs in terms of the same venue, the same subject or the same learning period, but there are two things I would like to highlight is, first is, online programs or online learning is not the enemy of offline. In contrast of that, online programs, offline programs, they are both tools for learning, for the improvement of students. So, instead of competing with each other in the long term, they are complementary to each other.
Secondly, we believe that online programs in order to be really effective, they need to find a way to cooperate or kind of merge with the offline programs, given the fact that a lot of students in the K-12, after school tutoring industry, are teenagers or even younger. So that's our standing of the landscape in this. Thank you.
Sharon Liang -- CICC -- Analyst
Okay. Thank you for the detailed information. I would like to add one more question regarding the Global Education. Could you please give us Puxin's [Phonetic] briefly introduction on the current situation of Global Education? Thank you.
Peng Wang -- Chief Financial Officer
Yeah. Sure. As you may well know, we bought Global Education from Pearson in the third quarter of 2017, roughly two years ago. At the time of the acquisition, Global Education's top line with around RMB600 million with a net loss of RMB120 million or even plus. It's kind of [Indecipherable] at a time. After two years, we are looking at a 20% plus growth rate in terms of the top line for Global Education this year and more meaningfully, we are expecting a next to break even of Global Education by the end of 2019. Means, compared with the RMB19 million net loss last year, we are looking forward to a next to break even performance of Global Education by the end of this year. Yes, of course, there is lot of efforts put in during the process, but luckily, we are turning around this trend.
Sharon Liang -- CICC -- Analyst
Okay. Thank you for answering my questions. Thank you.
Peng Wang -- Chief Financial Officer
Thank you.
Operator
I would now like to turn the conference back over to Claire. Please go ahead.
Claire -- Investor Relations
Okay. We received some questions from investors before the conference call today. And management team will like to take this opportunity to answer them for us. So the question is, how do you explain this improvement in non-GAAP profit and loss this quarter?
Peng Wang -- Chief Financial Officer
Okay. Try answer your question one by one or one for all?
Claire -- Investor Relations
There will be just this one question.
Peng Wang -- Chief Financial Officer
Okay, so by then, non-GAAP and non-GAAP improvement.
Claire -- Investor Relations
Yes. I'll repeat the question again. How do you explain the improvement in non-GAAP profit and loss this quarter?
Peng Wang -- Chief Financial Officer
Okay. Actually, our gross profit increased by 28% year-over-year for the first quarter and by 23.6%for the second quarter. As Mr. Sha mentioned just now, our gross margin reached 47.4% in the second quarter and for the first half of the year it's 46.5%. Total operating expenses in the first quarter decreased 24% year-over-year, or 12.6% for the second quarter of this year. Accordingly, the net loss attributable to Puxin Limited narrowed by 14.4% in the second quarter. Given that our revenue growth strategy, we have already seen a key improvement in operating loss. Means, we narrowed the net loss while we increased our revenues steadily over the previous quarters. So in non-GAAP terms our EBITDA was only negative RMB25 million in the second quarter of this year.
If we look at the investment we made in our online school business, which is over to RMB20 million, in other words, our non-GAAP EBITDA excluding the investment in the online business, is about negative RMB5 million or next to breakeven. Yeah, I think that's the improvement in non-GAAP process.
Claire -- Investor Relations
Okay. Thank you for answering. We have one more question. What's the general situation of your study abroad program?
Peng Wang -- Chief Financial Officer
Okay. The study abroad business?
Claire -- Investor Relations
Yes.
Peng Wang -- Chief Financial Officer
Yeah. Okay. As I have explained to the question raised by CICC analyst, the study abroad business, mainly including Global Education and ZMN, which in Chinese [Foreign Speech], they contributed to a great portion, if not all, of the net loss of our study abroad business line, because at the time of acquisition in 2017, those two institutions or companies added up to almost RMB200 million in net loss. As to -- per Global Education, we have talked about that in detail just now. We are looking at RMB20 million plus increase in terms of top line, and the next to breakeven in terms of bottom line. For ZMN, though, it is still making loss by now, and will be making loss by the end of this year. We are happy to say, its cash revenue has been steadily growing.
For example, as we disclosed in the first quarter earnings release, the ZMN saw a 34% increase in half revenue, but its revenue grow only by 1% due to the business nature of ZMN, because in essence, ZMN is a high end university or college placement consulting firm. So its revenue could be recognized over a period of two or sometimes 2.5 years as students usually come to us at Grade 9 or Grade 10, but the service could be only completed or finished by Grade 12 before their entrance into colleges or universities in the United States or Commonwealth Countries. So in that way ZMN, especially, its revenue could be recognize at a lower speed, much slower speed or slower rate compared with cash revenue. So, in other words, Global Education, which has been the largest acquisition we ever made, will be breakeven or next to breakeven by the end of this year and a RMB20 million plus increase in the top line, while ZMN will be still making loss by the end of this year. But we are expecting a breakeven or above in terms of the bottom line of the ZMN in the year 2020 because its cash revenue will be steadily recognized on its P&L. So that's the general -- the whole picture -- the general picture of our study abroad business line. Thank you.
Operator
This concludes our question-and-answer session. I would now like to turn the conference back over to Claire for any closing remarks. Please go ahead.
Claire -- Investor Relations
Thank you. Operator. In closing, on behalf of the entire management team, we'll 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
[Operator Closing Remarks]
Duration: 38 minutes
Call participants:
Claire -- Investor Relations
Yunlong Sha -- Founder, Chairman, and Chief Executive Officer
Peng Wang -- Chief Financial Officer
Tommy Wong -- China Merchants Securities -- Analyst
Sharon Liang -- CICC -- Analyst
