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Puxin Limited (NYSE:NEW)
Q3 2019 Earnings Call
Nov 18, 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 Third Quarter 2019 Earnings Conference Call and Webcast. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

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

Claire Yung -- Investor Relations

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

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

[Foreign Speech] Hello ladies and gentlemen, welcome to Puxin Limited earnings conference call for the third quarter of 2019.

[Foreign Speech] In the third quarter of 2019, Puxin Limited has achieved overall profitability for the first time. Net income reached RMB33.742 million compared to a net loss of RMB50.219 million. Gross profit margin was 50.3%, which had shown a steady increase, potentially making us on-track for continued profitability in the future. First, net revenues grew 48.7% year-over-year to RMB996 million, beating previous expectations. We have continued implementing our acquisition and integration growth strategy and successfully acquired eight schools. In addition, increase in student enrollment continues to be a key driver for our success. In the third quarter, Puxin student enrollment increased by 60.2%, reaching a total number of 871,896 enrollments.

[Foreign Speech] As we take a closer look at our business, the K-12 service line performed exceptionally well. Net revenues increased by 86.4% year-over-year. This can be attributed to both our acquisition and integration strategy while we have emphasized the acquisition of K-12 focus as well as excellent organic growth of our existing portfolio. On organic growth, our quarterly highlight affirms the improved operational efficiency as Puxin Business System continues to expand into lower-tier cities. For example, our retention rate reached 70.3% and has exceeded 70% for three consecutive quarters. Such exceptional retention rates have solidified Puxin's position as a top-tier education service provider. In particular, the operating profit of K-12 service lines, excluding financial impact from online school and headquarter increased by 667.1% year-over-year to over RMB90 million as we continue to scale-up.

[Foreign Speech] We're also happy to announce Puxin's Study Abroad business turned profitable for the first time this quarter since the acquisition of Global Education and ZMN Education in the third quarter of 2017. This was another testament to our acquisition and integration strategies. The strategic privilege is Puxin's Study Abroad business and led to positive result after three quarters.

[Foreign Speech] In summary [Phonetic], Puxin have secured consecutive and rapid revenue growth and turned profitable in the third quarter 2019. We are very optimistic about the future as we implement our acquisition and integration strategy and continue to build on solid organic growth.

[Foreign Speech] 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. Hello, ladies and gentlemen. Please be reminded that all amounts quoted here will be RMB and all percentage increase will be on a year-over-year basis unless otherwise stated. Please also refer to the earnings release for detailed information of our comparative financial performance on a year-over-year basis.

To start, net revenues were RMB996 million, an increase of 48.7% from the third quarter of 2018. This increase was primarily driven by an increase in student enrollments. Student enrollments increased 60.2% to 872,000 from 544,000 during the same period of 2018. Cost of revenues was RMB494.6 million, an increase of 32% from the same period of 2018, primarily due to an increase in teaching staff's compensation. Cost of revenues excluding share-based compensation expenses was RMB493.6 million, an increase of 32.5% from the third quarter 2018. Gross profit was RMB501.5 million, an increase of 70% from the same period of 2018. Gross margin was 50.3% compared to 44.1% for same period in 2018.

Total operating expenses were RMB459.9 million, an increase of 29.1% from the third quarter of 2018. Selling expenses were RMB304.8 million and increased 28.5% from the third quarter of 2018. Selling expenses excluding share-based compensation expenses were RMB299.9 million, an increase of 31.8% from the third quarter 2018. The increase was primarily due to increase in marketing expense and marketing staff compensation. General and administration expenses were RMB155.1 million, an increase of 30.5% from the same period last year. General and administrative expenses, excluding share-based compensation expenses were RMB150.3 million, an increase of 35% from the third quarter of 2018. The increase is primarily due to increases in staff compensation and daily operating expense. Total share-based compensation expenses allocated to related operating cost expenses decreased to RMB10.7 million from RMB19.3 million of the same period 2018, primarily due to less grants of options to employees in 2019.

Operating income was RMB41.5 million compared to an operating loss of RMB61.1 million in the third quarter of 2018. Operating margin was 4.2% compared to negative 9.1% for the same period in 2018. Adjusted operating income was RMB52.2 million compared to an adjusted operating loss of RMB41.8 million in third quarter of 2018. Adjusted operating margin was 5.2% compared to negative 6.2% for the same period of the prior year. Net income attributable to Puxin Limited was RMB33.7 million compared to net loss attributable to Puxin Limited of RMB50.2 million during the third quarter of 2018. Basic and diluted net income per ADS attributable to Puxin Limited were RMB0.38 compared to basic and diluted net loss of RMB0.62 during the same period of 2018. Adjusted net income attributable to Puxin Limited was RMB43.5 million compared to adjusted net loss attributable to Puxin Limited of RMB51.0 million during the same period of 2018. Adjusted basic net income per ADS attributable to Puxin Limited was RMB0.50 compared to adjusted base net loss of RMB0.62 during the same period 2018. Adjusted diluted net income for ADS attributable to Puxin Limited was RMB0.49 compared to adjusted net loss of RMB0.62 during the same period 2018.

EBITDA was RMB70.8 million compared to negative RMB19.5 million in the third quarter of 2018. EBITDA margin was 7.1% compared to negative 2.9% for the same period of 2018. Adjusted EBITDA was RMB80.6 million compared to negative RMB20.3 million in the third quarter of 2018. Adjusted EBITDA margin was 8.1% compared to negative 3% during the same period of the prior year.

Next, we will move on to the balance sheet. As of September 30, 2019, we have total cash and cash equivalents of RMB322 million compared to RMB778 million as of December 31, 2018. The decreases were primarily due to acquisitions of K-12 schools.

Finally, for guidance. For the fourth quarter of 2019, we expect net revenue to be between RMB770.6 million and RMB797.2 million, which represents an increase of 45% to 50% year-over-year. This forecast reflects company's current and preliminary views on the market and operational conditions, which are subject to change.

This concludes our prepared remarks. We'll 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 Instructions] Our first question comes from Mark Li with Citi. Please go ahead.

Mark Li -- Citigroup Inc. -- Analyst

Hi management, congratulations on the results. May I ask, what is our target for 2020 in terms of the revenue growth for both the K-12 and the Study Abroad and also any margin color and what would be our focus for M&A? Thanks.

Peng Wang -- Chief Financial Officer

Thank you Mark for the questions. As to the 2020, we are looking at a high double-digit growth in terms -- top-growth -- topline growth, of which the main driver will be the K-12 segment. And as you may well -- you may well know the Study Abroad clients, the Study Abroad segment is growing little bit slower in the K-12. So for 2020, we are, in general -- we are looking at the high-double digit growth, driven by the K-12 both from the acquisition and the organic growth altogether. So as to the margin, as shown in this earnings release, the overall gross margin for Puxin has risen to over 50%, but as a reminder of -- as a reference, we are looking at the opportunity of expansion in the high tier cities across China. So in terms of organic growth, we are looking at a higher gross margin rate, but in order to balance the topline and bottom line, we are going to expand our learning centers in the higher-tier cities. So gross margin is not the top priority of Puxin, instead we are looking at the balanced growth with the topline expansion and also the bottom line. Thank you.

Mark Li -- Citigroup Inc. -- Analyst

Thanks. May I follow-up? So for the organic growth expansion or M&A like any region, particularly we would focus more on? Thanks.

Peng Wang -- Chief Financial Officer

Okay, thank you. In terms of organic growth, we are looking at a 30% plus organic growth rate, managed [Phonetic] by the same-store growth as shown by the second and third quarter results of 2019. Again, we are also looking for opportunities in -- of the feasible expansion in the higher-tier cities of China. So of the other growth opportunity in 2020, we are expecting a growth, mainly driven by the organic growth, accompanied by physical expansion of learning centers in the high-tier cities.

Operator

Our next question comes from Sharon Zhang with CICC. Please go ahead.

Sharon Zhang -- CICC -- Analyst

[Foreign Speech] So let me briefly translate my questions. So my first question is regarding the Study Abroad business. So what's the trends of the profitability right now. Are we still targeting at increased profitability of the Study Abroad segment?

And my second question is regarding the K-12 segment. So what's the general mergers and acquisition environment of this segment and what's the level of evaluation right now is for this segment? Thank you.

Peng Wang -- Chief Financial Officer

Okay, thank you for your two questions. First, in terms of the growth for Study Abroad segment. First of all, I'd like to highlight that our Study Abroad segment is growing at the very top in the industry. As shown by the results in the third quarter of this year, our Study Abroad segment has grown -- for Global Education as an example, has grown over 30% in the past eight [Phonetic] quarters with a great reduction in the operating loss of the business. So we are looking at next -- 20% increase in the fourth quarter of this year, which still ranks us at the high-end of the industry.

As to the landscape there, the M&A, firstly, driven by the regulatory movement more and more stakeholders of the state -- of the small and medium size --school tutoring companies, they are more ready to cooperate with Puxin and secondly, the valuation is relatively -- the consideration or valuation is relatively higher, because Puxin is growing bigger and bigger and Puxin the -- the bottom line is Puxin is becoming stronger and stronger. We are looking at relatively bigger and relatively more profitable targets in the pipeline. So yes, I think, consideration we are looking at is relatively higher compared with those targets we have in the pipeline prior to the IPO, but yeah, again, we are not rushing for those deals. So we are trying our best to get the reasonable deal. Thank you.

Sharon Zhang -- CICC -- Analyst

Okay, thank you.

Operator

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

Claire Yung -- Investor Relations

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

[Operator Closing Remarks]

Duration: 25 minutes

Call participants:

Claire Yung -- Investor Relations

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

Peng Wang -- Chief Financial Officer

Mark Li -- Citigroup Inc. -- Analyst

Sharon Zhang -- CICC -- Analyst

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