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Puxin Limited (NYSE:NEW)
Q4 2019 Earnings Call
Mar 5, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Puxin Limited Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Claire Yung. Please go ahead.

Claire Yung -- Investor Relations

Thank you, operator. Hello everyone, and thank you for joining Puxin's fourth quarter and fiscal year 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. I will translate for him in English. Mr. Sha, please go ahead.

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

[Foreign Speech]

Hello, ladies and gentlemen. Welcome to Puxin Limited earnings conference call for the fourth quarter and fiscal year of 2019. 2019 was a very inspiring year for the education industry. Online tutoring market has experienced rapid growth and leaders in the offline market have also achieved outstanding progress in the past year. Following the Online-Merge-Offline trend in after-school tutoring market, Puxin has put forth significant efforts in both online and offline markets. In the offline space, we have not only reengaged M&A activity, but we have also leveraged Puxin Business System's capabilities to maintain a stellar organic growth rate for our K-12 business. Our online business has also been growing quickly.

Therefore, as with our previous results, the fourth quarter earnings continued to be very encouraging. Net revenues this quarter are RMB859.3 million, an increase of 61.7% year-over-year. Specifically, student enrollments remained our primary growth engine. Total student enrollments grew to 873,000 in the fourth quarter of 2019, which is an increase of 67.5% compared to 521,000 in the same period of 2018. Gross profit increased by 74.5% year-over-year, and gross profit margin in the fourth quarter remains above 45%.

In this earnings report, we have provided net revenue breakdown of our three main businesses. K-12, study-abroad and Online School business for the first time. This will allow everyone to see a clear picture of our performance and to have a better understanding of our operating conditions. In the fourth quarter, net revenues of K-12 business grew 95.3%. Study-abroad services increased by 18.8% year-over-year.

For the fiscal year of 2019, the consolidated net revenues reached RMB3.104 billion with a very noteworthy increase of 39.3% year-over-year. Puxin Online School, our strategic project of online K-12 group class courses initiated in November 2018, has achieved substantial development in 2019. We have also attained an enrollment total of over 2.87 million for the year, an increase of 55.6% showing strong organic growth.

In addition, we managed to reduce the operating loss by 44%. As we are all aware, the coronavirus situation has put a strain on almost all industries. The spread of the coronavirus is especially challenging for our offline business, which puts pressure on our results for the first quarter in 2020.

Puxin Online tutoring services achieved its initial success as we brought forward the deployment of our Online-Merge-Offline strategy prior to the incident. We have also implemented the necessary technology as well as student excellent teaching and execution team, all of which enables a 93% offline-to-online conversion rates.

Overall, we remain optimistic as we continue to evolve. The coronavirus outbreak will become history one day. The outlook is still very promising as long as we take the necessary steps to manage our business.

With that, I will 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. Good morning. 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.

Starting with the financial results for the fourth quarter of 2019, net revenues were RMB859.3 million, an increase of 61.7% from the fourth quarter of a 2018. This increase was primarily driven by increases in student enrollments. Student enrollments increased by 67.5% to 873,000 from 521,000 in the same period of 2018. K-12 tutoring, study-abroad services and Puxin Online School, each contributed the 676,000, 16,000 and 181,000 in terms of student enrollments in the fourth quarter 2019.

Net revenues of K-12 tutoring services were $581.9 million, an increase of 95.3% from the fourth quarter of 2018. Group class, personalized tutoring and full-time tutoring courses contributed net revenues of RMB302.4 million, RMB114.8 million and RMB164.7 million in fourth quarter of 2019, respectively. Both internal organic growth and M&As contributed to the solid revenue achievements in the fourth quarter and full year of 2019.

Net revenues of study-abroad tutoring services were RMB277.4 million, an increase of 18.8% from the fourth quarter of 2018. Net revenues of Puxin Online School, providing K-12 tutoring services, were RMB4.4 million in the fourth quarter of 2019. Cost of revenues was RMB466.4 million, an increase of 52.3% from the fourth quarter of 2018, primarily due to an increase in teaching staff's compensation. Cost of revenues, excluding share-based compensation expenses, was RMB465.6 million, an increase of 52.6% from the fourth quarter of 2018.

Gross profit was RMB392.9 million, an increase of 74.5% from the fourth quarter of 2018. Gross margin was 45.7%, compared to 42.4% for the same period in 2018.

Total operating expenses were RMB486.7 million, an increase of 24.4% from the fourth quarter of 2018. Selling expenses were RMB314.6 million, an increase of 33.2% from the fourth quarter of 2018. Selling and marketing expenses, excluding share-based compensation expenses, were RMB310.1 million, an increase of 36.3% from the fourth quarter of 2018. The increases were primarily due to increases in marketing expense and marketing staff compensation.

General and administrative expenses were RMB172.1 million, an increase of 11% from the same period of 2018. General and administrative expenses, excluding share-based compensation expenses, were RMB167.8 million, an increase of 40.6% from the fourth quarter of 2018. The increases were primarily due to increases in staff compensation and daily operating.

Total share-based compensation expenses allocated to related operating costs and expenses decreased by 78.6% to RMB9.7 million. The decrease was primarily due to the fully vested restricted shares granted in the fourth quarter of 2018, while there were no new restricted shares or options granted in the fourth quarter of 2019.

Operating loss was RMB93.8 million, a decrease of 43.4% from the fourth quarter of 2018. Operating margin was negative 10.9% compared to negative 31.2% for the same period of 2018. Operating loss of K-12 tutoring services decreased by 36.4% to RMB28.2 million, while operating margin improved to negative 4.9% from negative 14.9%. Operating loss of study-abroad services decreased by 46% to RMB65.6 million, while operating margin improved to negative 23.7% from negative 52%.

Adjusted operating loss was RMB84.2 million, a decrease of 30.3% from the fourth quarter of 2018. Adjusted operating margin was negative 9.8%, compared to negative 22.7% for the same period of the prior year.

Net loss attributable to Puxin Limited was RMB108.8 million, a decrease of 54.6% from the fourth quarter of 2018. Basic and diluted net loss per ADS attributable to Puxin Limited were RMB1.26, compared to RMB2.92 during the same period of 2018.

Adjusted net loss attributable to Puxin Limited was RMB92.5 million, a decrease of 41.8% from the fourth quarter of 2018. Adjusted basic and diluted net loss per ADS attributable to Puxin Limited was RMB1.06, compared to RMB1.94 during the same period of 2018.

EBITDA was negative RMB68.1 million, compared to negative RMB176.2 million in the fourth quarter of 2018. EBITDA of K-12 tutoring services was negative RMB11.1 million, compared to negative RMB49.5 million in the fourth quarter of 2018. EBITDA margin was negative 7.9% in the fourth quarter of 2019, compared to negative 33.2% in the same period in 2018.

Adjusted EBITDA was negative RMB51.8 million, compared to negative RMB95.4 million in the fourth quarter of 2018. Adjusted EBITDA margin was negative 6%, compared to negative 18% in the same period in 2018.

Now, as for the financial results for the fiscal year 2019. Net revenues were RMB3,104 million, an increase of 39.3% from 2018. This increase was primarily driven by increases in student enrollments. Student enrollments increased by 55.6% to 2.87 million from 1.85 million in 2018. K-12 tutoring, study-abroad services and Puxin Online School, each contributed 2,607,000, 72,000 and 193,000 in terms of student enrollments in 2019.

Net revenues of K-12 tutoring services were RMB1,943.9 million, an increase of 64.4% from 2018. Group class, personalized tutoring and full-time tutoring courses contributed net revenues of RMB1,103.6 million, RMB553.7 million and RMB286.6 million in 2019, respectively.

Net revenues of study-abroad tutoring services were RMB1,160.1 million, an increase of 10.9% from 2018.

Net revenues of Puxin Online School, providing K-12 tutoring services, were RMB16.5 million in 2019.

Cost of revenues were RMB1,629.4 million, an increase of 31.1% from 2018. Cost of revenues, excluding share-based compensation expenses, increased by 31.4% to RMB1,625.1 million. Gross profit was RMB1,474.5 million, an increase of 49.7% from 2018. Gross margin was 47.5%, compared to 44.2% in 2018.

Total operating expenses were RMB1,832.1 million, an increase of 12.8% from 2018. Selling expenses were RMB1,083.8 million, an increase of 27.8% from 2018. Selling and marketing expenses, excluding share-based compensation expenses, increased by 29.6% to RMB1,061.9 million.

General and administrative expenses decreased by 3.6% to RMB748.3 million. General and administrative expenses, excluding share-based compensation expenses, increased by 24.7% to RMB544 million. Total share-based compensation expenses allocated to related operating costs and expenses decreased by 38.5% to RMB230.4 million.

Operating loss decreased by 44% to RMB357.5 million. Operating margin was negative 11.5% in 2019, compared to negative 28.7% in 2018. Operating loss of K-12 tutoring services decreased by 48.3% [Phonetic] to RMB119.9 million, while operating margin improved to negative 6.2% from negative 20%. Operating loss of study-abroad services decreased by 40.9% to RMB237.6 million, while operating margin improved to negative 20.5% from negative 38.5%. Adjusted operating margin was negative 4.1%, compared to negative 11.8% in 2018.

Net loss attributable to Puxin Limited decreased by 37.8% to RMB518.5 million, compared to RMB833.4 million in 2018. Basic and diluted net loss per ADS attributable to Puxin Limited were RMB6.06, compared to RMB11.56 in 2018. Adjusted net loss attributable to Puxin Limited was RMB183.5 million, compared to RMB325.8 million in 2018. Adjusted basic and diluted net loss per ADS attributable to Puxin Limited was RMB2.14, compared to RMB4.52 in 2018.

EBITDA was negative RMB349.3 million, compared to negative RMB680.9 million in 2018. EBITDA for K-12 tutoring services was negative RMB114.2 million, compared to negative [Phonetic] RMB256.8 million in 2018.

EBITDA margin was negative [Phonetic] 11.3% in 2019, compared to negative 30.6% in 2018.

Adjusted EBITDA was negative RMB14.3 million, compared to negative RMB173.3 million in 2018.

Adjusted EBITDA margin was negative 0.5%, compared to negative 7.8% in 2018.

Next, we'll move on to the balance sheet. As of December 31, 2019, the Company had total cash and cash equivalents and the current portion of restricted cash of RMB606.3 million, compared to RMB778 million as of December 31, 2018. The current portion of restricted cash consisted primarily of deposits with Chinese commercial banks as collateral for our bank borrowings within one-year term.

Finally, for guidance, for the first quarter of 2020, we expect net revenues to be between RMB708 million and RMB738.8 million, which represents an increase of 15% to 20% year-over-year. These forecasts reflects the Company's current and preliminary views on the market and operational conditions, which are subject to change. This concludes of the prepared remarks.

I will 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] The first question will come from Mark Li with Citi.

Mark Li -- Citigroup -- Analyst

Hi. [Foreign Speech] So, may I ask if you could share more color on the measures you have taken for the coronavirus incident and how much impact on the financials besides the revenue, maybe also the margin you can share with us. And I also want to know what is our target and the strategy for our online education revenue this year. Thank you.

Peng Wang -- Chief Financial Officer

Thank you, Mark. As to your first question, I will break down into the courses in the winter vacation, primarily in January and February and also the impact of the coronavirus on the March, which is the starting month for the spring semester. So as for the winter courses, the winter vacation courses, luckily with the help of OMO strategy with the practices, the timings we obtained from the initiatives we took starting from the -- from November 2018, we successfully transferred over 93% of our students, those offline students to our online group classes and we have around only 2% -- roughly about 2% of students who refunded their courses. So the virus, its impact on our winter courses was relatively small and our performance is quite satisfactory to the management.

But as to its impact on the spring semester, say for example, this March uptil now, I could not quantify its impact, but I can say that it did have an impact -- quite significant impact on the recruitment of student for the spring semester. So I'm sorry, I could not quantify its impact, but I do -- I would like to shed some light on the retention rate of our spring semester, I mean from the winter courses. It's around 80%. So, the retention rate is still quite satisfactory, but we need maybe one, two or three weeks to say the quantified impact of the virus on the spring semester until those day schools, boarding schools, the students go back to their schools.

For your second question, we -- with our OMO strategy, we have three sub-strategies. As we -- our CEO, Mr. Sha mentioned last earnings release, we -- our strategy is to cover those lower-tier cities, I mean, Tier 4, 5, 6 with online programs mainly from Puxin Online School.

And with those higher tier cities, Tier 1, 2, 3, we would like to leverage some of our students offline to online, a blended learning process. And we also have the third sub-strategy to expand physically with the help of OMO, meaning we will expand to the relatively suburban areas of the cities we currently set footprint with those dual teacher programs. So that's basically the three sub-strategies of our OMO strategy. Thanks, Mark.

Mark Li -- Citigroup -- Analyst

Thank you.

Operator

The next question will come from Liping Zhao of CICC.

Liping Zhao -- CICC -- Analyst

[Foreign Speech]

I will translate my questions by myself. So I have two questions for the management. The first one is regarding the Puxin Online School, what's your strategy in terms of the fierce competition in the market? And my second question is related to the summer courses because due to the outbreak of the coronavirus in China right now, there's saying that this summer might have very shortened the time. So what's the impact on that financials, if the management can provide detailed explanation. And the third question is regarded to the teaching staff as we may know that there are a lot of online players right now and also Puxin has this OMO strategy, so is there any problem or any pressure from the hiring teaching staff? Thank you.

Mark Li -- Citigroup -- Analyst

Okay. Thank you, Liping for your questions. For the first question as to the strategy of Puxin Online School, our strategy is quite simple and clear. We focus on the lower tier cities. We cover our students, clients there with our online large group classes. This business model has been proven by the top leaders, top players in the field like GSX. So I won't explain the strategy into details. So there are two takeaway elements, first, lower tier cities; second, large group classes, because again, as like now the question raised by Mark just now for the Tier 1, 2, 3 cities, the high tier cities, we will still focus on the OMO strategy with the help of our current offline learning centers.

For your second question, as to the potential cutting of the summer vacation and the delayed opening of those day schools, yes, it does have impact, probably a significant impact on the performance of Puxin and I think also on the other players in the field because we have to spend more time with our students with the online programs. And we are still not sure whether we can restart our offline programs. So yes, for one thing, it will have -- it is impacting and it will have impact on our performance in the -- of the spring semester, but unfortunately, by now, I couldn't quantify -- could not quantify either its impact on the financials of the spring semester or those financials in the summer because at by this -- right at this moment, there is only one province across China who has just confirmed its reopening only for the ninth and 12th graders, let alone the other grades. So, sorry I could not quantify its impact, but it won't take long, maybe two weeks or three weeks, we can maybe catch up with this quantified impact.

For the third question, as to the supply of teachers with our OMO strategy, we have several tactics to deal with it. First, with the higher tier cities like Tier 1, Tier 3, we already have 5,000 full-time teachers across 34 cities. They are well trained and they have practiced OMO strategy during the winter vacation. So we already have over 5,000 teachers by hand and as to recruit new teachers, we have launched our campaign together with top players, not only in our industry, but also across industries with that top companies across China indeed. We will cover the 211, the 985, universities, colleges. So yes, we have a launch of the campaign, and we already have 5,000 teachers by hand. So thank you for questions again.

Liping Zhao -- CICC -- Analyst

All right. Thank you.

Operator

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Claire Yung 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: 40 minutes

Call participants:

Claire Yung -- Investor Relations

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

Peng Wang -- Chief Financial Officer

Mark Li -- Citigroup -- Analyst

Liping Zhao -- CICC -- Analyst

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