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Puxin Limited (NEW)
Q2 2020 Earnings Call
Aug 24, 2020, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the Puxin Limited Second Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Nadia Wang [Phonetic], Senior Investor Relations Manager, please go ahead.
Nadia Wang -- Senior Investor Relations Manager
Thank you, Anita. Hello everyone. Welcome to Puxin's second quarter 2020 earnings conference call. This is Celsi [Phonetic] Wang, Senior Investor Relations Manager at Puxin Limited. We appreciate your time and ongoing interest in Puxin. Our financial results were released earlier today and are available on the Company's IR website at ir.pxjy.com.
On the call today, we have Mr. Yunlong Sha, the Company's Founder, Chairman and Chief Executive Officer and Mr. Peng Wang, the Company's Chief Financial Officer.
Yunlong will give a quick introduction 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.
Please be reminded 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 operating conditions and relate to events that involve 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.
A number of information regarding these risks, uncertainties and other factors are included in our public filings with the U.S. 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 by required law.
With that, I will now turn the call over to Mr. Sha. Mr. Sha will give his remarks in Chinese and Jessie Jin from ICA, our Investor Relations Advisory Firm will translate it for him in English.
Mr. Sha, please go ahead.
Yunlong Sha -- Founder, Chairman, and Chief Executive Officer
[Foreign Speech]
Jessie Jin -- Senior Associate at Institutional Capital Advisory
Ladies and gentlemen, good evening, and good morning to you all. Thank you for joining Puxin Limited Second Quarter 2020 earnings conference call. Together, the teaching staff and students have overcome the challenges brought by the COVID-19 pandemic over the past few months. Under the guidance of the Ministry of Education and the National Health Commission, local governments have coordinated with schools and universities to resume classes and we are glad to see the entire education industry is finally back on track.
Again, we appreciate the contribution of government departments, all sectors of the community, as well as the staff at Puxin. Thank you for providing your continuous social, mental, and educational support.
In the second quarter of 2020, though there were a few bounce back occurrences of COVID-19 in some areas of China, Puxin continued to place the mental and physical health of our students and teaching staff to our first priority. We have had zero COVID-19 case and we'll work our best to keep this record going forward.
Puxin has made steady progress in the second quarter. Student enrollments increased by 18.1% year-over-year to 857,000. Puxin, once again, won the recognition of students and parents with our excellent teaching quality. Despite the impact of the COVID-19 pandemic, net revenues in the second quarter exceeded RMB600 million, net income was above RMB35 million compared to a net loss of RMB190 million in the second quarter of 2019.
Puxin also continued to show profitability in non-GAAP measures. Non-GAAP EBITDA was over RMB80 million, compared to negative RMB26 million. We also made progress in cost control. By refining our marketing and sales strategy, non-GAAP selling expenses decreased by 12.4% year-over-year -- excuse me, decreased by 12.4% year-over-year.
In addition, non-GAAP administrative expenses dropped by 30.3% year-over-year. In the second quarter of 2020, K-12, the core business segment of Puxin, achieved net revenues of RMB420 million, an increase of 14% year-over-year. Due to the impact of the pandemic in overseas markets, net revenues of study-abroad services decreased by 39.9%. However, its profitability was improved during the second quarter of 2020. EBITDA was approximately RMB4 million compared to negative RMB19 million in the same period of 2019.
As for Puxin Online School benefited from previous strategic investments, has made impressive progress. Net revenues were approximately RMB24 million, an increase of more than six times year-over-year. The COVID-19 pandemic gave us a unique opportunity to reflect on our business. In terms of Puxin's organic growth plus M&A dual engine strategy, we found Puxin Business System effective for improving the operational and financial performance of the acquired schools.
Positive achievements can be seen in carryover income, non-GAAP Income and student enrollments. These have proved that the acquisition and integration approach is truly driving the organic internal growth of Puxin.
For example, the non-GAAP income of the majority of the K-12 schools acquired in 2015 and 2016 became positive after adopting Puxin Business System. These results have reaffirmed the strategic role of PBS and its capability to optimize capital structure.
Overall, the education industry has recovered substantially since the second quarter of this year. However, we will never second our efforts. Looking into the third quarter of 2020, we will continue our focus on the K-12 business segment and the Online-Merge-Offline strategy. We expect that Puxin Online School may continue to achieve a rapid growth. We believe Puxin will gradually become a premium brand with strong profitability.
Now, I will hand the call over to Mr. Wang, our CFO, who will walk you through our financial details.
Peng Wang -- Chief Financial Officer
Thank you, Mr. Shah. Hello, ladies and gentlemen. Please be reminded that all amounts quoted here will be in 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 for our comparative financial performance on a year-over-year basis.
Starting with the financial results for the second quarter of 2020, net revenues were RMB601.1 million, a decrease of 5% from the second quarter of 2019. This decrease was primarily due to the adverse impact of the COVID-19 pandemic on the demand for study-abroad tutoring services.
Net revenues of K-12 tutoring service increased by 14% year-over-year to RMB419.7 million. In the second quarter of 2020, the student enrollments of K-12 tutoring service including group class, personalized tutoring, full-time tutoring services reached 598,369.
Net revenue of Puxin Online School significantly increased to RMB24 million from RMB3 million in the same period 2019. Student enrollments of Puxin Online School were 249,452 in the second quarter of 2020.
Net revenues of study-abroad tutoring services decreased by 39.9% year-over-year, to RMB157.4 million. This was primarily due to a sharp drop in student enrollments from 15,696 to 8,853 in the second quarter of 2020, affected by the global spread of the COVID-19 pandemic in major countries of the world.
Cost of revenues slightly decreased by 0.4% year-over-year to RMB331.4 million, primarily due to a decrease in staff cost which reflected the decreased demand for study-abroad services attributable to the COVID-19 pandemic. Cost of revenues, excluding share-based compensation expenses, decreased by 0.3% year-over-year to RMB330.8 million.
Gross profit was RMB269.7 million, a decrease of 10.1% year-over-year. Gross margin was 44.9% compared to 47.4% for the same period in 2019. Total operating expenses decreased by 37% year-over-year to RMB295.5.
Selling expenses decreased by 13.1% year-over-year to RMB210.1 million. Selling expenses, excluding share-based compensation expenses, decreased by 12.4% to RMB207 million. This was primarily due to a decrease in sales staff's performance-based compensation attributable to decreased demand for our study-abroad services caused by the COVID-19 pandemic, as well as our cost control measures to improve operation efficiency.
General and administrative expenses decreased by 62.4% year-over-year to RMB85.3 million. General and administrative expenses, excluding share-based compensation expenses, decreased by 30.3% year-over-year to RMB82.4 million. The decreases were primarily due to our cost control measures to improve operation efficiency.
Total share-based compensation expenses allocated to related cost of revenues and operating expenses decreased by 94.1% year-over-year to RMB6.8 million. The decrease was primarily due to a decrease in the number of options vested in the second quarter of 2020 compared to the same period of 2019.
Operating loss was RMB25.8 million, a decrease of 84.7% year-over-year. Operating margin was negative 4.3% in the second quarter of 2020, compared to negative 26.7% for the same period in 2019.
Operating income of K-12 tutoring services was RMB19.3 million compared to operating loss of RMB54.5 million in the second quarter of 2019 while operating margin improved to 4.6% from negative 14.8% in the second quarter of 2019.
Adjusted operating loss was RMB19.1 million, a decrease of 64.3% year-over-year. Adjusted operating margin was negative 3.2%, compared to negative 8.4% in the same period of the prior year.
Net income attributable to Puxin Limited was RMB36.6 million, compared to net loss attributable to Puxin Limited of RMB194.6 million during the second quarter of 2019. Basic and diluted net income per ADS attributable to Puxin Limited were RMB0.42 and RMB0.42, compared to basic and diluted net loss per ADS attributable to Puxin Limited of RMB2.28 and RMB2.28 during the same period of 2019.
Adjusted net income attributable to Puxin Limited was RMB45.2 million compared to adjusted net loss attributable to Puxin Limited of RMB60.7 million during the second quarter of 2019. Adjusted basic and diluted net income per ADS attributable to Puxin Limited were RMB0.52 and RMB0.51, compared to adjusted basic and diluted net loss per ADS attributable to Puxin Limited of RMB0.71 and RMB0.71 during the same period of 2019.
EBITDA was RMB71.8 million, compared to negative RMB159.8 million in the second quarter of 2019. EBITDA of K-12 tutoring services was RMB109.1 million, compared to negative RMB50.3 million in the second quarter of 2019. EBITDA margin was 12% in the second quarter of 2020, compared to negative 25.2% in the same period in 2019.
Adjusted EBITDA was RMB80.4 million compared to negative RMB25.8 million in the second quarter of 2019. Adjusted EBITDA margin was 13.4%, compared to negative 4.1% in the same period in 2019.
For the financial results for the six months ended June 30, 2020; net revenues were RMB1,352.4 million, an increase of 8.3% year-over-year. This increase was primarily due to the continued growth momentum of student enrollments. Net revenues of K-12 tutoring services increased by 26.3% year-over-year to RMB943 million.
In the first half of 2020, the total student enrollments of K-12 tutoring services, including group class, personalized tutoring services, including group classes, personalized tutoring and full-time tutoring services, reached 1,165,074. Net revenue of Puxin Online School significantly increased to RMB47 million. Student enrollments of Puxin Online School were 607,066 for the first six months of 2020.
Net revenues of study-abroad tutoring services decreased by 27.1% year-over-year to RMB362.4 million. Study-abroad consulting and tutoring services had 22,809 student enrollments in the first half of 2020 compared to 32,366 in the same period of 2019. This was primarily due to the global spread of the COVID-19 pandemic in major countries of the world.
Cost of revenues increased by 9.5% year-over-year to RMB731.6 million. Cost of revenues, excluding share-based compensation expenses, increased by 9.7% year-over-year to RMB930.4 million [Phonetic]. Gross profit was RMB620.8 million, an increase of 7% year-over-year. Gross margin was 45.9%, compared to 46.5% for the same period in 2019.
Total operating expenses decreased by 27.4% year-over-year to RMB642.9 million. Selling expenses decreased by 5.1% year-over-year to RMB440.7 million. Selling expenses, excluding share-based compensation expenses, decreased by 4.1% year-over-year to RMB433.5 million.
General and administrative expenses decreased by 52% year-over-year to RMB202.3 million. General and administrative expenses, excluding share-based compensation expenses, decreased by 13.5% year-over-year to RMB195.5 million. The decreases were primarily due to our cost control measures to improve our operation efficiency under the COVID-19 pandemic.
Total share-based compensation expenses allocated to related cost of revenues and operating expenses decreased by 92.8% year-over-year to RMB15.2 million. The decrease was primarily due to a decrease in the number of options vested in the first six months of 2020 compared to the same period of 2019.
Operating loss decreased by 92.7% year-over-year to RMB22.2 million. Operating margin was negative 1.6% in the first six months of 2020, compared to negative 24.4% for the same period in '19.
Operating income of K-12 tutoring services was RMB86.0 million, compared to operating loss of RMB80.4 million in the same period of 2019 while operating margin improved to 9.1% from negative 10.8%. Adjusted operating loss decreased by 92.7% year-over-year to RMB7 million. Adjusted operating margin was negative 0.5%, compared to negative 7.6% in the same period of 2019.
Net loss attributed to Puxin Limited was RMB6.9 million, a decrease of 98.5% year-over-year. Basic and diluted net loss per ADS attributable to Puxin Limited were RMB0.08, compared to basic and diluted net loss per ADS attributable to Puxin Limited of RMB5.28 during the same period of 2019.
Adjusted net income attributable to Puxin Limited was RMB70.6 million, compared to adjusted net loss attributable to Puxin Limited of RMB134.4 million during the same period of 2019. Adjusted basic and diluted net income per ADS attributable to Puxin Limited were RMB0.81 and RMB0.79, compared to adjusted basic and diluted net loss per ADS attributable to Puxin Limited of RMB1.60 and RMB1.60 during the same period of 2019.
EBITDA was RMB67.9 million, compared to negative RMB351.7 million for the first six months of 2019. EBITDA of K-12 tutoring services was RMB170.3 million, compared to negative RMB112.1 million in the same period of 2019. EBITDA margin was 5% in the first six months of 2020, compared to negative 28.2% in the same period in 2019.
Adjusted EBITDA was RMB145.4 million, compared to negative RMB42.7 million in the same period of 2019. Adjusted EBITDA margin was 10.8%, compared to negative 3.4% in the same period in 2019.
Next, we'll move on to the balance sheet. As of June 30, 2020, the Company had an aggregate amount of cash and cash equivalents and the current portion of restricted cash of RMB569.6 million, compared to RMB606.3 million as of December 31, 2019. The current portion of restricted cash consisted primarily of deposits with the Chinese commercial banks as collateral for our bank borrowings within one-year term.
Finally, for guidance, for the third quarter ending September 30, 2020, based on the information available as of the date of this press release, the Company expects net revenues to be between RMB816.8 million and RMB866.6 million, which represents a decrease of 18% to 13% year-over-year. This forecasts reflect 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 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
Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Sofia Zane [Phonetic] with Citi. Please go ahead.
Sofia Zane -- Citi -- Analyst
[Foreign Speech] So, thanks, management, for taking my questions. My first question is, how has our offline segment being recovered in terms of retention and recruitment of students for our summer courses? And my second question is, so could you please provide some updates on the implementation of our OMO strategy and also some color on our M&A plans for the second half. Thank you.
Peng Wang -- Chief Financial Officer
Okay, thank you for questions. The first question of the reopening of offline learning centers, we are happy to say over 19% [Phonetic] of current offline learning centers have been reopened step by step, though as we have to get the permission from the local educational committees and those pandemic fighting authorities. Unfortunately, we have two major cities, which are still under the impact of the COVID-19 pandemic, which are Beijing and Dalian. As you may have known, at Dalian, we have two -- we have two K-12 bodies operating there, which makes Dalian the largest single city of our K-12 operation for Puxin.
Due to the outbreak of the pandemic in the -- by the end of June, the offline learning centers of Dalian have been closed and all the programs classes had to be transferred to online. So yes, we did have some negative impact due to the -- to the second round of outbreak of the COVID-19 pandemic, especially in Beijing and Dalian.
For Dalian, the impact is mainly on the, on the shoulder of K-12 business. And in Beijing, the burden is mainly on the study-abroad business. So yes, we did have some negative impact, especially in Beijing and Dalian, but we are still optimistic about the rebounding of the business in all of our offline learning centers.
As to the OMO strategy, we have been implementing the -- our OMO strategy during the pandemic period. We had several pilot programs in our Tier 2 cities like Taiwan, like Chengdu, which are quite optimistic for the first -- for the first pilot programs. But in terms of revenue, it only contributes a very small part of the revenue. So OMO strategy is on -- is one of the [Indecipherable] of our business, but it still need time to play a significant part of our business.
And as to the third question about the M&A, we did not make any acquisition during the first half of this year, also due to the outbreak of the COVID-19. But we've been working hard to get back on track with our M&A strategy. Again we'll stick to our acquisition and integration strategy and with the -- with the outbreak of COVID-19, we can say more targets are available due to the pandemic and we will work hard to -- yeah to get back on track. Thank you.
Sofia Zane -- Citi -- Analyst
[Foreign Speech]
Peng Wang -- Chief Financial Officer
[Foreign Speech]
Operator
[Operator Instructions] Since there appears to be no further question, I would like to turn the conference back over to Nadia Wang for any closing remarks.
Nadia Wang -- Senior Investor Relations Manager
Thank you, Anita. In closing, on behalf of the entire management team of Puxin, we'd like to thank you again for your participation on today's call. If you have any future questions in the future, please feel free to contact us at ir.pxjy.com or [email protected]. Thank you all.
Operator
[Operator Closing Remarks]
Duration: 38 minutes
Call participants:
Nadia Wang -- Senior Investor Relations Manager
Yunlong Sha -- Founder, Chairman, and Chief Executive Officer
Jessie Jin -- Senior Associate at Institutional Capital Advisory
Peng Wang -- Chief Financial Officer
Sofia Zane -- Citi -- Analyst
