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Puxin Limited (NEW)
Q3Â 2020 Earnings Call
Nov 19, 2020, 7:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the Puxin Limited Third Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.
I would now like to turn the conference over to Nadia Wang, Senior Investor Relations Manager of Puxin Limited. Please go ahead.
Nadia Wang -- Senior Investor Relations Manager
Thank you, operator. Hello, everyone. Thanks for joining Puxin's third quarter 2020 earnings conference call. This is Xiaoxi Wang [Phonetic], Senior Investor Relations Manager at Puxin Limited. We appreciate your time and ongoing interest in Puxin. 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, 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 brief 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.
I would like to 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 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 U.S. Securities and Exchange Commission. The Company does not undertake 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 give his remarks in Chinese and Jessie Jin from ICA, our Investor Relations advisory firm, will translate for him in English. Mr. Sha, please go ahead.
Yunlong Sha -- Founder, Chairman, and Chief Executive Officer
[Foreign Speech]
Jessie Jin -- Investor Relations Specialist
Ladies and gentlemen, good evening and good morning to you all. Thank you for joining Puxin Limited third quarter 2022 earnings conference call. Although the summer break from significantly due to COVID-19, we still realized a net income of RMB42.43 million, representing a year-over-year increase of 25.7% as well as EBITDA of RMB77.46 million, which is a year-over-year growth of 9.4%.
Till now under GAAP financial measures, we have successfully achieved profitability for two consecutive quarters, while the achievement is three consecutive quarters under non-GAAP financial measures. In addition, the K-12 business has had three consecutive profitable quarters and its nine-month cumulative net revenue growth since the beginning of 2020 reached 15%. The nine-month cumulative net income of K-12 business was RMB219 million, and the net income margin was 14.1%, but it was a net loss of RMB116 million in the same period of 2019.
At the meantime, the establishment of Puxin's international education business unit in the third quarter of 2020 has successfully consolidated our language exam preparation services and study-abroad consulting services. Strategically, our competitive edge around ZMN Education and Global Education remains strong while a streamlined operation not only reduced cost, but also elevated efficiency. The formation of international education business unit has created synergy and has successfully increased our service quality and captured additional market share.
Furthermore, based on the semi-annual report published by MSCI on November 10, we have been included in the MSCI Global Small Cap Index, MSCI China Index, for the first time. This is a recognition of our operational excellence and our value proposition, which will fuel our continued growth in the capital markets and deliver value to our shareholders and investors.
Looking ahead, Puxin will concentrate on K-12 business and our online Online-Merge-Offline strategy. We are committed to further strengthening our organizational capacity, optimizing the management structure, reinforcing the personnel base, as well as maintaining the vitality of the Company.
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. Sha. Hello, ladies and gentlemen. Again, we are very glad that Puxin has survived the COVID-19 pandemic with strong growth, with the bottom line of our K-12 business, as Mr. Sha has mentioned just now. 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 of our comparative financial performance on a year-over-year basis.
Now, let's start with the financial results for the third quarter of 2020. Net revenues were RMB833.2 million, a decrease of 16.3% year-over-year. 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 services increased by 1% to RMB609.3 million. In the third quarter of 2020, the student enrollments of K-12 tutoring services, including group class, personalized tutoring and full-time tutoring services, reached 827,685.
Net revenues of Puxin Online School increased to RMB32.5 million. Student enrollments of Puxin Online School were 283,598 in the third quarter of 2020.
Net revenues of study-abroad tutoring...
Operator
[Foreign Speech] Sorry. Dear subscriber, you dialed [Indecipherable]. Please hold on.
Peng Wang -- Chief Financial Officer
Net revenues of the study-abroad tutoring services decreased by 50.4% to RMB191.4 million. This was primarily due to a continued impact from the global spread of COVID-19 pandemic in many -- in major countries of the world. However, net revenues of study-abroad tutoring services had an increase of 21.6% compared to the second quarter of 2020.
Cost of revenues decreased by 14.6% to RMB422.6 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 14.5% to RMB422.1 million.
Gross profit was RMB410.6 million, a decrease of 18.1% year-over-year. Gross margin was 49.3% compared to 50.3% for the same period in 2019.
Total operating expenses decreased by 7.7% year-over-year to RMB424.6 million.
Selling expenses increased by 4% year-on-year to RMB317.0 million. Selling expenses, excluding share-based compensation expenses, increased by 4.7% to RMB313.9 million, primarily due to our increased marketing and promotion activities during the third quarter of 2020 to further increase student enrollments.
General and administrative expenses decreased by 30.7% to RMB107.6 million. General and administrative expenses, excluding share-based compensation expenses, decreased by 30.3% to RMB104.7 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 39.5% to RMB6.5 million. The decrease was primarily due to a decrease in the number of options vested in the third quarter of 2020 compared to the same period of 2019.
Operating loss was RMB13.9 million, compared to operating income of RMB41.5 million in the third quarter of 2019. Operating margin was negative 1.7% in the third quarter of 2020, compared to 4.2% for the same period in 2019. Operating income of K-12 tutoring services decreased by 6.5% to RMB54.0 million. Operating margin of K-12 tutoring services was 8.9%, slightly dropped from 9.6% in the same period of 2019.
Adjusted operating loss was RMB7.5 million, compared to adjusted operating income of RMB52.2 million in the third quarter of 2019. Adjusted operating margin was negative 0.9%, compared to 5.2% in the same period of the prior year.
Net income was RMB42.4 million, an increase of 25.7% year-over-year. Net income of K-12 tutoring services increased by 93.4% year-over-year to RMB99.5 million. Net income attributable to Puxin Limited was RMB43.5 million, an increase of 28.9% year-over-year. Basic and diluted net income per ADS attributable to Puxin Limited were RMB0.50 and RMB0.48, compared to basic and diluted net income per ADS attributable to Puxin Limited of RMB0.38 and RMB0.38 during the same period of 2019.
Adjusted net income attributable to Puxin Limited was RMB8.6 million, a decrease of 80.3% year-over-year. Adjusted basic and diluted net income per ADS attributable to Puxin Limited were RMB0.1 and RMB0.1, compared to adjusted basic and diluted net income per ADS attributable to Puxin Limited of RMB0.50 and RMB0.49 during the same period of 2019.
EBITDA was RMB77.5 million, an increase of 9.4% year-over-year. EBITDA margin was 9.3% in the third quarter of 2020, compared to 7.1% in the same period in 2019. Adjusted EBITDA was RMB42.5 million, a decrease of 47.2% year-over-year. Adjusted EBITDA margin was 5.1%, compared to 8.1% in the same period of 2019.
Now for financial results for the nine months ended September 30, 2020. Net revenues were RMB2,185.6 million, a decrease of 2.6% year-over-year. 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 services increased by 15% to RMB1,552.3 million. In the nine months ended September 30, 2020, the student enrollments of K-12 tutoring services, including group class, personalized tutoring and full-time tutoring services, reached 1,992,759.
Net revenues of Puxin Online School increased to RMB79.5 million. Net revenues of study-abroad tutoring services decreased by 37.3% to RMB553.8 million. This was primarily due to the global spread of the COVID-19 pandemic in major countries of the world.
Cost of revenues decreased by 0.8% year-over-year to RMB1,154.2 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 0.6% year-over-year to RMB1,152.4 million.
Gross profit was RMB1,031.4 million, a decrease of 4.6% year-over-year. Gross margin was 47.2%, compared to 48.2% for the nine months ended September 30, 2019.
Total operating expenses decreased by 20.7% year-over-year to RMB1,067.5 million.
Selling expenses decreased by 1.5% year-over-year to RMB757.7 million. Selling expenses, excluding share-based compensation expenses, decreased by 0.6% year-over-year to RMB747.4 million, 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, which was partially offset by increased marketing expenses attributable to marketing and promotion activities for our online business.
General and administrative expenses decreased by 46.2% year-over-year to RMB309.8 million. General and administrative expenses, excluding share-based compensation expenses, decreased by 20.2% year-over-year to RMB300.2 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 90.2% year-over-year to RMB21.6 million. The decrease was primarily due to a decrease in the number of options vested in the nine months ended September 30 2020, compared to the same period of 2019.
Operating loss decreased by 86.3% to RMB36.1 million from an operating loss of RMB263.7 million for the nine months ended September 30, 2019. Operating margin was negative 1.7%, compared to negative 11.7% for the same period in 2019.
Operating income of K-12 tutoring services was RMB140.0 million, compared to an operating loss of RMB22.7 million in the same period of 2019. Operating margin of K-12 tutoring services was 9%, compared to negative 1.7% for the same period in 2019.
Adjusted operating loss decreased by 66.3% year-over-year to RMB14.4 million. Adjusted operating margin was negative 0.7% [Phonetic], compared to negative 1.9% for the same period in 2019.
Net income was RMB33.7 million, compared to a net loss of RMB409.6 million for the nine months ended September 30, 2019. Net income of K-12 tutoring services was RMB219.0 million, compared to net loss of RMB116.0 million for the nine months ended September 30, 2019.
Net income attributable to Puxin Limited was RMB36.6 million, compared to a net loss attributable to Puxin Limited of RMB409.7 million. 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 RMB4.82 and RMB4.82 during the same period of 2019.
Adjusted net income attributable to Puxin Limited was RMB79.2 million, compared to an adjusted net loss attributable to Puxin Limited of RMB91.0 million for the same period in 2019. Adjusted basic and diluted net income per ADS attributable to Puxin Limited were RMB0.91 and RMB0.89, compared to adjusted basic and diluted net loss per ADS attributable to Puxin Limited of RMB1.07 and RMB1.07 during the same period of 2019.
EBITDA was RMB145.4 million, compared to negative RMB280.9 million for the nine months ended September 30, 2019. EBITDA margin was 6.7% for the nine months ended September 30, 2020, compared to negative 12.5% in the same period in 2019.
Adjusted EBITDA was RMB188.0 million, an increase of 396.7% year-over-year. Adjusted EBITDA margin was 8.6%, compared to 1.7% in the same period in 2019.
Next, we'll move on to the balance sheet. As of September 30, 2020, the Company had an aggregate amount of cash and cash equivalents and the current portion of restricted cash of RMB560.1 million, compared to RMB606.3 million as of December 31, 2019. 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 fourth quarter ended December 31, 2020, based on the information available as of the date of this press release, the Company expects net revenues to be between RMB730.4 million and RMB773.4 million, which represents a decrease of 15% to 10% year-over-year. These 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'll now turn the call over to the operator and open the call up for the Q&A. Operator, we're ready to take questions. Thank you.
Questions and Answers:
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Mark Li of Citi. Please go ahead.
Mark Li -- Citi -- Analyst
Hi, management. Thanks for the presentation. May I know, for your guidance for the Q4, could you breakdown for our K-12, study-abroad and Puxin Online School for us? And also, we have seen the news of some -- maybe some consideration of potentially selling the Online School to a relative online peer. I don't know, if you have any comment or what would be our strategy going forward? Thank you.
Peng Wang -- Chief Financial Officer
Okay. Thank you, Mark, for your questions. Yes, first of all, we are under the process of spinning off our online business, online school -- Puxin Online School. But, as the Company has not officially declared the transaction, so I'm sorry we have to wait a while for the official announcement.
But as to the breakdown of the growth in the first -- in the fourth quarter of this year, the decrease will be primarily due to the decrease of growth of the study-abroad tutoring and study-abroad college placement services, again, which we -- as of which, we're looking at around 40% decrease.
And as to the K-12 segment, we are looking at a low-single-digit to a high-single-digit decrease for the K-12, including group class and the personalized tutoring. Thank you.
Mark Li -- Citi -- Analyst
Thank you, Wang. A quick follow up. May I know why our K-12 is a little bit, I think, left behind some offline peers? For Q4, what do you think is the drivers? Thank you.
Peng Wang -- Chief Financial Officer
Okay. The main difference lies in the calendar of this quarter as our fourth quarter covers November -- October, November, December. And while you may see another top player, their fourth quarter, they do not have July. So for the difference of this the growth rate, the first reason is, there is a -- most of our students, they are retained students from the summer programs and we'll recruit some new students during the fourth semester. But as you know, this summer, especially in some major cities like Beijing, Dalian, we experienced second wave of COVID-19 pandemic, so we lost some students. We lost some students during the second wave for COVID-19 pandemic. So, the retained students for the fourth semester were also comparatively lower than last year. So that's the first reason.
Another reason is due to -- also due to the pandemic -- the COVID-19 pandemic, we slowed down our pace of physical expansion in the major cities of our Puxin Education, like Tianjin, like Ningbo, like Xi'an, like Jinan, and changing the top K-12 branches of Puxin. So that's another major reason underlying our slowed pace of K-12 growth. Thank you.
Mark Li -- Citi -- Analyst
Got it. Thank you.
Operator
[Operator Instructions] The next question comes from John King of Citi Securities. Please go ahead.
John King -- Citi Securities -- Analyst
So, I understand the Company recent sell its online school business and I know there is no comments until now. I would like you to maybe elaborate on the Company's future strategy on the online business.
Peng Wang -- Chief Financial Officer
Okay. Thank you for your question. Yes, we're still waiting for the official announcement of the transaction, but I can talk -- I can give more light on the future online strategy of Puxin Education. First of all, as everybody here is well known, there is some breakevens -- there are some breakevens in the industry with some top players having funding of millions of millions money recently. So it has significantly changed the landscape of the online education industry, especially those group classes or our super large group classes business model.
So our future strategy with the online education will be focused on the Online-Merge-Offline, OMO strategy, which will leverage our current presence at the major cities across China. We have over 300 learning centers across China and we will leverage our current presence at those major cities into those areas which our current learning centers could not cover in the near future, like the dual-teacher -- with the dual-teacher model and the other inter-week programs. So, we do not give up online strategy, instead we spin-off online the live broadcasting group class programs and focusing on our OMO strategy. So that's our current strategy with online education.
John King -- Citi Securities -- Analyst
Thank you for your answers. So, I understand this Online-Merge-Offline. Another question is about the recent recovery on the offline enrollment recovery. So, it's been hit by the COVID-19, how is the recent recovery?
Peng Wang -- Chief Financial Officer
Okay. As almost every city across China has regained from -- has recovered from the COVID-19 pandemic, we -- all our current learning centers have -- yeah, we have reopened our all other current learning centers and we see -- we are glad to see most of students -- most of the students, including their parents, are very happy to come back to offline learning centers programs because after quite a few months of immersed study with online programs, a lot of students and their parents come to realize that offline study has this unique advantages, especially when we come to the person-to-person in the personal communication, in the personnel inspiration and those one-on-one tutoring services, which are combined to guarantee that the final results of the students improved performance. So, we are not only glad to say our students coming back to our offline learning centers, we are more glad to say the students, the parents, their realization of the unique advantage or importance of the offline programs.
John King -- Citi Securities -- Analyst
Thank you for your answers. No more questions.
Peng Wang -- Chief Financial Officer
Okay. Thank you.
Operator
The next question comes from Maggie Zheng of Haitong International. Please go ahead.
Maggie Zheng -- Haitong International -- Analyst
Hello, thank you for taking my question. You just mentioned that you kind of attributed the growth in your K-12 business to your seize [Phonetic] of expansion in offline. So, can you share with us that when do you think it's appropriate to accelerate the offline expansion?
Peng Wang -- Chief Financial Officer
Okay. Okay. Actually, we are -- right now at this moment, we are already on the track of quick expansion with -- especially with our top offline branches, like Taiwan, like Xi'an, like Ningbo, Nanjing, all of these major cities are the top branches of us. After the survival of the COVID-19 pandemic, we are back to the normal rate of fees expansion. As we shared with our investors during the NDRs, we are -- we were planning a 20% to -- 20% capacity growth for the year 2020 by the end of 2019 as we were working on the budget. So this is -- right now this moment, it's kind of a pickup, so we will pick up the original speed or we may even accelerate the pace of our physical expansion, especially with those top branches within Puxin Education as in most of the cities of our current learning centers, their utilization rate is quite high and their brand, they are especially in the city -- in the very city they are located, where the brand is quite strong. So it's time for us to expand physically, especially with those top branches.
Maggie Zheng -- Haitong International -- Analyst
Okay. Thank you. Another question is regarding, you just mentioned that some of the students were lost after the second wave of pandemic in Beijing and Dalian. And so do you think that this kind of students, they actually stick to online platform or they are turning to some offline competitors of yours?
Peng Wang -- Chief Financial Officer
Well, to be honest, as in the case with Dalian, because we shut down our offline learning centers the next day we started off summer vacation programs because of the second wave of COVID-19 pandemic. Most of the students who had registered with our offline programs were successfully transferred to our online programs, as we did during the spring semester. But to be honest, and it's unfortunate, we lost some of the students to the online players as all of us are well known that this is a hot season. It was hot season -- for this summer, it is a hot season, every major player was trying or struggling to get as many students as they could.
So first of all, we lost a few students to the online competitors. And on the other hand, as I mentioned just now, we are glad to, say, at the end of the day, that most of the students and their parents, they come to realize that offline tutoring programs have its unique advantages when we talk about the final performance of those students because most of students, they could not make his way to the final academic success without the accompany of teachers and students. So, human are social animals. So yes, we lost some students during the summer vacation to the online competitors, but most of the students come back to us and they will stay with our offline programs. Thank you.
Maggie Zheng -- Haitong International -- Analyst
Thank you. Okay. My last question is that, as you might be in the process of spinning off the online business, so is it possible that you kind of accelerate your schedule to turnaround the new business, because the online business seems to be loss-making and has been a drag on your overall business?
Peng Wang -- Chief Financial Officer
Well, first of all, I have to admit that the online live broadcasting group class programs are money burning, as everyone can say for this year and even for the next maybe one or two years. So, yes, it is not our strategy to continue those live broadcasting group classes. And, yeah, it won't be a big drag on everyone's balance sheet or the P/L.
Secondly, as I talked to us, we are not giving up online education or our online strategy. Instead, we will continuously focus on our Online-Merge-Offline strategy, trying our best to leverage our current learning centers to ascend or to get those high-quality teaching resources to those clients, to those areas, which we originally could not cover. That's our strategy. I will hold on to that.
Maggie Zheng -- Haitong International -- Analyst
Okay. Thank you. No more questions from my side.
Peng Wang -- Chief Financial Officer
Thank you.
Operator
[Operator Instructions] Showing no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Nadia Wang for any closing remarks.
Nadia Wang -- Senior Investor Relations Manager
Thank you, operator. In closing, on behalf of the entire management team of Puxin, we'd like to thank you again for your participation today. If you have further questions in the future, please feel free to contact us at [email protected] or [email protected]. Thank you.
Operator
[Operator Closing Remarks]
Duration: 45 minutes
Call participants:
Nadia Wang -- Senior Investor Relations Manager
Yunlong Sha -- Founder, Chairman, and Chief Executive Officer
Jessie Jin -- Investor Relations Specialist
Peng Wang -- Chief Financial Officer
Mark Li -- Citi -- Analyst
John King -- Citi Securities -- Analyst
Maggie Zheng -- Haitong International -- Analyst
