Puxin Limited American Depositary Shares, each representing two Ordinary Shares

Good day and welcome to the Pusheen Limited first quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Jessie Jin, Investor Relations from Institutional Capital Advisory. Please go ahead.

Thank you, operators. Hello, everyone. Thanks for joining Pungshin's first quarter 2020 earnings conference call. By way of introduction, I'm Jessie Jin, Investor Relations Specialist from Institutional Capital Advisory. the IR consulting firm for Puxin Limited. We will 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 are Mr. Yunlong Sha, the company's founder, chairman, and chief executive officer, and Mr. Peng Wang, the company's chief financial officer, Linlong 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 statement. Further information regarding this and other risks and certainties 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. Shah. Mr. Shah will give his remarks in Chinese, and I will translate for him in English. Mr. Shah, please go ahead.

Hello, ladies and gentlemen. Welcome to the first quarter of 2020, the first quarter of 2020, For Puxin and the entire Chinese education industry, it is very unusual. Thousands of medical staff and volunteers risked their lives to complete the most beautiful journey, including more than a dozen citizens in Wuhan, paid a huge price for isolation, and gradually realized safety, recovery, and study. After this unusual period, We summarize the past here and look forward to the future. Thank you to everyone who made an effort during the epidemic to sacrifice and contribute. During the outbreak of the epidemic, Puxin also acted at the first time and cooperated with institutions such as the Chinese Academy of Psychiatry and the University of Zhejiang to provide a wide range of effective psychological and health assistance to the people in the epidemic area. On the other hand, most of the teachers are familiar with online classes. For our next step, The OMO strategy has established a solid foundation for talent. We have appointed Mr. Xiao Yun to be the CEO of the group. Mr. Xiao is the co-founder of the group. He has made excellent achievements in many different fields, including offline and online. The OMO strategy, an online-offline strategy, will also be developed by Mr. Xiao Yun himself. and group resources to be promoted. Our Hanxu Village has achieved 85% of the market share. Last year, the same period, this quarter's net income was 7.5 billion yuan, which has grown to 22%. Of this, the total number of students from 400,000 to 2,000 people It has increased to 93%. The total growth is 133%. This growth is still the main force of our income. The net profit has increased by 25.3%. The net profit has reached 46.7% in the first quarter. It is a good thing that in the first quarter of 2020, In 2020, the first quarter, The overall revenue of our elementary and secondary schools is 5.6 billion yuan, which is 43.6% of the total growth rate. The student registration rate is 92.4 million yuan. The study business revenue is 2.05 billion yuan, which is 12.8% of the total drop. This is mainly due to the outbreak of the COVID-19 epidemic in Europe and the United States. which has led some students and parents to close their schools. At the same time, the pandemic has led to the cancellation of the spring college entrance exams, which has affected students' study plans. Due to the COVID-19 pandemic in Europe and the United States, we expect that the second quarter of this year will have a greater impact on student income and profits. In the first quarter of this year, Huoxin Internet School's revenue reached 2,300 million yuan, which is 1177.8% of the total growth. This rapid growth is also due to the increase in the number of offline classes and the increase in the number of online business adjustments. In the second quarter of this year, we will also welcome and the full recovery of K12 business. In the next one to two years, K12 education will adhere to the construction of core capabilities, build a capable high-end development model, and focus on the K12 field, which is not verifiable, profitable, and shareable, to promote corporate development and achieve global value. Ladies and gentlemen, good evening and good morning to you all.

Thank you for joining Puxin Limited first quarter 2020 earnings conference call. It has been an annual quarter for both Puxin and China's education industry. We are deeply grateful to the tens of thousands of medical professionals and volunteers on the front line who have worked tirelessly to contain the coronavirus and to all the citizens that have cooperated with the government and made tremendous sacrifices during the quarantine period, especially those in Wuhan. We are glad to see a gradual return to normalcy here in China, especially appreciative of the individuals who have kept essential services up and running during this challenging period. Wu Xin has also reacted quickly to the outbreak through collaboration with the Institute of Psychology, Chinese Academy of Sciences, and IGET College, the Dao Da Shi, to provide much needed counseling services during this stressful time. In the first quarter of 2020, we successfully transitioned the offline courses during the winter holidays to an online format. We have not only ensured that our students can successfully complete the coursework with high satisfaction, but we have also provided an opportunity for our teachers to master the skills required for teaching small group online classes. This has further enhanced the professional development of our teaching staff for our OMO strategy. We have appointed Mr. Yun Xiao, who is also a co-founder, as Chief Operating Officer of Pusheen Limited. Mr. Yun has made great contributions to multiple roles across offline and online businesses. Mr. Yun will be responsible for implementing our OMO strategy and further integrate our internal resources. Our OOMO strategy will be during this period. During this period, we have achieved 80.5 retention rates, which is about the same as last year. Net revenues in the first quarter of 2020 increased by 22% year-over-year to RMB 751 million. Specifically, student enrollment continued to be our primary growth engine. Total student enrollment grew to 938,000, an increase of 133.4 year-over-year, compared to 402,000 in the same period of 2019. Wealth profit increased by 25.3% year-over-year and gross profit margin in the first quarter reached 46.7%. We achieved positive operating profit of RMB 3.65 million in the first quarter, compared to the operating loss of RMB 137 million in the first quarter of 2019. This is a very impressive result. Adjusted net income attributable to Cushion Limited was RMB 25.4 million. compared to adjusted net loss attributable to tuition limited of RMB 73.8 million in the first quarter of 2019. For the first quarter of 2020, the net revenues of K-12-Q-20 business reached RMB 546 million, an increase of 43.6%, and the student enrollments were 924,000. The net revenues of study abroad services for RMB 205 million, a decrease of 12.8 year over year. This is mainly due to the outbreak of COVID-19 in Western countries, which has led to a more cautious approach from students and parents when it comes to going abroad. In addition, the cancellation of overseas examinations this spring has also affected students' plans to study abroad. As the coronavirus situation continues to disrupt life in Europe and the US, we expect that the revenue and profit of study abroad business will also be greatly affected in the second quarter. The net revenues of Beijing Online School in the first quarter of 2020 reached RMB 23 million, an increase of 1,177.8% year-over-year. This was primarily due to the transition of offline courses to the online format. Looking ahead to the second quarter of 2020, K-12 business will fully recover as full-time students in China resume normal operations. In the next one to two years, Xinxin will continue to develop its core capabilities and establish a profitable and sustainable growth model. We aim to achieve flexible deployment of assets and talent of our K-12 tutoring business, which has a business model with proven track record and transferable approach to enhancing profitability. This strategy is fundamental to the success of our company and the realization of shareholder value. The COVID-19 outbreak brought us challenges and opportunities. The education industry will evolve, and we are confident that Pusheen will continue to adapt and emerge from this crisis stronger than ever. Now I will hand the call over to Mr. Wang, our CFO, who will walk you through our financial details.

Thank you, Jessie. Thank you, Mr. Sha. Hello, ladies and gentlemen. 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. This also referred to our earnings release for detailed information of comparative financial performance on a year-over-year basis. Starting with the financial results for the first quarter of 2020, net revenues were $751.3 million, an increase of 22% from the first quarter of 2019. This increase was primarily driven by increases in student enrollment. Student enrollment increased by 133.4% to 938,000 from 402,000 in the same period, 2019. Revenue of K-12 tutoring services increased by 43.6% to $546.3 million from the first quarter of 2019. In the first quarter of 2020, the total student enrollment of K-12 tutoring services reached 922,000, which included 358,000 students enrollment of Puskin Online School. Fourth-class courses generated net revenue of $308.4 million. among which Putin Online School contributed a net revenue of $23 million. Personalized tutoring and four-time tutoring courses contributed a net revenue of $158 million and $79.9 million in the first quarter of 2020, respectively. Although we have closed all of the learning centers in China since early February 2020, in response to the measures taken by the PCC government, content that spreads novel coronavirus, COVID-19, we have focused on offering in-purpose and new courses online, and strengthen student recruitment for online courses offered in the spring semester. As a result, our student enrollments in the first quarter of 2020 continue to increase, compared to 872,000 950 in the fourth quarter of 2019, and 402,061 student enrollment in the third quarter of 2019. However, the school closure has adversely affected our student recruitment for courses to be held in the spring semester, which could in turn adversely affect our business, financial condition, and results of operations. for the remainder of 2020. Net revenues of study abroad tutoring services decreased by 12.8% to $205.0 million from the first quarter of 2019, primarily due to the impact of COVID-19 outbreak. Study abroad tutoring services have 14,000 student enrollment in the first quarter of 2020 compared to 17,000 in the first quarter of 2019. As COVID-19 cases have recently surged outside China, student parents may postpone or even give up study abroad plans due to the worldwide outbreak of the virus, which may continue to materially adversely affect the student's enrollment and results of operations of our study abroad tutoring business for the remainder of 2020. Cost of revenues was $400.3 million, an increase of 19.3% from the first quarter of 2019, primarily due to an increase in rent costs in line with the increase of learning centers. Cost of revenues, excluding share-based compensation expenses, was $399.6 million, an increase of 19.6% from the third quarter of 2019. Ross profit was $361.1 million and increased 25.3% from the same period of 2019. Gross margin was 46.7% compared to 45.5% of the same period in 2019. Total operating expenses were $347.4 million, a decrease of 16.6% from the first quarter of 2019. Selling expenses were $230.5 million, an increase of 3.5% from the first quarter of 2019. Selling marketing expenses, including share-based compensation expenses, were $226.5 million, an increase of 5.1% from the first quarter of 2019. But increases were primarily due to increases in marketing expenses. General and administrative expenses were $116.9 million, a decrease of 39.7% from the same period of 2019. General and administrative expenses, excluding share-based compensation expenses, for $113.1 million and increased 5% from the first quarter of 2019. The increases were primarily due to increases in staff compensation. Total share-based compensation expenses allocated to related cost of revenues and operating expenses decreased by 91.1% to $8.4 million from $94.7 million in the first quarter of 2019. The decrease was primarily due to less options vested in the first quarter of 2020 compared to the first quarter of 2019. Operating income was $3.7 million compared to the operating loss of $136.5 million in the first quarter of 2019. Operating margin was 0.5% compared to negative 22.2% in the same period in 2019. Operating income of K-12 tutoring services was $35.0 million compared to operating loss of $40.1 million in the first quarter of 2019, while operating margin improved to 6.4% from negative 10.5%. Adjusted operating income was $12.1 million compared to the adjusted operating loss of $41.8 million in the first quarter of 2019. Adjusted operating margin was 1.6% compared to negative 6.8% in the same period of the prior year. Net loss attributable to pushing limited decreased by 82.5% to 43.5 million, facing diluted net loss per ADS attributable to Pushing Limited were 0.50 compared to 3.02 during the same period 2019. Adjusted net income attributable to Pushing Limited was 25.4 million compared to adjusted net loss attributable to Pushing Limited of 73.8 million during the same period of 2019. Adjusted basing dilute net income per ADS attributed to Purchase Unlimited was 0.29 compared to adjusted basing dilute net loss per ADS attributed to Purchase Unlimited of 0.90 during the same period of 2019. EBITDA was negative compared to negative 191.9 million in the first quarter of 2019. EBITDA of paid for child tutoring services was 30.5 million compared to negative 74.9 million in the first quarter of 2019. EBITDA margin was negative 0.5% in the first quarter of 2020. compared to negative 31.2% in the same period in 2019. Adjusted EBITDA was 65.0 million compared to negative 16.9 million in the third quarter of 2019. Adjusted EBITDA margin was 8.6% compared to negative 2.7% in the same period in 2019. We'll move on to the balance sheet. As of March 31, 2020, the company had total cash and cash equivalent, and the current portion of restricted cash are $563.9 million, compared to $606.3 million as of December 31, 2019. The current portion of restricted cash consists primarily of deposits. with the Chinese commercial banks as collateral for other bank borrowings within one year term. Finally, for guidance, the beginning of 2020 was challenging for all the school education industry due to the outbreak of the novel coronavirus. As a result of the impact of the coronavirus outbreak, we have lowered our expectations for growth in the second quarter of 2020. Based on the information available as of today of this press release, the company expects net revenue for the second quarter of 2020 to be between $620.3 million and $661.9 million, which represents a decrease of 2% to an increase of 3% year over year. This forecast reflects the company's current and preliminary views on the market and operational conditions, which are subject to change. This concludes our prepared remarks, and I'll turn the call over to the operator and open the call up for Q&A. Operator, we're ready to take questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Dolly Lee with Citigroup. Please go ahead.

Okay, let me translate my question. Regarding the Q2 revenue guidance, could management give more color on the gross outlook by segments. For example, the K-12 online school as well as the study abroad tutoring service. In the meantime, do we have more color on the ASP trend by segments as well? Thank you.

Okay. Thank you, David, for your question. The first question is to the color of the guidance of the second quarter. We expect the K-12 segment to be either a break-even, I mean the growth rate, or a slightly increase compared with the second quarter of last year, but on the other hand, We also expect the study abroad segment to be decreasing compared to the same period last year because of, I mentioned just now, the outbreak of the virus. The epidemic is still there with the English-speaking countries. That's the general breakdown of the guidance for the second quarter. Our second question is to the ASP or the pricing. We are not expecting in-depth discount to our current customers or the customers in the coming summer programs. With the experiences of our programs offered during the first quarter, the winter vacation programs and the spring, the first half of the spring programs, we are very confident that our students, customers, they are pretty satisfied with the quality, the teaching services of Pusheen with our online small group classes. So, we don't need to give that discount. So, yeah, that's all. Thank you.

Okay, thank you.

Again, if you'd like to ask a question, please press star, then one. There are no further questions. I would like to turn the conference back over to Jessie Jin for any closing remarks.

Okay. Thank you all for your time. In closing, on behalf of the entire management team of PUSHIN, 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 at pushin.icaasia.com. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.