ATA Creativity Global (AACG) Earnings Call Transcript & Summary

Greetings, and welcome to the ATA Creativity Global's First Quarter 2023 Financial Results Call. [Operator Instructions]. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Alice Zhang, with The Equity Group. Thank you, Alice. You may begin.

Thank you, Camilla, and hello, everyone. Thank you for joining us. The press release announcing ATA Creativity Global's or ACG's results for the first quarter ended March 31, 2023 is available at the IR section of the company's website at www.atai.net.cn. As part of this conference call, the company has an accompanying slide presentation available on its website. A replay of this broadcast will also be made available at ACG's website for the next 90 days. Before we get started, I would like to remind everyone that this conference call and any accompanying information discussed herein contains certain forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terms such as anticipate, believe, could, estimate, expect, forecast, future, intend, look forward to, outlook, plan, should, will and similar terms that include, among other things, statements regarding ACG's future growth and results of operations; ACG's plans for mergers and acquisitions generally; ACG's growth strategy, anticipated growth prospects and subsequent business activities, including initiatives taken by ACG as China's public health situation has improved, market demand for and market acceptance and competitiveness of, ACG's portfolio training programs and other education services, and the impact of the COVID-19 pandemic on ACG and its operations. Although the company believes such expectations reflected in these forward-looking statements are reasonable as to today, those statements are subject to risks and uncertainties that could cause the actual results to differ dramatically from those projected. There can be no assurance that those expectations will prove to be correct. Information about the risks associated with investing in ACG is included in its filings with the Securities and Exchange Commission, which we encourage you to review before making an investment decision. The company does not assume any obligation to update any forward-looking statements as a result of new information, future events, changes in market conditions or otherwise, except as required by law. Regarding the disclaimer language, I would also like to refer you to Slide 2 of the conference call presentation for further information. All U.S. dollar amounts in this conference call related to financial results for the first quarter ended March 31, 2023, are converted from RMB using exchange rate of RMB 6.8676 to USD 1, the new buying rate as of March 31, 2023. All historical conversions are accurate as of the time reported, unless otherwise noted. The company reports its financial results under U.S. GAAP in RMB, and all percentages calculated in the presentation are based on RMB unless otherwise noted. For those of you following along with the accompanying PowerPoint presentation, there is an overview of the company on Slide 3. In addition, we're more than happy to take investor questions during today's Q&A session, or via e-mail to the company. If you wish to ask questions, you can send your questions to the e-mail address [email protected], and please specify whether you would like to have your name read during Q&A session. On today's call, the company's CFO, Mr. Ruobai Sima, will provide a brief overview of operating and financial highlights for the first quarter 2023; and Chairman and CEO Mr. Kevin Ma is unable to be here today due to personal reasons; Mr. Sima will join President, Mr. Jun Zhang, in providing an update on the company's outlook and long-term growth strategy before opening the floor for questions. With that, I'll turn the call over to ACG's CFO, Mr. Ruobai Sima. Please go ahead, Mr. Sima.

Thank you, Alice, and welcome, everyone. Good evening to those in America. We appreciate everyone's time. 2023 got to a soft start of ACG, [indiscernible] teaching staff back in the platform across our 21 training centers nationwide. We were very pleased to report a 10% increase in student enrollment during the first quarter, which was driven by a notable increase in portfolio trading students. We realized stable total net revenue of RMB 42.3 million, which was supported by the portfolio training services and overseas study counseling services business. Everyone in ACG is working hard in anticipation of launching our overseas summer camp and other programs that will be held during the summer for the fourth time since the pandemic began in 2020, and we have seen strong demand from students for these summer programs. Total student enrollment for first quarter 2023 was 1,097, an increase of 10% from 997 in the prior year period. [indiscernible] closed 171 students who were enrolled in the foreign language training business that were disposed of in the third quarter 2022. The enrollment increase would have been 32.8%. Enrollment in our core portfolio trading programs increased more than 20%, with 648 students enrolled during first quarter 2023 compared to 537 students in the prior year period. We delivered 27,630 credit hours for our portfolio training program with a more flexible product-based portfolio training programs accounting for approximately 2/3 of our portfolio training credit hours delivered. We continue to encourage our students to opt from product-based programs, and more favorable mix has contributed to improve operational efficiencies, giving us an opportunity to grow revenue without sacrificing the quality of teaching. With that, let's move to financials for first quarter 2023. Total net revenue for first quarter 2023 remained stable at RMB 42.3 million compared to RMB 42.1 million in the first quarter of 2022. This was primarily driven by portfolio training and overseas study counseling services. Portfolio training services represented 4.6% of total net revenues during the period. Gross margin was 44.3% during the first quarter of 2023 compared to 45.7% in the prior year period. The decrease in gross margin was primarily due to the increased cost of service related to higher compensation expenses incurred for certain teaching staff or engaging in enhancing efficiency and the quality of service delivery and initiatives that began in the second quarter of 2022. Net loss attributable to ACG was RMB 17.8 million during first quarter 2023 compared to RMB 15.9 million in the prior year period which was primarily a result of increased sales expenses related to performance bonus awarded in line with the enrollment growth during the period. Moving to the balance sheet, we continue to be in a solid financial position with USD 9.6 million in cash and cash equivalents. Working capital adjusted was USD 35.5 million, and total shareholders' equity was USD 18.4 million at March 31, 2022, compared to working capital debt of USD 33 million and shareholders' equity of USD 20.8 million respectively at December 31, 2022. Now turning our attention to ACG's outlook and growth strategy. We are delighted to welcome all of our students back in person at our training centers at the start of 2023. With the pandemic luckily behind us, we were pleased to have achieved such strong enrollment being driven by our core portfolio training service business, resulting in consistent revenues for the quarter driven by the portfolio training and overseas study counseling services as many students are preparing to apply for overseas education since many countries, including China, have relaxed travel restrictions. We recently launched our rebranding strategy, introducing a new contemporary logo and motto, Beyond the Difference. We believe these new elements better reflect our goal of helping students find the courage and determination to be their authentic selves and embrace original thought and expression. And we think today's [indiscernible] will identify with our philosophy and approach to creative education. ACG prides itself on being honest, innovative and a forward-thinking organization, and we hope to instill in our students a love for creativity and sharing of ideas among the different people from different places and life circumstance. Enrollment during first quarter 2023 appeared to markup along the start of a more positive trend within our research-based learning services business as many students have signed up for our leverage to overseas camps we have planned this summer. These programs were historically strong drivers for our business during the summer season, and we anticipate taking full advantage of the strong demand of those lease programs in 2023. We continue to work closely with our overseas institutional partners and teaching staff, and looking forward to delivering rewarding experiences to our students who will expand upon our efforts [indiscernible]. We would also like to congratulate students who [indiscernible] different college application process and are finally being rewarded for their efforts with admission letters from their dream schools. For the application submitted in academic year 2022, ACG students had continued success with offers of admission coming from top tier art schools such as [indiscernible], College of [indiscernible], Royal College of Art, Howard University, Columbia University, and the list goes on. We are proud of these students who have [indiscernible] through an uncertain pandemic environment and are sure to see the continued pursuing their creative education at schools for their choice. We are optimistic that we are by and large operating in a post-pandemic year as we are also observing, showing our business due to the improved public health situation and opening up for international travel. We believe we are well positioned to continue executing our growth initiatives, including expanding our partnership base as well as our portfolio of offerings. With the help of our reputable institution partners and our ability to continuously adapt our offerings to serve the changing market, we are able to continue delivering positive building outcomes and strengthening our reputation in the creative arts education industry. I'd like to hand the floor over to Jun Zhang, ACG's President, to provide an update on our current growth initiatives. He may make his remarks in Mandarin, which will be followed by an English translation. Jun, please go ahead.

[Foreign Language]p

Thank you, Mr. Sima. We're honored to have served so many students who have remained committed to the creative start education during the past few challenging years. Our goal during this time has been to continue providing a quality curriculum, access and support from teachers and staff, guiding them from start to finish on a competitive portfolio. And enriching their education with hands-on art-related experiences. Our hope is that all of this will eventually culminate in a student having a well-rounded education and experience that would set him apart from others who are applying to our school. We believe our track record of positive student outcomes sets us apart from the competition, and we expect to be on the current momentum and continue to grow our business by providing superior art education experiences to our students. ACG has continued to offer immersive research-based learning projects. We're excited about the overseas summer camps we're currently enrolling students in. One of the projects is for summer school at University of the Arts London, where participating students will be able to take courses designed for each stage of the study on the UAL campus, and immediately engage in an English-speaking environment. We're also offering a future of design exploration work hosted in the Netherlands and Denmark, through which students will learn about the current and future design trends and be exposed to the interdisciplinary methodologies. The goal is for students to independently create a design proposal. Students who participate in this project, will receive certificates of completion at the end of the camp, and 1-on-1 study opportunities with some of the greatest minds in the particular areas of creative arts. We're very excited to be offering this summer progress this year and cannot wait to hear from students about their experiences. We continue to be committed to offering valuable insight for research-based loan experiences to our students. We believe first quarter 2023 marks an inflection point for our business, with a favorable operating environment given relaxed domestic and international travel restrictions at the beginning of the year. We are seeing an increasing number of students reengaging the pursuit of a creative arts education and study abroad opportunities. We're confident in our ability to serve a wide range of students, those still who follow a more traditional education and those who have opted to follow a nontraditional path of study, and continue to actively explore various service options to meet the needs of all student types. Our mission continues to be to provide quality learning experiences that cultivate and enhance students' creativity in a post-pandemic environment. We believe we're well prepared to take advantage of the recovering market and strengthening our leading position in the creative art education market in China. With that, I'll turn it back over to Mr. Sima.

Thanks, Jun. In closing, we are excited about ACG's [indiscernible] in 2023, and feel confident in our ability to see the opportunities ahead of us. Our top priority remains our students, and we look forward to continuing to explore ways in which we can expand our services to better support their creative art journey. With that, operator, let's open it up for questions.

[Operator Instructions]

As we wait for questions to queue, I received some questions via e-mail from William Gregozeski from Greenridge Global that I would like to post to the management team. I'll start with this one. Were there any COVID-related impact on the first quarter numbers, or is it a true reflection of the period?

Thank you. I think, yes, the progress, I think there's some pent up demand during -- after the COVID period. But maybe for 1 figure, I think, for the sales volume, I think, which is on the right [indiscernible] changes. I think compared for the last -- for the same quarter last year, I think we have taken a very great increase in total sales by is around RMB 50 million and to around RMB 80 million. But also, we compare with the same figure for the same period in 2019 -- I mean the period before the COVID-19 occurred. And I think we also take a very big increase that from the total sales volume is increased from RMB 60 million to RMB 90 million. I think it means that with this increase is not only from the COVID impact, it's also from some natural increase. Aside from this, I think we noted that if the increase is not a simple increase from the enrollment numbers, but also increase about the unit price. So in that way, I think that figure can reflect the real situation about the [indiscernible] during the period this year. Thank you.

Thanks, Mr. Sima, for the answer. The second question I have is can we expect to see student enrollment and credit hours increase on a year-on-year basis for the remainder of 2023?

Yes. I think -- we hope that this trend can be continued. And since our portfolio gets bigger and bigger, and currently, we are -- we still believe that this increase we keeping some increased trend and for the [indiscernible] for the year.

One last question from Bill is where do you think you need to be in terms of enrollment or credit hours to reach profitability? And do you have the cash to get there?

I think in order to get profitability, it's not a simple question as to just simply and increase enrollment of 30 hours. I think, of course, and for the marketing side, I think with that our sales volume increase is 1 way. And beside of this, we also try to develop more new business lines and also we made our pricing methodology more closer to the flat marketing situation changes. And besides of these, maybe we will also focus our internal controls. I think we have made our operating and more efficiency, and we will focus on cost controls and teaching management, and more patients in the period. That way we can enhance our operating efficiency. As results approaches, I think we will make our tax management balance and invest where I think we can state and make our profitability.

Great. Thank you. That's all the questions from Bill. I'll hand it back to the main Q&A session now.

[Operator Instructions] There are no questions at this time. I would like to turn the floor over to Mr. Sima, CFO, for closing comments.

Thanks again to all of you for joining us. If anyone have questions for us, please feel free to reach us directly to us or our investors related from The Equity Group. We are always available to speak to investors and look forward to speaking with you all during our next quarter call. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.