ATA Creativity Global ($AACG)

Greetings, welcome to ATA Creativity Global Fourth Quarter and Year-End 2025 Financial Results Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Alice Zhang for The Equity Group. Please proceed.

Thank you, operator. Good evening to all of you joining us from the United States, and good morning to all of you joining us from China. Please be advised that the discussions on today's call may include forward-looking statements. Such forward-looking statements involve certain risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the company's most recent SEC filings for a more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligation to update forward-looking statements as a result of new information, future events or otherwise. Regarding the disclaimer language, I would also like to refer you to Slide 2 of the conference call presentation, which is accessible via the IR section of ACG's website. Simultaneous audio webcast is also accessible via the IR section of ACG's website, including the replay, which will be available for the next 90 days. ACG's Chairman and CEO, Mr. Kevin Ma, will start this call by highlighting the company's fourth quarter 2025 key operational achievements and financial highlights. CFO, Mr. Ruobai Sima, will provide an overview of financial and operating results for fourth quarter 2025 and full year 2025. President, Mr. Jun Zhang, will conclude the prepared remarks with an update on the company's long-term growth strategy before opening the floor for questions. For those of you following the accompanying slide presentation, please refer to the slides for further details. With that, I'll turn the call over to ACG's Chairman and CEO, Mr. Kevin Ma. Please go ahead, Mr. Ma.

Thank you, Alice, and welcome, everyone. Good evening to those in America. We appreciate everyone's time. As Alice mentioned, please refer to our earnings deck available on the IR site of our website as we go through our prepared remarks. As we have discussed in previous quarters, 2025 overall student demand normalized following the [ surge ] of student enrollment in the previous year while we report lower total revenues during fourth quarter 2025 as compared to the same period of last year. Revenues from research-based learning and other educational services increased year-over-year, primarily as we hosted more project and provided more service to institutional partners. In fourth quarter 2025 due to cost saving initiatives, we have been implementing and resulting streamlined operations compared to fourth quarter 2024. We reported a 15.7% lower operating expenses excluding a onetime goodwill impairment charge in quarter 4 2025. For fiscal year 2025, despite overall normalized market demand, total revenues were stable, supported by our core portfolio training service and increased contribution from research-based learnings, overseas study counseling and other educational services. Full year 2025 was also marked by lower operating expenses as compared to full year 2024. During fourth quarter 2025, our main revenue contributor remained the portfolio training service, accounting for 68.8% of total net revenues. Project-based programs have become the main choice for our students, accounting for 74.9% of total credit hours delivered with 66.8% in fourth quarter 2024. Revenues from research-based learning and overseas study counseling increased by 4.6% during fourth quarter 2025 as a result of more services delivered for in-school art class in partnership or schools. During fourth quarter 2025, our highly diversified research-based learning services continued to get student interest, especially during the winter vacation where students have the time to participate in more intense projects, either in person or online. As usual, in addition to our Open Hack Shanghai Fashion Week project, we hosted 10 online Master Class covering a wide area of art topics, given by lectures from top universities including Carnegie Mellon University, Harvard University as well as the University of Arts London, Royal College of Art. We also made continuous investments to ensure ACG students has access to world-class educational infrastructure and academic resources when preparing for overseas study journeys. In October, we hosted the 2025 ACG Expert Tour in several cities bring academia and industry experts to Shanghai, Wuhan, Chengdu, Chongqing and Suzhou to site face-to-face with over 1,000 students. Experts gave lectures on industrial and academic trends of interdisciplinary designs and mainly with 30 students one-on-one, providing feedback on their artwork and application portfolios and sharing their input in career plan. During quarter 4 2025, we established the ACG's first music preparatory center in Chengdu, working in exclusive partnership with lead conservatory, which is the first and only music-focused preparatory center in collaboration with the overseas institute to provide a 1-year intensive study program before students hit to the U.K. to finish their bachelor's degree. We also implemented a series of service enhancements to our existing ACG Japan center, which now hosted more Master Class projects and provide improved class offerings and courses customization, working in collaboration with more Japanese art schools. Additionally, we began providing services to more institutional partners contributing to increased revenues from other educational service. With that, I hand over the call to Sima for a detailed overview of our financial and operating results for fourth quarter and full year 2025.

Thank you, Kevin, and I will start with fourth quarter 2025 key financial metrics. Total net revenue for fourth quarter 2025 was RMB 89.1 million, decreased 11.7% as compared to the fourth quarter 2024. The decrease was primarily due to decreased revenue contribution from portfolio training programs and overseas study counseling services, partially offset by increased revenue contributions from research-based learning services and other educational services. Gross profit for fourth quarter 2025 was RMB 50.2 million, compared to RMB 63.7 million in fourth quarter 2024, affected by lower revenues and higher cost of revenues related to research-based learning services, outsourcing costs and part-time teacher costs. Gross margin was 56.4% during the fourth quarter 2025 compared to 63.1% in the prior year period. Total operating expenses was RMB 73.3 million in fourth quarter 2025 compared to RMB 46.8 million in fourth quarter 2024, increased primarily as a result of onetime goodwill impairment charge for RMB 33.9 million or USD 4.8 million recorded in Q4 2025, which was not recorded in Q4 2024 and partially offset by an RMB 7.4 million decrease in sales expenses related to lower headcount in sales personnel and decreased sales incentives during the period. Excluding the onetime goodwill impairment charge, total operating expenses decreased by 15.7% from fourth quarter 2024 and as a percentage of net revenues, decreased to 44.2% during fourth quarter 2025 compared to 46.3% in the prior year period. As a result, loss from operations in the fourth quarter 2025 was RMB 23 million compared to income from operations of RMB 17 million in fourth quarter 2024. Net loss attributable to ACG during the fourth quarter 2025 was RMB 26.3 million compared to the net income attributable ACG of RMB 13.3 million in the prior year period. During the full year 2025, total net revenue was RMB 268.1 million, flat from prior year period. Revenues were impacted by lower contribution from portfolio training services and offset by increased contribution from research-based learning and overseas study counseling and other educational services. Gross profit for full year 2025 was RMB 130.3 million, a decrease of 7.8% from RMB 141.3 million in full year 2024. As a result of increased outsourcing costs during the period, gross margin was 48.6% compared to 52.7% in full year 2024. Total operating expenses were RMB 194.6 million in full year 2025, an increase of 5.5% from RMB 184.5 in full year 2024. Increase in operating expenses during the year was primarily due to a onetime goodwill impairment charge of RMB 33.9 million recorded in Q4 2025, will partially offset by lower operating expenses and RMB 3.8 million collection of prior impaired loans and other receivables recorded in Q1 2025. Excluding the onetime goodwill impairment charge and collection of prior impaired loans and other receivables, total operating expense decreased by 10.8% from full year 2024 and as a percentage of net revenues decreased to 61.3% from 68.8% in the prior year period. We recorded a RMB 17.3 million decrease in sales expenses as a result of lower headcount in sales personnel and decreased sales incentives compared to full year 2024 and RMB 2.1 million decrease in general and administrative expenses mainly as a result of decreased administrative personnel expenses and a decrease in amortization expenses related to purchase price accounting from a previous completed acquisition as well as RMB 0.6 million decrease in research and development expenses. As a result, loss from operations in full year 2025 was RMB 64.1 million compared to RMB 43.2 million in full year 2024. Net loss attributable to ACG full year 2025 was RMB 48 million compared to RMB 36.1 million as a result of widened operating loss and was partially offset by a onetime impairment gain from previous investments. Moving to the balance sheet highlights. At December 31, 2025, we had RMB 85.2 million in cash and cash equivalents, total assets of RMB 408.3 million, total liabilities of RMB 376.3 million and total shareholders' equity of RMB 32 million. Moving on to year-to-date enrollment trends. Starting with students enrollment. For fourth year -- for fourth quarter 2025, total student enrollment was 921 compared to 1,038 in prior year period, decreased as a result of normalized demand for our service in 2025. Portfolio training students enrollment for fourth quarter 2025 was 568 and student enrollment for all the other program for fourth quarter 2025 was 353. Moving on to credit hours delivered. For fourth quarter 2025, total credit hours delivered decreased by 10.5% compared to prior year period. Project-based programs accounting for 74.9% of total credit hours delivered. With that, I will now turn it over to Jun, who will expand our long-term business strategy, Jun, please go ahead.

[Foreign Language]

[Interpreted] We will now discuss ACG's business strategy in 2026. In 2026 and beyond, our goal is to maintain our leading position in China's creative art education industry despite increased market competition. On one hand, we believe our competitive advantages are rooted in our skilled and highly experienced teaching team, our strong portfolio of high-quality existing and new offerings as well as an extensive network of global partnerships with leading art institutions. Our teaching faculty brings together academic excellence and real-world industry experience, enabling us to deliver education that is both creative and practical. Meanwhile, our broad institutional collaborations provide students with greater international exposure, enriched learning opportunities and smoother pathways to top global arts programs. Together, these strengths form the foundation of ACG's sustained leadership and continued growth in the creative education sector. On the other hand, we plan to continue executing our existing operational initiatives while introducing additional measures aimed at driving cost savings and reducing operating expenses. To that end, we're optimizing our service portfolio and enhancing classroom utilization by expanding online course offerings and increasing student capacity. We're hosting more online classes and accommodating more students, strategically allocating sales and teaching resources to larger campus locations and consolidating select campuses in less active markets to maximize efficiency. In addition, we're streamlining sales organization and prioritizing cost-effective and proven student acquisition channels. Collectively, this initiative should position us well for an overall improved operational and financial performance in 2026 and beyond. For Q1 2026, we have a strong pipeline of research-based learning projects, highlighted by the Finland Sustainable Design & Art Research Program. This winter camp offers participating students the opportunity to visit Aalto University in Finland, one of the world's leading institutions in design, architecture and engineering and take part in Arctic Center sustainable development workshops to learn about Arctic and Sámi culture and hand create art works, such as reindeer antler sculptures. Furthermore, in response to multiple contest opportunities our students are interested in, we're holding the 2026 Competition Winter Camp in January through a hybrid format of online and in-person classes. The camp includes multiple workshops for students with various areas of focus, including fashion design, digital design, future architecture and more with customized class offerings and hands-on guidance from ACG teaching staff, students prepare their interdisciplinary portfolios for participation in various international and national competitions and strengthen their application portfolios. This relevant, well-designed and carefully delivered project along with our core portfolio training services that would continue to improve, demonstrate our long-term commitment to delivering state-of-the-art products and services to ACG students as they pursue their aspirations in creative arts. Over the long term, we remain focused on strengthening our portfolio of existing higher fee and higher-margin services while driving innovation and introduction of new services. These efforts, combined with disciplined call management initiatives, are designed to enhance overall margin improvement and drive results for ACG and our shareholders. Driving positive student outcome has been the center of our business for years. Through continuous investment in our teaching team and continuous enhancement of our service portfolio, we're able to cater to student populations that covers 6 major arts disciplines, a wide age range and those with different backgrounds and knowledge in their respective areas of arts and addressing their evolving needs. We remain dedicated to serving ACG students as they pursue their academic and professional goals in 2026 and beyond. With that, operator, let's open it up for questions.

[Operator Instructions] There are no questions at this time. I would like to turn the conference back over to Kevin Ma for closing remarks.

Thanks again to all of you for joining us. If anyone has questions for us, please feel free to reach out directly to us or our Investor Relations firm, The Equity Group. We are always available to speak to investors and look forward to speaking with you all during our next earnings call. Thank you.

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]