ATA Creativity Global - Q1 2023

Transcript

Operator (participant)

Greetings, welcome to the ATA Creativity Global's first quarter 2023 financial results call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. 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.

Alice Zhang (Associate)

Thank you, Camilla. Hello, everyone. Thank you for joining us. The press release announcing ATA Creativity Global's, or ACG's, results for the first quarter ending 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 site 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, intent, look forward to, outlook, plan, should, will, and similar terms, and 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 that the expectations reflected in its forward-looking statements are reasonable as to date, 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 marketing conditions or otherwise, except as required by law. Regarding the disclaimer language, I would also like to refer you to slide two of the conference call presentation for further information. All US dollar amounts in this conference call relating to financial results for the first quarter ending March 31, 2023, are converted from RMB using an exchange rate of 6.8676 RMB to $1, the noon 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 US GAAP in RMB. All % 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 email to the company. If you wish to ask questions, you can send your questions to the email address, [email protected]. Please specify whether you would like to have your name read during the 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. As 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.

Ruobai Sima (CFO)

Thank you, Alice, and welcome everyone. Good evening to those in America. We appreciate everyone's time. 2023 got off to a strong start of ACG with students and teaching staff back in the classroom across our 21 training centers nationwide. We were very pleased to report a 6% increase in student enrollments during the fourth quarter, which was driven by a notable increase in portfolio training 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 at 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 fourth quarter 2023 was 1,097, an increase of 6% from 997 in the prior year period. FY6 showed 171 students who were enrolled in the foreign language training business that we disposed of in the third quarter 2022. The enrollment increase, which have been 32.8%. Enrollment in our core portfolio training programs increased more than 20% with 648 students enrolled during fourth quarter 2023. Compared to 537 students in the prior year period. We have delivered 27,630 credit hours for our portfolio training programs, with a more flexible project-based portfolio training programs accounting for approximately two-thirds of all portfolio training credit hours delivered.

We continue to encourage our students to opt from the project-based programs, and more favorable mix has contributed to improved operational efficiencies, giving us an opportunity to grow revenues without sacrificing the quality of teaching. With that, let's move to financials for fourth quarter 2023. Total net revenue for fourth quarter 2023 remained stable at RMB 42.3 million, compared to RMB 42.1 million in the fourth 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 fourth 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 who were engaged in enhancing the efficiency and the quality of service delivery. An initiative that began in the second quarter of 2022. Net loss attributed to ACG was RMB 17.8 million during fourth 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 solid financial position with $9.6 million in cash and cash equivalents.

Working capital deficit was $35.5 million, total shareholders equity was $18.4 million at March 31, 2022, compared to working capital deficit of $33 million and shareholders equity of $20.8 million respectively, at December 31st, 2022. 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. Many students are preparing to apply for overseas education since many countries, including China, have relaxed travel restrictions.

We recently launched a 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 the determination to be their authentic selves and embrace original thought and expression. We think today's students will identify with our philosophy and approach to creative education. ACG prides itself in being an innovative and forward-thinking organization, and we hope to instill in our students a love for creativity and sharing of ideas among different people from different places and life circumstances. Enrollment during fourth quarter 2023 appeared to mark the start of a more positive trend within our research-based learning services business, as many students have signed up for our various overseas camps we have planned for this summer.

These programs were historically strong drivers then for our business during the summer season. We anticipate seeing full advantage of the strong demand of those, these 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 here shortly. We would also like to congratulate students who endured a different college application process and are finally being rewarded for their efforts with admission letters from their dream schools. For the applications submitted in academic year 2022, ACG students have had continued success with offers of admission coming from prestigious art schools such as Berklee College of Music, Royal College of Art, Howard University, Columbia University, and the list goes on.

We are proud of these students who have persevered through an uncertain pandemic enrollment and are thrilled to see them continue pursuing their creative educations at schools of their choice. We are optimistic that we are by and large operating in a post-pandemic year. As we're also observing trends in 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 eager to continue delivering positive student outcomes and strengthen 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 will make his remarks in Mandarin, which will be followed by an English translation. Jun, please go ahead.

Jun Zhang (President)

Thank you, Mr. Sima .

Alice Zhang (Associate)

Thank you, Mr. Sima . We're honored to have served so many students who have remained committed to the creative arts 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 them apart from others who are applying to art school. We believe our track record of positive student outcomes sets us apart from the competition, and we expect to build on the current momentum and continue to grow our business by providing superior arts 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 the summer school at University of the Arts London, where participating students will be able to take courses designed for each stage of their art study on the UAL campus and immediately engage in an English-speaking environment. We're also offering a Future of Design Exploration Work camp 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 one-on-one study opportunities with some of the greatest minds in the particular areas of creative arts. We're very excited to be offering these summer programs this year and cannot wait to hear from students about their experiences. We continue to be committed to offering valuable, insightful, research-based learning 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're seeing an increasing number of students re-engage in the pursuit of a creative arts education and study abroad opportunities.

We're confident in our ability to serve a wide range of students, both those who have followed a more traditional education and those who have opt to follow a non-traditional 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 arts education market in China. With that, I'll turn it back over to Mr. Sima.

Ruobai Sima (CFO)

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

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions.

Alice Zhang (Associate)

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

Ruobai Sima (CFO)

Thank you. I think, there are some. Of course, there are. I think there are some pent-up demands, during the after the COVID period. But maybe for one figure, I think for the sales volume, I think, which is very directly reflect the market situation changes. I think compared for the last quarter, for the same quarter last year, I think we have a very great increase in maybe the total sales volume is around RMB 50 million to 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.

I think we also take a very big increase that from the total sales volume is increased from $60 million to $90 million. I think in that way it means that this increase is not only from the COVID impact, it's also from some natural increase. Besides of this, I think we noted that it's an increase is not the similar increase from enrollment numbers, but also increase about the union price. In that way, I think that the figure can reflect the real situation about the increase and during the period of this year. Thank you.

Alice Zhang (Associate)

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?

Ruobai Sima (CFO)

Yeah, I think we hope that this trend can be continued as since our portfolio got bigger and bigger. Currently, we still believe that this increase will be keep, you know, yeah, increase track and for the following months of the year.

Alice Zhang (Associate)

Great. Appreciate the answer. One last question from Bill is: Where do you think you need to be in terms of enrollment or credit hours to reach profitability? Do you have the cash to get there?

Ruobai Sima (CFO)

I think, in order to get profitability is not a simple question as to just simply and increase enrollment or credit hours. I think of course, and from the marketing side, yeah, so I think we get our sales volume and increase is one way. Besides of this, we also try to develop more new business lines and also will make our pricing methodology and more closer to the class of marketing situation changes. Besides of this, maybe we will also focus on our internal controls. I think we will make our operating and more efficiency, and we will focus on cost controls and the teaching management and more efficient in the year. In that way, we can enhance our operating efficiencies.

The other, by those, by those approaches, I think we will make our cash management balance, and in that way I think we can get the stage and to make our profitability. Thank you.

Alice Zhang (Associate)

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

Operator (participant)

Thank you. As a reminder, if you would like to ask a question, it is star one on your telephone keypad. There are no questions at this time. I would like to turn the floor over to Mr. Sima, CFO, for closing comments.

Ruobai Sima (CFO)

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

Operator (participant)

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