ATA Creativity Global - Q1 2024

Transcript

Operator (participant)

Greetings. Welcome to ATA Creativity Global's first quarter 2024 financial results call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If you would like to ask a question, please press star one on your telephone keypad. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to Alice Zhang with the Equity Group. Thank you. You may begin.

Alice Zhang (Head of Investor Relations)

Thank you, operator, 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, 2024, 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 by terms such as anticipate, believe, could, estimate, expect, forecast, future, intent, look forward to, outlook, guidance, 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 into acquisitions generally, ACG's growth strategy, anticipated growth prospects and subsequent business activities, ACG's 2024 guidance, market demand for and market acceptance and competitiveness of ACG's portfolio training programs and other education services. Although the company believes that the expectations reflected in its forward-looking statements are reasonable as of 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 for to be correct.

Information about the risk 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 US dollar amounts in this conference call relating to financial results for the first quarter ended March 31, 2024, are converted from RMB using exchange rate of 7.2203 RMB to one US dollar, the noon buying rate as of March 31, 2024. All historical conversions are accurate as of the time reported, unless otherwise noted.

The company reports its financial results under the 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 email to the company. If you wish to ask questions, you can send your questions to the email address, [email protected], and 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 of 2024. As President, Mr. Jun Zhang, is unable to be here today, the company's chairman and CEO, Mr. Kevin Sima and Mr.

Sima, will follow with an update on the company's guidance, outlook, and its long-term growth strategy before opening the floor for questions. With that, I'll turn the call over to ACG CFO, Mr. Ruobai Sima. Please go ahead, Mr. Sima. Please go ahead.

Ruobai Sima (CFO)

Thank you, Alice, and welcome, everyone. Good evening to those in America. We appreciate your time. We are pleased to start 2024 on strong notes, achieving a 13.7% increase in total net revenues in fourth quarter 2024, driven by significant growth in portfolio training services as a result of increased student enrollment and credit hours delivered. We continue to regard portfolio training as our primary growth driver and glad to see continued growth, students' interest in our primary creative art offerings. To better support our growing student population, we recruited additional teaching staff. We have also expanded our sales team to meet growth demands.

We'll continue to enhance our research-based learning and overseas study counseling services to provide students with a comprehensive portfolio of offerings that provides a strong foundation in creative arts and an extensive choice of areas in which to specialize with ample opportunities to experience history and culture, and showcase their learnings in the real world. Total student enrollment for fourth quarter 2024 was 1,370, up nearly 25% from 1,097 in prior year period. Enrollment in our core portfolio training programs increased more than 33%, with 863 students enrolled during the fourth quarter 2024 compared to 648 students in the prior year period. We also delivered 33,527 portfolio training credit hours, an increase of 21.3% year-over-year.

With that, let's move to financials for fourth quarter 2024. Total net revenues for fourth quarter 2024 was RMB 48.1 million, up 13.7% from RMB 42.3 million in the fourth quarter of 2023. This was primarily driven by increased contributions from the portfolio training services, which represented 73.7% of total net revenues during the period. Gross margin improved to 45.5% during fourth quarter 2024, from 44.3% in the prior year period. We realized increased efficiencies in our operations, despite increased cost of services related to the hiring of additional teaching staff to support enrollment growth.

Net loss attributed to ACG was RMB 17.9 million during the fourth quarter 2024, compared to RMB 17.8 million in the prior year period, which was primarily a result of increased sales expenses related to the hiring of additional sales personnel to support the continued growth of our portfolio training services business. Moving to the balance sheet, we continue to be in a solid financial position with $8 million in cash and cash equivalents. Working capital deficit was $36.9 million, and total shareholders' equity was $13.3 million at March 31, 2024, compared to working capital deficit of $34.4 million, and shareholders' equity of $15.9 million, respectively, at December 31, 2023.

With that, I'd like to turn it over to Kevin, who will expand upon our outlook and growth trends. Kevin?

Kevin Xiaofeng Ma (Chairman and CEO)

Thank you, Simon. We opened 2024 with a solid first quarter, achieving top-line growth, supported by our expanding core portfolio training service business, while we made investments in our teaching staff and sales team to continue supporting operational growth. Having completed a full year of in-person class delivery without interruption, we received valuable feedback from 2023 students, which will help us improve existing and design new programs with a focus on our mission of enabling possible student outcomes. Given a strong start to the year, we are reiterating our revenue expectations for the year ending December 31, 2024, of between RMB 233 million to RMB 245 million, which represents a 5%-50% increase from fiscal year 2023.

We continue to grow our existing business and explore potential acquisitions and other business opportunities. As any material developments arise, we will be sure to update the market and revise our guidance as appropriate. Our enrollment efforts and the commitment to supporting students academically and emotionally lies at the heart of our business development. Student interest in ACG's portfolio training service was not only reflected in increased student enrollment and service delivery during the first quarter 2024, but also in our long-term sales results. As China continues to encourage students to take on different study paths after junior high school graduation, the demand for a non-traditional pathway to pursuing higher education opportunities have improved the visibility of China's arts education institution. We believe the achievements of our students and our reputation for high quality offerings and support position us well in this favorable market environment.

During the first quarter of 2024, we hosted the March Open House Shanghai Fashion Week Program. This program was well received by the participating students, and we were pleased to see their experience and the work performed during this program incorporated into student portfolios for overseas art institution applications. Our other research-based learning offering, including a Master Class, were introduced during that period, enrolled more than 100 students in multiple projects across a variety of art topics, which we believe is a testament to ACG's unparalleled expertise in understanding and addressing students' needs in specific art subcategories, categories.

As a rich education service provider, we believe that the best outcomes are driven by creativity, hard work, and determination. To that end, I would like to congratulate our students whose efforts have been rewarded with letters of admission from prestigious schools such as the Royal College of Art, University of the Arts London, the Rhode Island School of Design, and the Pratt Institute, as well as Harvard University, University of Pennsylvania, and Cornell University, among others. We look forward to continue to support our students through graduation, and I cannot wait to see what they accomplish beyond ACG. And now, I'd now like to hand it over back to the Mr. Sima to provide an update on our current growth initiatives. Ma, please go ahead.

Ruobai Sima (CFO)

Thank you, Kevin. ACG's mission has always been to empower creative individuals to reach their full potential in their educational and career goals. We are honored by the continued trust from our students, their families, and our institutional partners, who recognize our roles and our teachers' dedication in supporting students in their arts careers. In addition to our portfolio training and overseas study counseling services, we are pleased to announce a new project launched this month, the United Nations Art Boot Camp. This two-week boot camp focused on Sustainable Development Goals, a concept created by the United Nations to address global development issues concerning social, economic, and environmental sustainability. Students are able to take classes taught by UNESCO officers and arts professors from four Italian institutions.

They also complete a creative project that can become part of their overseas school application portfolio. Upon completion, participating students will receive a certification of completion issued by UNESCO, and the students who performed exceptionally will receive an internship certification from UNESCO, as well as reference letters. Selected students will also be invited to attend the United Nations University Annual Conference this summer. We designed a boot camp for students of all arts backgrounds, with the hope that students will benefit in several ways when it comes to their overseas study applications, including portfolio, application essay, reference letter, and internship experience. Currently, we are hosting master classes with specialties such as interior design, photography, and visual design.

Students are excited to have the opportunity to study their disciplines with professors from universities, including the University of the Arts London, and Rhode Island School of Design. We believe that various types of research-based learning programs are a reflection of ACG's capability to expand students' horizons, no matter what discipline they have chosen to focus on or where they are in their arts education journey. It is also a reflection of our ability to strengthen and expand our institutional partnerships. In the remainder of 2024, we remain focused on growing our core portfolio training service business and ensuring that we have the operational infrastructure to support the growth. We believe ACG's competitive advantages are built upon our track record of empowering students to reach their full potentials, which is only possible because of our dedicated instructors and support team, and our network of institutional partners.

We continue to explore potential merger and acquisition opportunities and are excited by what we are seeing in the industry. We will be sure to update the market with any development. With that, I turn it back to Kevin.

Kevin Xiaofeng Ma (Chairman and CEO)

Thanks. For years, ACG has strived to become a leading player in the China creative education market, and we take pride in guiding our students along the way for better education opportunities and experience. We remain opt about ACG's prospects for 2024 and look forward to reporting progress on our strategic growth initiatives in the coming months. With that, operator, let's open it up for questions.

Operator (participant)

Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate 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 while we poll for questions. Once again, it is star one on your telephone keypad. If you would like to ask a question, please press star one on your telephone keypad. Our first question comes from Louis Fan with The Benchmark Company. You may proceed.

Louis Fan (Analyst)

Hi, thank you for taking my call. Congratulations on a solid quarter. I just have a couple questions. First of all, you mentioned Q1 revenue growth was primarily due to portfolio training services. Could you tell us how we should think about enrollment in portfolio training and your thoughts on its growth trajectory? I mean, do you feel it can continue to grow at its current rate? I believe you mentioned about 30% in Q1.

Ruobai Sima (CFO)

Hi, Louis, and thanks for your question. We have a strong first quarter with revenues from the business increased nearly 50%. Due to a 24.9% increase in student enrollment and 21.3% increase in credit hour delivered. The program of our portfolio training services business can be measured through different ways and student enrollment, the number of credit hours delivered, and the unit price per credit hour delivered. For the unit price, we have continued to encourage students to optimistic for the product-based programs over time basis. They are designed to be more flexible and customizable and adjustable according to students' needs. For this reason, I will change a higher unit price and for product-based programs.

The enrollment growth was primarily a result of sales force hiring in our sales team and with digital hiring, and we are able to successfully deliver more credit hours and with the hiring of more full-time teaching staff, which will also support future growth in the line of business. We have continued to realize economies of scale, and this business has grown, and students have continued to express interest in our portfolio training services. We believe that ongoing investment in teaching resources will enable us to meet students' demands and drive sustainable growth. In addition, our sales team has been working closely with teaching staff, who have been increasingly engaged in program design and sales efforts.

For the sales momentum that we have gathered internally, we believe there's a certain room to grow our portfolio training services business, which remains our core business, and we will subsequently be a key growth driver from ATA moving forward. Yeah. Thank you.

Louis Fan (Analyst)

Okay, thank you. That's very good information. Now, you reiterate your revenue guidance for the full year of 2024. So given that we are nearly halfway through the year, is there any additional color you could provide on cadence? Whether revenue will be relatively consistent from Q2 to Q4, or whether there will be some lumpiness, or where do you see this 5%-15% growth coming from? Thank you.

Ruobai Sima (CFO)

Thank you. Actually, I think, and for the next two or three quarters, I think the first part of our core business and for portfolio training will sustainable growth and in the following period. And besides of this, as things our portfolio get bigger and bigger, I think for the next two or three quarters, our main revenue and the sales benefits will still come from this part. And to sell, besides of this, I think we also try to get some more diversified income, including research-based learnings and also in other overseas study counseling. I think that two part also will contribute another part of the additional revenues and for the next following period. Yeah.

Louis Fan (Analyst)

All right. Thank you very much. Appreciate it.

Ruobai Sima (CFO)

Thank you very much. Appreciate it.

Operator (participant)

There are no further questions at this time. I would like to turn the conference back over to Kevin Ma.

Ruobai Sima (CFO)

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.

Operator (participant)

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.