ATA Creativity Global - Q2 2023

Transcript

Operator (participant)

Greetings. Welcome to ATA Creativity Global's Second Quarter 2023 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 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 of The Equity Group. Thank you. You may begin.

Alice Zhang (Associate)

Thank you, operator. Hello, everyone. Thank you for joining us. The press release announcing ATA Creativity Global's, or ACG's, results for the second quarter and six months ended 30 June 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 with 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 and adjustments taken by ACG as China eased COVID-19 pandemic-related restrictions, 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 these forward-looking statements are reasonable as of today, those statements are subjected 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 two of the conference call presentation for further information.

All US dollar amounts in this conference call relating to the financial results for the second quarter and six months ended 30 June 2023, are converted from RMB using an exchange rate of 7.2513 RMB to $1, the noon buying rate as of 30 June 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, 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 second quarter of 2023.

Chairman and CEO, Mr. Kevin Ma, and President, Mr. Jun Zhang will follow with an update on the company's outlook and its 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, and good evening for those in America, and we appreciate everyone's time. We were pleased to see positive enrollment trend from the fourth quarter of 2023 continue into the second quarter. We saw some pent-up demands at the start of the year when domestic and international travel restrictions were lifted in China. However, enrollment levels normalized over the course of the second quarter of 2023.

Total student enrollment for the second quarter 2023 was 928, compared to 1,018 in the prior year period. However, excluding 155 students who were enrolled in the foreign language training business that were disposed of in the third quarter of 2022, student enrollment actually increased 7.5% year-over-year.

We also achieved a stable growth in net revenue compared to the prior year period, which was primarily due to increased service delivered for portfolio training and overseas study counseling. We delivered 28,698 credit hours for the portfolio training program in second quarter, a 13% increase from the prior year period. As a result of increased gross profit and lower operating expenses, we also reported improved year-over-year bottom-line results. We were particularly excited about our overseas summer programs this year.

As this is the fourth summer, we resumed offering this type for pro-programming since the COVID-19 pandemic. We saw strong demand for those offerings, many of which have been delivered at this point in time and have been filled with the positive feedback we have received from students thus far.

We remain excited about the prospects of all major lines of business in the remainder of the year. I will quickly review the financials. Total net revenue for second quarter 2023 increased 6.5% to RMB 36.2 million, compared to RMB 34 million in the second quarter of 2022.

It was primarily driven by increased revenue from portfolio training and overseas study counseling services, despite a lack of revenue from the disposal of foreign language training services business. Portfolio training services represented 78.1% of the total net revenue during the period. Gross margin improved to 39.5% during second quarter 2023, compared to 35.6% in the prior year period.

The increase in gross margin was primarily due to increased net revenues, where the cost of revenue remained relatively stable from the prior year period. Net loss attributed to ACG narrowed to RMB 17.2 million during second quarter 2023, compared to RMB 22.1 million in the prior year period, which was primarily a result of increased net revenues and decreased operating expenses during the period.

Turning to the fourth half of 2023, net revenue increased to RMB 78.6 million, compared to RMB 76.2 million in the prior year period. Gross margin improved to 42.1% from 41.2% in the prior year period. Net loss attributed to ACG narrows to RMB 35 million, compared to RMB 37.9 million, primarily due to decreased operating expenses.

Moving to the balance sheet, we continue to be a solid financial position with $7.8 million in cash and cash equivalents. Working capital deficit was $35.9 million, and total shareholders' equity was $15.2 million as 30 June 2023, compared to working capital deficit of $33 million, and shareholders' equity of $20.8 million, respectively, as of 24 December 2022. With that, I'd like to turn it over to Kevin, who will expand upon our outlook and growth strategy. Kevin?

Kevin Ma (Chairman and CEO)

Thank you, Sima. Riding the positive momentum we experienced at the beginning of 2023, with the lifting of pandemic-related restrictions, we continued to see growing demand for our offerings, particularly in portfolio training and overseas studies counseling service, which more than offset a lack of revenue contributions from the foreign language training service we disposed of in third quarter 2022. We saw a wave of new students enroll during first quarter 2023, which is to normalize the levels in second quarter 2023.

We anticipate students' enrollment will continue to grow at a stable rate in the improved market environment. Overseas study counseling service continues to gain momentum as an increasing number of students are looking to apply for overseas art school and institutions.

We leverage our teaching resources and international institutional partnerships to support our students with active academic program and a comprehensive counseling service, working as a trusted advisor throughout the application process. We remain optimistic about the potential of our business as more and more students seek to initiate or re-initiate their art study journey in a post-pandemic environment.

We are extremely proud to be part of their journey, and take pride in our comprehensive, high-quality offerings and first-class teaching staff, extensive educational resources, and, above all, the positive student outcomes resulting from education with ACG. We will continue to explore ways to expand our portfolio of service, which targets a wide spectrum of arts-related topics for all kind of students in different stages of their study.

Look forward to serving an increasing population of students as a leader in the creative arts education industry in China. I'd now like to hand it over to Jun Zhang, ACG's president, to provide an update on our current growth initiatives. Jun will make his remarks in Mandarin, which will be followed by English translation. Jun, please go ahead.

Jun Zhang (President)

Thank you, Kevin. 接 着 ， 我 们 从 过 去 几 年 面 对 外 部 环 境 挑 战 的 状 态 中 调 整 过 来 ， 迎 接 同 学 们 回 到 校 区 ， 完 全 恢 复 了 学 生 面 对 面 沟 通 与 交 流 。 ACG 度 过 收 入 颇 丰 的 上 半 年 ， 我 们 一 直 致 力 于 充 分 发 挥 学 生 们 的 艺 术 创 作 潜 力 ， 并 帮 助 他 们 从 学 术 和 专 业 上 获 得 成 功 。 我 们 对 学 生 在 疫 情 期 间 展 现 出 的 毅 力 ， 印 - 印 象 深 刻 ， 并 为 他 们 取 得 的 成 绩 倍 感 自 豪 。

自 二 零 二 三 年 初 以 来 ， 我 们 注 意 到 学 生 对 我 们 的 项 目 的 需 求 不 断 增 加 ， 许 多 学 生 寻 求 参 与 各 类 实 践 项 目 ， 以 及 能 够 探 索 国 内 外 及 其 他 领 域 的 项 目 机 会 。我 们 相 信 ACG 能 够 最 大 限 度 地 用 在 研 学 和 项 目 规 划 方 面 的 优 势 ， 以 适 应 不 断 变 化 的 艺 术 世 界 ， 并 培 养 学 生 在 相 关 领 域 的 敏 感 性 。

我 们 相 信 ， 对 学 生 来 说 ， 这 些 项 目 也 是 他 们 在 学 校 的 教 育 之 外 非 常 有 价 值 的 经 验 。 今 年 夏 天 ， 除 了 常 规 的 实 习 、 训 练 营 、 夏 校 项 目 外 ， 我 们 将 继 续 组 织 国 内 非 物 质 文 化 遗 产 主 题 的 研 究 内 容 ， 覆 盖 中 国 云 南 省 、 贵 州 省 、 甘 肃 省 三 个 地 点 。

这 些 独 特 的 项 目 ， 使 参 与 的 学 生 能 够 真 正 地 沉 浸 在 当 地 的 环 境 中 ， 向 专 家 学 习 各 种 技 能 ， 包 括 摄 像 和 电 影 拍 摄 、 少 数 民 族 文 化 、 矿 石 绘 画 和 彩 绘 雕 塑 等 。 在 这 些 国 内 项 目 之 外 ，ACG 还 将 与 中 日 教 育 交 流 协 会 联 合 推 出 在 日 本 东 京 举 办 的 创 新 设 计 研 修 营 。

该 项 目 将 为 学 生 提 供 涵 盖 六 大 内 容 模 块 的 沉 浸 式 体 验 。 参 观 地 点 不 仅 有 东 京 大 学 和 早 稻 田 大 学 的 校 园 ， 还 包 括 艺 术 馆 、 艺 术 场 馆 、 特 色 街 区 和 艺 术 家 工 作 室 。 参 与 的 学 生 将 有 机 会 进 行 艺 术 领 域 的 化 学 和 探 索 ， 获 得 接 触 日 本 当 地 不 同 的 艺 术 风 格 和 学 校 的 机 会 。

本 项 目 旨 在 帮 助 可 能 对 出 国 留 学 感 兴 趣 的 学 生 ， 带 领 他 们 学 习 如 何 从 视 角 ， 多 视 角 解 读 国 外 艺 术 与 文 化 。 学 习 日 本 文 化 在 历 史 和 传 统 中 展 现 的 同 时 ， 探 索 现 代 创 新 设 计 。 我 们 相 信 ， 这 个 项 目 以 及 我 们 今 年 夏 天 所 有 的 ...

收 入 恢 复 海 外 市 场 的 良 好 起 点 。 我 们 迫 不 及 待 地 想 听 到 学 生 的 反 馈 。 从 今 年 夏 天 开 始 ， 大 多 数 想 申 请 国 外 院 校 的 学 生 已 经 开 始 紧 张 地 努 力 准 备 他 们 的 作 品 集 ， 我 们 的 同 事 也 一 直 在 与 学 生 密 切 沟 通 他 们 想 呈 现 的 想 法 和 创 意 ， 而 这 也 将 成 为 学 生 作 品 集 的 关 键 部 分 。

能 够 见 证 学 生 们 在 申 请 过 程 中 的 努 力 变 成 结 果 ， 真 是 令 人 无 比 欣 慰 。ACG 在 创 新 艺 术 领 域 一 直 保 持 领 先 地 位 ， 我 们 的 能 力 源 于 我 们 为 学 生 带 来 积 极 成 果 方 面 的 良 好 记 录 。

在 世 界 各 地 ， 主 要 的 艺 术 领 域 拥 有 丰 富 经 验 的 优 秀 教 职 员 工 ， 与 著 名 艺 术 机 构 建 立 强 大 也 不 断 发 展 的 关 系 网 络 ， 以 及 推 出 学 生 感 兴 趣 的 相 关 产 品 能 力 ，ACG 全 面 的 产 品 类 别 和 服 务 ， 在 为 大 量 多 样 化 的 学 生 群 体 提 供 服 务 。

我 们 将 继 续 努 力 提 高 ACG 在 不 同 年 龄 段 学 生 中 的 品 牌 知 名 度 ， 通 过 引 入 更 多 的 优 质 艺 术 教 育 资 源 ， 我 们 将 致 力 于 为 学 生 们 提 供 更 多 的 更 优 质 的 服 务 选 项 。 好 ， 接 下 来 是 Kevin。

Alice Zhang (Associate)

Thank you, Kevin. It has been a truly rewarding first half of the year for ACG, as we welcome students back to campus in person, fully returning to the face to face communication and interaction with our students that has been more challenging to come by in recent years. Our goal has always been to help students explore the full potential of their arts pursuits and achieve what they define as success from an academic and professional perspective. We have been impressed by the perseverance demonstrated by several of our students during the pandemic and are particularly proud of their achievements.

Since the beginning of 2023, there has been growing demand for our programs, with many students seeking to experience hands-on projects or educational tours that provide an opportunity to explore other parts of the country or the world.

We're confident that ACG will be able to maximize our strength in research-based learning, curating projects and programs that adapt to the changing world of the arts, and nurture student sensibilities in related fields, which we believe is incredibly valuable beyond their schooling. This summer, on top of regular internships, boot camps, and summer school programs, we continue to host domestic and tangible cultural heritage-themed camps, covering three heritage sites across China in Yunnan Province, Guizhou Province, and Gansu Province.

These unique programs allow participating students to really immerse themselves in a local environment and learn from experts in various fields, including photography and film, ethnic minor groups, cultures, mineral oil painting, and painted sculptures. In addition to these domestic programs, ACG will also launch a design innovation camp experience in Tokyo, Japan, co-hosted by the Sino-Japanese Education Exchange Association.

This project will provide students with an immersive experience covering six content modules, not only at the campuses of the University of Tokyo and Waseda University, but also at art venues, local neighborhoods, and art studios. Participating students will have the opportunity to explore interdisciplinary art studies and gain local access to different artistic styles and schools of Japan.

This program aims to help students who may be interested in studying abroad, to learn how to understand foreign arts and culture from multiple perspectives, looking from both a historical and traditional presentation and modern design display of Japanese culture. We believe this program, along with all our other programs this summer, will serve as a good starting point for resuming our overseas programs since the pandemic, and we cannot wait to hear the feedback from our students.

Starting this summer, most students who want to apply for overseas schools have started to work intensively on the portfolios. Our staff have been working closely with students on the presentation ideas and projects that will become key pieces of the portfolio, it is always gratifying to see the culmination of the students' hard work as they undergo the application process. ACG has maintained a leading role in the creative arts field. Our competency stems from a proven track record of delivering positive student outcomes.

Our amazing teaching staff with experiences in all major areas of art around the world, a strong and growing network relationship with renowned arts institutes, and the ability to launch relevant products of interest to students.

ACG's comprehensive set of offerings and services is meant to serve a large, diverse student population, and we continue working to increase our brand awareness among students of different age groups. By introducing more options for superior educational arts experiences, we aim to better serve these students. With that, I'll turn it back over to Kevin.

Kevin Ma (Chairman and CEO)

Thanks, Jun and Alice. We're pleased with ACG's achievements in the first half of 2023 and are excited about the opportunities for the remainder of the year. We are always thinking ways to improve our student experience, and believe we are well-equipped to execute our growth strategy by extending our service to meet their demands. With that operates, 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, and for participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment while we pull for questions. As a reminder, it is star one on your telephone keypad. There are no questions at this time. I would like to hand it back to Kevin for closing remarks.

Kevin Ma (Chairman and CEO)

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 from The Equity Group. We are always available to speak to investors and look forward to speaking with you all during our next quarterly call. Thank you.

Operator (participant)

Thank you. This will conclude today's conference. You may disconnect your lines at this time.