ATA Creativity Global - Earnings Call - Q2 2025

Transcript

Speaker 2

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, for future events, or otherwise. Regarding the disclaimer language, I would also like to refer you to slide two of the conference call presentation, which is accessible via the IR section of ACG's website.

A 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 CFO, Mr. Ruobai Sima, will start this call by highlighting the company's key operational achievements and financial highlights for the second quarter of 2025. He will provide an overview of financial and operating results for the second quarter and first half of 2025, and briefly discuss expectations for 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 CFO, Mr. Ruobai Sima. Please go ahead, Mr. Sima.

Speaker 0

Thank you, Alice, and welcome, everyone. Good evening to those in America, and we appreciate everybody's time. As Alice mentioned, please refer to our earnings that are visible on the IR side of our website, and we go through our prepared remarks. The second quarter of 2025 was marked by a year-over-year increase in net revenues and gross profits. Growth in net revenues was mainly attributed to increased contributions from overseas study counseling services, other educational services, and research-based learning services, combined revenue of which increased by more than 50%. Continuing to the first half of 2025, we delivered strong growth for the six-month period, highlighted by a double-digit increase in both net revenues and gross profits. We also recorded growth across all business lines. Our value-added offerings, including research-based learning, overseas study counseling, and other educational services, were the primary drivers. Moving on to the second quarter's operational highlights.

During the second quarter of 2025, our main revenue contributor remained portfolio training services, accounting for 68% of total net revenues. Our project-based programs' credit hours delivered increased by 25.7% compared to the second quarter of 2024 and contributed to about 76.7% of total credit hours delivered. Revenue from research-based learning, overseas study counseling, and other educational services accounted for an increasingly important part of net revenues, which grew by 54.2% compared to the prior year period as a result of more services delivered during the period. Despite Q2 normally being a slower quarter for its perennial offerings, we delivered a variety of high-quality research-based learning projects to ACG students, including several master classes and a new session of our signature program, the United Nations Sustainable Goals Art Gold Camp.

In addition, we introduced the Cannes Film Festival United Tour, bringing students interested in film production to the forefront of one of the world's most prestigious and influential film festivals for an immersive experience. We recorded significant revenue growth in overseas study counseling services. As a result of more services delivered, our students continue to explore study abroad options in world-class universities and colleges. For the full 2025 admission results, we are more than excited to announce that ACG students have received more than 4,000 offers. These offers and scholarships come from prestigious institutions across all of our six major art disciplines.

Highlight results include offers in computer design at Cornell University and Carnegie Mellon University, architecture at Columbia University and Aachen, music at the Royal College of Music and Leeds Conservatory, film, games, and animation at the California Institute of the Arts and Sheridan College, fine arts at the Royal College of Art and FBE, as well as fashion at the Parsons School of Design and Central Saint Martins College of University of the Arts London. We also have students accepted into the Master of Arts in Design Engineering, a double major program co-designed by Brown University and Rhode Island School of Design, where students will have access to academic resources from both Ivy League schools and top art institutes.

Moving on to the second quarter of 2025's key financial metrics, total net revenues for the second quarter of 2025 were RMB 55.9 million, an increase of 8% from RMB 51.8 million in the second quarter of 2024, which was primarily due to increased revenue contributions from overseas study counseling services, other educational services, and research-based learning services. Gross profit for the second quarter of 2025 was RMB 28.3 million, an increase of 10.2% from RMB 25.7 million in the second quarter of 2024, primarily due to higher net revenues. Gross margin also improved to 50.6% during the second quarter of 2025, from 49.6% in the prior year period. Total operating expenses were RMB 42.1 million in the second quarter of 2025, a decrease of 9.4% from RMB 46.5 million in the second quarter of 2024.

As a percentage of net revenues, total operating expenses decreased to 75.3% during the second quarter of 2025 compared to 89.8% in the prior year period. The decrease in operating expenses was due to an RMB 2.6 million decrease in sales expenses related to lower headcount in sales personnel and decreased sales incentives, an RMB 1.5 million decrease in general and administrative expenses as a result of decreased professional fees, as well as an RMB 0.3 million decrease in research and development expenses as the ACG system development was completed in Q2 2024. As a result of higher net revenues and slightly lowered operating expenses, loss from operations in the second quarter of 2025 narrowed to RMB 13.7 million from RMB 20.8 million in the second quarter of 2024. Net loss attributed to ACG during the second quarter of 2025 was RMB 10.8 million compared to RMB 16.8 million in the prior year period.

During the fourth quarter of 2025, total net revenues increased 11.8% to RMB 111.7 million from RMB 99.9 million in the prior year period. The increase was primarily attributed to increased contributions from research-based learning and overseas study counseling and other educational services. Gross profit for the fourth quarter of 2025 was RMB 53.7 million, an increase of 12.8% from RMB 47.6 million in the fourth quarter of 2024. As a result of increased revenue during the fourth quarter, gross margin also improved to 48.1% from 47.7% in the fourth quarter of 2024.

Total operating expenses were RMB 84.3 million in the fourth quarter of 2025, a decrease of 6.4% from RMB 90.1 million in the fourth quarter of 2024. As a percentage of net revenues, total operating expenses decreased to 75.5% from 90.2% in the prior year period. The decrease was primarily due to an RMB 3.8 million decrease in sales expenses as a result of lower headcount in sales personnel and decreased sales incentives compared to the fourth quarter of 2024, and an RMB 0.6 million decrease in research and development expenses, and was partially offset by an RMB 2.5 million increase in general and administrative expenses related to the development of new programs carried out in the fourth quarter of 2025.

As a result of increased revenues and decreased operating expenses, loss from operations in the fourth quarter of 2025 narrowed to RMB 30.5 million compared to RMB 42.4 million in the fourth quarter of 2024. Net loss attributed to ACG in the fourth quarter of 2025 was RMB 24.1 million compared to RMB 34.7 million. Moving to the balance sheet highlights, as of June 30, 2025, we had RMB 34.7 million in cash and cash equivalents, total assets of RMB 444.2 million, total liabilities of RMB 388.4 million, and total shareholders' equity of RMB 55.8 million. Moving on to year-to-date enrollment trends, starting with student enrollment.

For the second quarter of 2025, total student enrollment was 1,050, decreased by 3.1% from the prior year period. The decrease in student enrollment was a result of normalized demand in our service in 2025 versus the rebound of student demand in 2023 and the fourth quarter of 2024. Portfolio training student enrollment for the second quarter of 2025 was 556, and student enrollment for all other programs for the second quarter of 2025 was 494. Moving on to credit hours delivered.

For the second quarter of 2025, credit hours delivered slightly increased by 0.3% compared to the prior year period. We reported a 25.7% increase in project-based programs, which in recent years have accounted for a continuously increasing percentage of total credit hours due to their flexibility and customization by design. Growth in total credit hours delivered was offset by decreased time-based program credit hours, as a majority of newly enrolled students opt for the project-based track. With that, let's move to our expectations for full year 2025. We expect to report a total net revenue of between approximately RMB 276 million to RMB 281 million for the year ended December 31, 2025, which represents a year-over-year increase of around 3% to 5% from full year 2024. We anticipate portfolio training to remain the main pillar of revenues, accompanied by increased contributions from all other lines of business.

As we continue to improve current offerings and introduce new programs, our fiscal year 2025 guidance range and related assumptions are based on the company's current business options, initiatives, and rate for the year-end December 31, 2025, and the current and preliminary view of existing domestic and international market conditions, which are all subject to change. I'd like to turn it over to Jun, who will expand upon our long-term growth strategy. Jun, please go ahead. Thank you, Sima. Next, we will talk about some recent highlights of our long-term growth plan. As a leading provider of high-quality creative arts education services, we are confident in our market position.

Although previously pent-up demand was released in 2024 and competition has intensified this year, we believe we are well prepared to achieve the expected growth and will continue to be a trusted partner for students. For the remainder of 2023, our financial and operational focus will be on improving profitability, driving organic growth across all business lines, strengthening cost control, and enhancing overall efficiency. Organic growth remains at the core of our business expansion. We are proud to provide ACG students with the quality and value of portfolio training services and keep in mind that these products need continuous improvement and refinement, while also introducing new services and courses to meet the evolving needs of students.

As we have discussed over the past few quarters, with our ongoing efforts, project-based programs have become the main contributor to our portfolio training service revenue. Our students also appreciate this efficient, flexible, and customizable course model that can be adjusted according to their needs and application timelines. We are committed to catering to the increasingly diverse needs of our student body. These students come from different backgrounds and possess varying levels of knowledge and experience in their chosen art majors. The expansion of our student base not only covers older groups and the younger generation but also includes students from different backgrounds with interdisciplinary skills. Our mission is to help students better showcase the breadth and depth of their artistic abilities when applying for portfolio training. Our highly professional and capable teaching team enables us to excel in this mission.

In an increasingly competitive global environment, we help students prepare early and plan flexible and long-term development paths from the moment they consider studying art abroad. In the summer of 2025, we will launch a series of exciting new research-based learning programs for ACG students, including our regular and recurring activities such as in-person educational tours to Japan and the U.S., as well as two domestic research-based learning programs themed on China's intangible cultural heritage, located in Dunhuang, Gansu, and Western Sichuan. In addition, we held several in-person master classes in Beijing covering a wide range of art fields, with instructors from renowned international institutions such as MIT, Yale University, University of Southern California, and Oxford University.

In the third quarter of 2025, we will also launch several new themed research-based learning programs to further enrich our curriculum and enhance the student experience. These include an art study tour to top schools in Singapore, a Berklee music performance camp, and ACG's exclusive Harvard Electronic Sound Lab camp, co-developed by Harvard University and UNESCO. Furthermore, in response to students' growing interest in practical disciplines, we are planning and launching more new programs aligned with long-term career development paths, such as those focused on computer design and interdisciplinary projects. In 2025, we will continue to consolidate and expand our geographic coverage. Expanding our international partner network globally is an ongoing strategy for ACG, especially in regions where student interest is growing. In addition to traditional popular countries such as the U.S.

and the UK, we have also noticed an increasing number of students applying to top schools in South Korea and Northern Europe. There are also relatively mature and well-known regions such as Australia, France, Italy, Japan, and Singapore. Our current strategy includes allocating marketing resources to better-performing campuses. In addition, we are further exploring and adopting more methods to optimize our business processes. In the second half of the year, we hope to continue implementing cost controls, including maintaining a streamlined sales team and adopting cost-effective student acquisition channels, such as online marketing on partner platforms. We have also begun to maximize classroom resources by organizing online group classes in regional centers like Beijing.

These courses feature our most popular teachers, providing the best online support to more students nationwide to help them complete their portfolio training and applications. This initiative has reduced operating costs. We believe this will be an effective way to improve company profitability for the remainder of 2025. For the rest of 2025, we remain committed to creating opportunities for student success by helping them realize their full potential. We are confident that we will finish the year strong and believe that our competitive advantages and multi-track growth strategy execution will support our continued leadership in China's creative arts education market. Good, second round of comments.

Speaker 2

Thank you, Sima. I will now discuss some recent execution highlights of our long-term growth initiatives. We remain confident in our market position as a leading provider of high-quality creative arts education services. While we see intensified competition this year after the release of pent-up demand in 2024, we believe we're well-positioned to achieve expected growth and continue to be a trusted partner to our students. Our financial and operational focus for the remainder of 2025 is on driving organic expansion across all lines of business and enhancing cost discipline and overall efficiency to improve bottom-line results. Organic growth remains at the core of our business expansion. We take pride in the quality and value our portfolio of offerings provide with ACG students, and keep in mind that these offerings are to be continuously improved and supplemented with new services and classes that address evolving student demands.

As we have discussed over the past quarters, our project-based programs have become a dominant contributor to our portfolio training services with a conscious effort, and our students have expressed their appreciation towards this efficient, flexible, and customizable track, which can be easily adjusted based on students' needs and application timelines. We're catering to a growingly diversified student population with different backgrounds and all levels of knowledge and experience in their interested art majors. The expansion of our student base is not limited to reaching older adults and younger generations, but also includes supporting a growing number of students who come from different arts backgrounds and possess hybrid skill sets across disciplines. Our job is to help students amplify how they demonstrate both the breadth and depth of their artistic capabilities in their application portfolios, and our strong, knowledgeable, and competent teaching team enables us to excel in this job.

In a time of increased global competition, we help students plan for early preparation, building flexible and long-term pathways from the moment they begin exploring the idea of starting arts abroad. For summer 2025, we have an exciting pipeline of new research-based learning projects for ACG students. These include our regular recurring offerings, such as the summer school camps to Japan and the U.S., two domestic-themed travel programs focused on Chinese intangible cultural heritage in Dunhuang, Gansu Province, and West Sichuan Province, as well as various in-person sessions of master classes in Beijing, featuring a wide range of arts topics taught by lecturers from reputable international colleges, including MIT, Yale University, University of Southern California, and Oxford University.

In third quarter 2025, we also launched several new theme travel programs to further diversify our offerings and enhance student experience, which include the Singapore Top School Arts Study Camp, Berklee Music Performance Intensive Camp, as well as an ACG exclusive Harvard University Studio for Electroacoustic Composition Summer School co-developed with Harvard University and UNESCO. Additionally, in response to the evolving student interest in career-oriented and practical disciplines, we're planning on launching more new projects and experiences that align with long-term career paths, such as those with a focus on computer design and/or those that are interdisciplinary. In 2025, we will continue to strengthen and expand our geographic footprint. Expanding our international partnership network across the globe is an ongoing strategy of ACG, especially in the regions where we observe growing student interest. Besides traditionally popular countries like the U.S.

and the U.K., we have noticed more students applying to top schools in South Korea and Northern Europe, alongside slightly more developed and better-known markets such as Australia, France, Italy, Japan, and Singapore. We have explored and deployed additional approaches to streamline our business, following the existing initiative to strategically allocate marketing resources to higher-performing campus locations. For the remainder of the year, we hope to continue implementing cost-conscious methods, which include maintaining a lean sales team and using cost-efficient student acquisition channels, such as online marketing on partner platforms. In addition, we have begun organizing online group classes led by our most popular teachers in regional centers like Beijing to maximize classroom utilization, giving more students across the country access to best-in-class support in portfolio creation and application counseling.

These initiatives have led to reduced operating expenses, and we believe will serve as effective ways to improve our bottom line for the rest of 2025. In the balance of 2025, we remain focused on driving success for our students by helping them achieve their full potential. We're optimistic that we'll finish the year with a strong note and believe that our competitive advantages and the execution of multi-track growth strategies will continue to strengthen our role as a leading player in China's creative arts education market. With that, Operator, let's open it up for questions.

Speaker 1

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. There are no questions at this time. I would like to turn the conference back over to Mr. Sima for closing remarks.

Speaker 0

To our investor relations for 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.

Speaker 1

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