ATA Creativity Global - Earnings Call - Q4 2024

Transcript

Operator (participant)

As a reminder, this conference is being recorded. It is now my pleasure to introduce Alice Zhang with The Equity Group. Thank you. You may begin.

Alice Zhang (Associate)

Thank you, Operator. Good morning to all of you joining us from China, and good evening to all of you joining us from the United States. Please be advised that the discussion 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 its 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 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 Chairman and CEO, Mr. Kevin Ma, will start this call highlighting the company's fourth quarter and full-year operational and Financial Achievements. cfo, Mr. Ruobai Sima, will provide an overview of financial and operating results for the fourth quarter and year in 2024, and briefly discuss 2025 full-year guidance. 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.

Kevin Xiaofeng Ma (Chairman and CEO)

Thank you, Alice.

Welcome, everyone. Listeners in America. We appreciate everyone's time. As Alice mentioned, please refer to our earlier stake available on the IR site of our website as we go through our prepared remarks. During 2024, with the mission of driving positive Student Outcomes in mind, ACG continued to concentrate on making college educational service available to our students. Our investment in the teaching team allowed us to introduce relevant and customized offerings and our efforts to establish and maintain Institutional Partnerships expanded the access to world-class educational resources. We also actively explored new ways to improve overall operation efficiency, from streamlining operations and locating regional resources to initiating the integration of AI Technologies into our services, which we believe will continue to drive long-term value to our operations. The fourth quarter of 2024 was highlighted by significant growth in net revenues and bottom-line results.

We reported a more than 20% increase in net revenues, driving a similar level of improvement in our gross profit. Portfolio training programs created in our delivery to ACG students increased by over 35% during the fourth quarter of 2024. As a result of increased revenues, net income attributable to ACG grew by 54.9% to RMB 13.3 million. Similarly, for the full year 2024, we reported a strong net revenue growth of 21%, exceeding the high end of our full-year guidance, which resulted in a 23.2% increase in gross profit for the year. Overall, student enrollment rates continued to grow, and our core business, portfolio training services, recorded a significant increase in student enrollment as well as created in our delivery.

Moving on to fourth quarter operation highlights, portfolio training service accounted for the majority of our revenues for the quarter, with project-based programs contributing to 66.8% of total credit hours delivered. The demand for our portfolio training service remained strong, and we were pleased that we have been able to address this demand with a teaching team that students trust. We organized a more group process, which allowed more students to take lessons for popular teachers, helping create credit hours delivered while enhancing teaching efficiency at the same time. Revenues from research-based learning, overseas study counseling, concerts, and other educational services all increased by more than 40%. We hosted an October session of the United Nations Sustainable Development Goals Arts Bootcamp. Our Shanghai Fashion Week program and several must classes covering arts topics like character animation, visual communication, and interior design.

By the way, in the 2025 application season, many of our students have submitted their application portfolio to overseas schools. We are glad to share that our students have started to receive favorable early admission results. So far, our students have received offers and scholarships from schools such as Cornell University, Columbia University, Rhode Island School of Design in the United States, and the University of the Arts London, University College London in the U.K., as well as prestigious art schools in Japan, Hong Kong, and Australia. At the same time, we continue to expand our partnership base, and we began providing educational service to two additional higher education institutions, the Central Academy of Drama and the Nanjing University of Arts.

During the quarter, we made the strategic decision to discontinue our Junior Art Service, aiming to increase the overall efficiency of our operations, which contributed to a large G&A expense during the quarter. With that, I will hand over the call to Sima for the overview of our financial and operating results for the fourth quarter and the full year 2024, and provide some color on our guidance for the fiscal year 2025.

Ruobai Sima (CFO)

Thank you, Kevin. I will start with the fourth quarter and full year 2024 key financial matrix. Total net revenues for the fourth quarter 2024 was RMB 109 million, an increase of 20.7% from RMB 83.6 million in the fourth quarter 2023, which was primarily due to increased revenue contributions from portfolio training programs, research-based learning, and Overseas Study Counseling Services. Gross profit for the fourth quarter 2024 was RMB 63.7 million, an increase of 21.6% from RMB 52.4 million in the fourth quarter 2023, primarily due to higher net revenues. Gross margin slightly increased to 63.1% during the fourth quarter 2024, compared to 62.6% in the prior year period, mainly as a result of higher net revenues despite an increase in costs associated with more teaching staff hired as compared to the fourth quarter 2023 to accommodate increased numbers of students.

Total operating expenses was RMB 46.8 million in the fourth quarter 2024, an increase of 8% from RMB 43.3 million in the fourth quarter 2023. The increase was primarily due to an RMB 6.8 million increase in selling expenses related to an increased number of sales personnel and marketing events in various different channels, which was partially offset by an RMB 2.4 million decrease in General and Administrative Expenses, mainly as a result of the disposal of ACG's Junior Art Service in the fourth quarter 2024, and an RMB 0.9 million decrease in RMB expenses as ACG's system development was completed in Q2 2024. Income from operating in the fourth quarter 2024 was RMB 17 million, compared to RMB 9.1 million in the fourth quarter 2023. Net income attributed to ACG during the fourth quarter 2024 was RMB 13.3 million, compared to RMB 8.6 million in the prior year period.

Turning to the full year 2024, total net revenues increased 21% to RMB 268.1 million from RMB 221.6 million in the prior year period. The increase was primarily attributed to increased contributions from portfolio training, research-based learning, and Overseas Study Counseling Services. Gross profit for the full year 2024 was RMB 141.3 million, an increase of 23.2% from RMB 114.7 million in the full year 2023. As a result of increased revenues during the full year 2024, gross margin slightly improved to 52.7% from 51.7% in the full year 2023. Total operating expenses were RMB 184.5 million in the full year 2024, an increase of 18.1% from RMB 156.2 million in the full year 2023.

The increase was primarily due to an RMB 21.2 million increase in sales selling expenses as a result of the expansion of our sales team and an increase in marketing events such as the Arts Education Exhibition and Fusion Arts Exhibition, as well as an RMB 8.1 million increase in General and Administrative Expenses related to increased professional fees and business expansion-related investments, and was slightly offset by lower Research and Development Expenses, which decreased by RMB 0.9 million. Loss from operations in the full year 2024 was RMB 43 million, compared to RMB 41.5 million in the full year 2023. Net loss attributed to ACG full year 2024 was RMB 36.1 million, compared to RMB 33.7 million. Move to the balance sheet highlights.

As of December 31, 2024, we had RMB 36.5 million in cash and cash equivalents, total assets of RMB 456.9 million, total liabilities of RMB 377.3 million, and total shareholders' equity of RMB 79.6 million. Moving on to year-to-date enrollment trends. For the full year 2024, total student enrollment increased by 15.8% as compared to the full year 2023, supported by strong student interest growth in both ACG's portfolio training and other programs. Portfolio training students' enrollment for the full year 2024 increased by 12.9% to 2,807, and all other program students' enrollment for the full year 2024 increased by 20.2% to 1,974. For the full year 2024, continued to record higher credit hours delivered from the second half of the year, similar to prior year results as our students started to prepare for portfolio work.

For the full year 2024, credit hours delivered significantly increased by 30.8%, whereby time-based program credit hours increased by 32% and project-based program credit hours increased by 30.2%. With that, let's move to guidance for the full year 2025. ACG is expected to achieve total net revenues of between RMB 276 million-RMB 281 million for the year-end at December 31, 2025, which represents a year-over-year increase of around 3%-5% from the full year 2024. We anticipate that growth to be primarily driven by our portfolio training services, which is also significantly students acquisition channel for all of our other business as more students sign up for our services. In full year 2024, we saw double-digit revenue growth and overall increased demands across our business lines following the COVID-19 international traveling recovery.

We expect full year 2025 growth to return to normalized levels, and we expect our business to record continuous growth and believe that strategy initiatives that we are implementing, which Jun will expand on a bit, will drive our long-term growth in and beyond 2025. I'd like to turn it to Jun, who will expand upon our long-term growth strategy. Jun, please go ahead.

Jun Zhang (President and Director)

ACG [Foreign language] ,Thank you.

Thank you, Sima. For 2025 and beyond, our goal remains to be a leading provider creative Arts Education services and products in China to students interested in a creative Arts Education and career. We believe our long-term growth is fueled by organic growth, strengthening and expanding geographic footprints, launch of new services, and potential M&A opportunities. The strong growth trend we observed in student enrollment and services delivered, as well as in our internal sales records, has reinforced our confidence in the ACG's business and the market potential of the creative Arts Education in China. We expect our organic growth to be supported by higher fee and higher margin services. For one, encouraging students interested in our portfolio training services to enroll in a project-based track, which offers higher value services compared to time-based programs due to its flexibility and customizability.

Furthermore, we expect positive student feedback on our core portfolio training services to drive increased interest in our other services, such as research-based learning and Overseas Study Counseling Services. With our frontline teachers and sales teams' input into designing our course offerings, we've released our capabilities to introduce new and unique research-based learning experiences and a growing student interest in our Overseas Study Counseling Services. We'll continue to fuel revenue growth and gross margin improvement. For 2025, to strengthen and expand our geographic footprint, ACG will continue to expand coverage in existing cities and strategically locate our regional resources to maximize operations at larger centers. In January 2025, ACG announced the grand opening of our ACG Japan Center, which focuses on Japanese Language Training and Arts Education.

At the ACG Japan Center, we provide both online and in-person language training services and help students settle down after they arrive for their future study, as well as tutoring students on their application portfolios and hosting various arts events. The opening of the ACG Japan Center follows the opening of our London Center in September 2024, which has since been actively serving students in London and surrounding areas. We are committed to helping students achieve their goals as a trusted partner throughout their journey with ACG. We have invested in the innovation and introduction of new research-based learning projects, which have become an increasingly substantial part of our revenue source. Since the beginning of 2025, we have introduced various experiences in both in-person and online formats, serving students of different age groups and with various arts backgrounds and majors.

These programs included Creative Arts Healing Training Program led by University of London lecturers, Japanese Classic Animation Study Tour in Tokyo, Sea Island Environmental Protection Creative Arts Camp in Sanya, Hainan Province, Safari Photography Creation Camp in East Africa, Milan Fashion Week Internship Program, Ivy League Art Campus Tour in the East Coast of the U.S., and Alibaba Artificial Intelligence Training Camp. Last but not least, ACG remains diligent in actively exploring potential M&A opportunities in 2025 to supplement our service portfolio of high-quality creative Arts Education products to our students. Serving our students with the best offerings is at the core of our business, especially as we continue to expand our student population and address the evolving needs of our students.

We're excited about our growth in 2025 and believe our investment in our teaching team and the strategic initiatives we take to improve operating efficiency will continue to drive results for ACG and our shareholders. 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 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star 2 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. We will pause for a brief moment to poll for questions. There are no questions at this time. I would like to turn the conference back over to Kevin for closing remarks.

Kevin Xiaofeng 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're 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.