ATA Creativity Global Q1 FY2020 Earnings Call

Good day and welcome everyone to the ATA Creativity Global 2020 First Quarter Conference call hosted by Carolyne Sohn. My name is Greg and I'm the event manager for today's call. During your presentation, your lines will remain on listen-only. Now, I'd like to hand over to Carolyne. Please proceed.

Thank you, Greg 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, 2020, 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 terms such as anticipate, believe, expect, future, plan, outlook and will include, among other things, statements regarding ACG's future growth and results of operations, ACG's strategy of becoming a leading international education service provider, ACG's plans for mergers and acquisitions generally, the benefits of the financial outcomes of acquisitions, ACG's ability to operate efficiently and maintain continued financial strength under unusual circumstances, ACG's growth strategy and subsequent business activities, market demand for ACG's portfolio and training programs and other ACG's services, the impact of the COVID-19 outbreak on ACG's operations and ACG's plans and anticipated benefits of the measures implemented in response to the outbreak. Although the company believes that the expectations reflected in the 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 to be correct. Information about the risks associated with investing in ACG is included in 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 and 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, 2020, are converted from RMB using an exchange rate of RMB7.0808 to US $1, the noon buying rate as of March 31, 2020. All historical conversions are accurate as of the time reported unless otherwise noted. The company reports 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 and management will be referring back to this deck throughout the prepared remarks. In addition, we are more than happy to take investor questions through our webcast portal or via email to the company. On today's call, the company CFO Amy Tung will provide a brief overview of operating and financial highlights for the first quarter of 2020. And then ACG's Chairman and CEO Mr. Kevin Ma and President, Mr. Jun Zhang will conclude the remarks with a discussion of the company's outlook as well as its long-term growth strategy before opening the floor for questions. With that, I'll turn the call over to ACG's CFO, Ms. Amy Tung. Please go ahead, Amy.

Thank you, Carolyne and welcome everyone. Good evening to those in America. We appreciate everyone's time. Our results for the first quarter of 2020 were impacted by seasonality as a result of the Spring Festival holiday as well as the effects of COVID-19. When we last spoke to investors at the end of March, businesses in China were beginning to open and while cautious, were returning to normal operations following the impact of the pandemic. We made a conscious decision to transition all Huanqiuyimeng’s coursework to a completely online format beginning February 1, as a measure of prioritizing the health and safety of our students, faculty, staff, and employees during this time. At that time, we provided all of our students the option to fulfill the classes online. On the portfolio training site, several students did opt to continue with their study, but some decided to postpone the coursework. Our educational travel services business was also impacted during the period as the majority of tours were cancelled. As a result of these headwinds, we reported an 8.7% year-over-year decrease in credit hours delivered for our portfolio training programs, from approximately 28,900 credit hours in quarter 1 2019 to approximately 26,400 in quarter 1 2020. We provide a breakdown of these credit hours and additional operating metrics on the next slide. Later in the presentation, Kevin and Jun will provide an update on current operations and where they stand. As an overview, a credit hour is the standard unit measuring educational credit for our portfolio training program and translates into roughly one hour of time committed. When it comes to enrollment headcount, a student may be counted twice in enrollment if he or she enrolls in both the portfolio training and educational travel services in any given period. Student enrollment for the period was 681, out of which 404 were enrolled in the Portfolio Training Program. The Portfolio Training Program consists of time-based programs and project-based programs. We provide a breakdown of the credit hours delivered during the period compared to the prior year comparable period in our presentation. Revenue is recognized proportionately per credit hour delivered; however, as the actual credit hours of project-based programs are not predetermined, the progress of a project-based program is measured by credit hours delivered compared against the total credit hours expected to be delivered as we evaluate it at each quarterly and annual financial reporting date. As in partial quarters three and four of 2019, we continue to observe the same trend of students increasingly opting for the project-based program versus the time-based program. We noted on the last earnings call that each program has its benefits depending on the particular student's needs. A student that already possesses some basic skills and wishes to only complete a portfolio will tend to favor the project-based program, as it appears to be the less expensive option for completing a portfolio with a defined cost. Meanwhile, the time-based program caters to students that may want additional guidance and opportunity to work with teachers with some basic foundational skills before beginning on their portfolio. With that, let's move to financials for the quarter. I wanted to remind everyone that for the results shown for this period, we have applied acquisition accounting and made purchase price allocation adjustments to various assets acquired and liabilities assumed from the Huanqiuyimeng acquisition. As a result, certain line items will include adjustments from the amortization of the difference between the carrying value in Huanqiuyimeng's book and the fair value of assets from the purchase price allocation process applied to the Huanqiuyimeng acquisition. I will highlight where we saw some impact on our financials due to this PPA adjustment for the 2020 first quarter. Total net revenues for the first quarter of 2020 increased to RMB32.7 million compared to RMB1.6 million in the first quarter of 2019 as a result of revenue contributions from Huanqiuyimeng, which consisted primarily of revenues from the Portfolio Training Program. Net revenues for this quarter include a PPA adjustment decrease of RMB6 million. Gross margin was 35.8% during the 2020 first quarter compared to a gross margin of 25.3% in the prior year period when the company did not have substantial operations. Excluding the PPA adjustment to net revenues, gross margin for the 2020 first quarter would have been 45.8%. Net loss attributable to ACG was RMB20.5 million for the period compared to a net loss of RMB12.9 million in the prior period as a result of increased operating expenses incurred related to the day-to-day operations of the Huanqiuyimeng business. Finally, we continue to be in a solid financial position with US$21.6 million in cash and cash equivalents on the balance sheet. Working Capital deficit was US$13.3 million and total shareholders' equity was US$14 million at March 31, 2020, compared to working capital deficit of US$11.7 million and shareholders' equity of US$43.9 million respectively at December 31, 2019. With that, I would now like to turn it over to Kevin, who will expand upon our outlook and growth strategy.

Thank you, Amy. Just unprecedented times, as Amy noted we continue to operate our business in this new environment and focus on continuing to provide the quality art and creativity instruction to our students, enabling them to continue working towards their goals even while much of the work that remains under shelter in place orders. We're fortunate to be in a solid financial position that will allow us to navigate the challenges businesses all over the world are facing as a result of COVID-19 for the amount of time it will take for society to return to a new normal. ACG has a great deal of operating flexibility as our infrastructure allows us to scale to meet challenges in demand from our student base. We have been taking advantage of this operating flexibility to streamline costs when it comes to teaching variability and associated teaching cost arrangements. At the same time, we're able to almost immediately remap to satisfy an increasing demand with students who had decided to postpone their status and resume their programs once again. With regard to educational travel, we do know that many of our partner institutions will not be holding their regular summer programs which will have an impact on our business. We regret that our students will not be able to take advantage of our tours and programs this summer. But we want to emphasize that the public health and safety of our students and employees is of the utmost importance. We are in close contact with all our partners. And we'll keep an eye on the global situation in the coming weeks and months. We're prepared to continue supporting our students; we are on that platform and are looking into ways in which we can maximize the potential of online technologies to grow our business and the base for students. Additionally, we announce today that our board of directors approved a share repurchase program, which will allow the company to repurchase up to US$1 million of its issued and outstanding ADS from time to time in the open market and proactively negotiated transactions. The plan is effective now through the end of the year. We are pleased that the board is showing our confidence in the long-term growth potential of ACG's business and our commitment to building value for shareholders. I'd now like to hand it over to Jun Zhang, ACG's President to provide an update on our current growth initiatives for Huanqiuyimeng.

Thank you, Kevin. As you might expect, our immediate goals have shifted somewhat due to the COVID-19 pandemic. Enhancing our technologies has become a significant priority as we observe that many students still want to pursue their studies in art and creativity. Our objective is to ensure reliable access to our top instructors nationwide through a remote learning platform, while also providing the necessary academic and emotional support our students require to succeed. Furthermore, we are exploring ways to leverage online delivery beyond just a service method. For instance, we intend to offer trial online classes that will allow students to experience Huanqiuyimeng's offerings firsthand to drive sales. We will continue offering traditional offline portfolio training but are considering converting some offline classes to online formats. Introductory classes that concentrate on the fundamentals typically have a more standardized curriculum, making them suitable for online instruction. This approach will provide students with increased flexibility and reduced costs. Additionally, online delivery presents opportunities for a broader range of academic offerings and access to esteemed instructors who can teach remotely without travel restrictions. Concerning educational travel, we previously noted that most partner institutions have canceled their regular summer programs. We are actively developing alternative options for students this summer, including online summer school programs, partnerships with renowned overseas art schools and institutions, and newly created art-themed domestic travel programs. Our sales pipeline is beginning to recover now that almost all of our sales and marketing staff in Beijing can return to the office. Some local offices have yet to fully reopen, but we anticipate they will do so in the coming weeks. We are financially and operationally well-positioned to navigate the challenges faced by businesses globally. We continue to advance our growth initiatives where it is most beneficial: building partnerships, enhancing our technology, and increasing enrollments. By doing so, we believe we will emerge as one of the leading providers of quality art and creativity education and study abroad experiences in China. I will now hand it back to Kevin.

Thanks Jun and Carolyne. To conclude ACG has a strong foundation needed to survive the current situation. We continue to look for M&A opportunities, but it's a slow process in the current environment. We have recommended a strategy when it comes to evaluating potential opportunities internationally, which is somewhat challenged inside of ACG where in-person meetings are prohibited. Above all, we'll remain focused on serving students to the best of our ability and prioritizing the well-being of all our stakeholders. I would once again like to extend my gratitude to all of our employees, associates, family, and friends for their support during these times. ACG wouldn't be what it is today without you. With that operator, let's open it up for questions.

Certainly, everyone your question-and-answer session will now begin. And as we do not have any questions that are coming in, I would like to turn it back to management for closing remarks.

Thanks again to all of you for joining us. If anyone has questions, please feel free to reach out directly to us or our Investor Relations firm. We're always available to speak to investors and look forward to speaking with you all during our next quarterly call. Thank you.

Thank you. Everyone that concludes your conference call for today, you may now disconnect. Thank you for joining and enjoy the rest of your day.