ATA Creativity Global Q1 FY2021 Earnings Call

Greetings, and welcome to ATA Creativity Global's First Quarter 2021 Financial Results Conference Call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I would like to turn the conference over to your host, Carolyne Sohn of The Equity Group. Thank you. You may begin.

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, 2021, 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 contain 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 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, market demand for ACG's portfolio training programs and other education services, the impact of COVID-19 on ACG and its operations, and ACG's plan and anticipated benefits of the measures implemented in response to COVID-19. 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 to be correct. Information about the risks associated with investing in ACG is included in these 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 U.S. dollar amounts in this conference call relating to financial results for the first quarter ended March 31, 2021, are converted from RMB using an exchange rate of RMB6.5518 to US$1, the noon buying rate as of March 31, 2021. All historical conversions are accurate as of the time reported, unless otherwise noted. The company reported its financial results under 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 are more than happy to take investor questions during today's Q&A session or via e-mail to the company. On today's call, the company's CFO, Ms. Amy Tung, will provide a brief overview of operating and financial highlights for the first quarter of 2021. Chairman and CEO, 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 CFO, Ms. Amy Tung. Please go ahead, Amy.

Thank you, Caroline. And welcome everyone. Good evening to those in America. We appreciate everyone's time. We are pleased to have gotten off to a strong start to the year, reporting a 41.6% increase in terms of student enrollment to 964 students in the first quarter of the year. In a promising sign that we are fully in the post-pandemic recovery, we saw significant year-over-year growth across our major programs: portfolio training, overseas study counseling, research-based learning, and foreign language training. Our primary offering in the portfolio training program enrolled 528 students during the period, an increase of 30.7% from 404 in the same period last year. Credit hours benefit for portfolio training increased 5.5% to 27,865. Having risen to meet the challenges of the 2020 pandemic has given us an opportunity to reinforce the foundation of our business and explore additional growth areas. We are gratified to begin realizing some of the tangible results of these efforts here in the first quarter of 2021, which is generally impacted by some seasonality due to the Chinese Spring Festival holiday. We are hopeful that the road to recovery will continue on a positive trajectory as vaccinations against COVID-19 progress globally. At this time, we are working closely with our overseas partner institutions to develop our summer programs. Given the current circumstances of the global pandemic, we have determined with our partners to offer alternative programming to students this summer. International travel continues to be in a place of uncertainty, and we feel this is the best way to maintain the health and safety of our students. We are pleased to be offering domestic learning experiences in China, as well as various online boot camps in partnership with overseas institutions. With that, let's look at the financials for the quarter. Total net revenues for the first quarter of 2021 increased 15% to RMB37.6 million from RMB32.7 million in the first quarter of 2020. This top-line improvement was primarily driven by an overall increase in services delivered across our major programs as we continue to recover in the post-pandemic environment. Gross margin was 39.6% during the 2021 first quarter, up from 35.8% in the prior-year period. Net loss attributable to ACG improved to RMB19 million, from RMB20.5 million in the prior-year period. This was primarily a result of an approximate RMB3.2 million improvement in loss from operations during the period, which was offset by an RMB1.7 million reduction in benefits from non-redeemable non-controlling interests. Moving to the balance sheet, we continue to be in a solid financial position with US$14.6 million in cash and cash equivalents. The working capital deficit was US$26.5 million, and total shareholders’ equity was US$27.2 million at March 31, 2021, compared to a working capital deficit of US$23.6 million and shareholders’ equity of US$30.5 million respectively at December 31, 2020. With that, I would now like to turn it over to Kevin, who will expand upon our outlook and growth strategy. Kevin?

Thank you, Amy. We are extremely pleased to see the turnaround demonstrated by the elements we achieved during the first quarter of 2021. Our 40% year-over-year growth in total enrollments increased across all lines of business. It’s a very promising start to the year as the public health situation in China remains stable over the past several months. We are optimistic that this recovery will continue over the course of the year as more of the global population is vaccinated against COVID-19, which will maintain strong demand recovery. This will be aided by our centralized system for monitoring sales leads, as well as the new offerings we have launched in the past year. ACG’s stellar reputation has been established by the consistent quality of our curriculum and the teaching staff, as well as the positive outcomes our students have achieved. This is true regardless of whether coursework is delivered in person or online. Our mission is to provide students with all the tools and support they need for success at ACG, and we are better equipped to deliver on this promise than ever before. In the post-pandemic world, I believe everyone is looking to take advantage of real-world experiences where we can fully interact with one another face to face. Our partnerships create excellent opportunities at home, but students cannot gain experience without actual in-person interaction. That being said, many students continue to be interested in pursuing study abroad, and we are prepared to meet that demand when it’s safe to do so. As Amy mentioned, we will be offering international study abroad programs; our partners have decided this is the best path forward under the current circumstances. We are pleased that students are enjoying the new domestic travel programs and online boot camp alternatives we have developed, and I look forward to working with our partners to make those options available this summer. I’d now like to hand the floor 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 an English translation. Jun, please go ahead.

Thank you, Kevin. During the first quarter of 2021, we continued to offer in-person coursework delivery with an option to complete some courses online. We expect to expand our online offerings and develop entirely new programs as well. In response to the pandemic, we focused on enhancing our research-based learning services and have been pleased with the positive feedback on our new domestic educational tours, online boot camps, and internship opportunities. We have identified new and innovative methods to partner with overseas institutions despite international travel restrictions, and we anticipate continuing these efforts as we approach summer 2021. We are ready to support the demand for research-based learning experiences, regardless of the impact of global travel, and we look forward to collaborating with our partner institutions on virtual programming for this summer. We are continually exploring ways to leverage technology across the ACG organization, which has become a vital part of our educational delivery and sales processes. This will allow us to better utilize the talents of our teaching staff in 2021. With technology's assistance, we look forward to reaching a larger group of students across China and providing them with opportunities to study the creative arts that may otherwise be inaccessible. With that, I'll turn it back over to Kevin.

Thanks, Jun and Carolyne. At ACG, we are well positioned both operationally and financially to capitalize on various growth opportunities before us, particularly as the road to recovery continues. Students who decided to postpone their studies during the pandemic are gradually resuming coursework, and the impact of these initiatives is resulting in great success. We are honored to have played a role in their achievements. Everyone, please stay safe and healthy. With that, operator, let’s open it up for questions.

There seems to be no questions at this time. So, I would pass it back over to management for any closing remarks.

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

This concludes today's teleconference. You may now disconnect your line at this time. Thank you for your participation, and have a wonderful day.