ATA Creativity Global Q4 FY2021 Earnings Call

Greetings. Welcome to ATA Creativity Global's Fourth Quarter and Year End 2021 Financial Results. 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 will now turn the conference over to your host Alice Zhang 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 fourth quarter and year ended December 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 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, could, estimate, expect, forecast, future, intend, 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, market demand for and market acceptance and competitiveness of ACG's portfolio training programs and other education services, the impact of the COVID-19 pandemic on ACG and its operations, and ACG's plan and anticipated benefits of the measures implemented in response to the COVID-19 pandemic. 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 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 obligations 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 fourth quarter and year ended December 31, 2021, are converted from RMB using an exchange rate of RMB6.3726 to US$1, the noon buying rate as of December 31, 2021. All historical conversions are accurate as of the time reported unless otherwise noted. The company reports the financial results under the 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 company's 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 email 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 fourth quarter and year-end 2021; 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, Ms. Amy Tung. Please go ahead, Amy.

Thank you, Alice, and welcome everyone. Good evening to those in America. We appreciate everyone's time. We are pleased with the solid 24.7% growth in revenues and substantial improvement in gross margin we achieved during the full year 2021. This was primarily driven by the increase in services provided during the year as we were able to scale our operations more effectively, significantly reducing the company's losses from the prior year. 2021 revenue growth was primarily supported by increased contributions from portfolio training as we delivered more services as the effects of the COVID-19 pandemic gradually subsided, particularly during the second half of the year. Our research-based learning services also contributed to top-line growth as many of these programs were developed in response to the pandemic. These experimental learning opportunities have been well received by our students and continue to be in high demand. Our core portfolio training program enrolled 569 students during the fourth quarter of 2021 compared to 636 students in the prior year period. Enrollments tend to be an indicator of future credit hours delivered and the decrease from the prior year period is a reflection of the increasingly fierce competition we are seeing within the market. We have been proactive in addressing the increased competition, particularly during the second half of 2021 by closely monitoring and enhancing our marketing and promotional strategies. We plan to allocate a larger portion of our marketing resources in 2022 to popular social media platforms in China such as Douyin, which is similar to TikTok in the U.S., Zhihu which is similar to Quora in the U.S., and Dianping with the goal of developing a private pool of leads for our brand. These newer platforms have proven to resonate more with young people generating leads that have a higher potential conversion rate to sales. During the fourth quarter of 2021, we delivered 53,538 credit hours for our portfolio training programs. Notable increases in both time-based programs and project-based programs, credit hours delivered resulted in a 17.8% increase from the fourth quarter of 2020. While it is less apparent in this reporting period, we have continued to make a conscious effort to shift our portfolio training mix in favor of project-based programs versus time-based programs. This shift translated into increased revenues and improved margins due to greater operational efficiencies. We have also continued to explore ways in which ACG can better serve a greater population of students from diverse backgrounds. We recently announced the opening of our International Arts Foundation Program Center in Beijing and the Shuren-ACG Arts Center, both of which opened their doors in September 2021 and are expanding our offerings to include authorized qualifications and accredited classes to students that may have different needs and desires that traditional programs do not fulfill. With that, let's move to financials for the fourth quarter and full year 2021. Total net revenues for the fourth quarter of 2021 increased 19.3% to RMB72.6 million from RMB60.8 million in the fourth quarter of 2020. This was primarily driven by increased contributions from portfolio training services delivered either in person through ACG's nationwide training center network or through online platforms, which represented nearly 75% of total net revenues during the period. Gross margin improved to 62.8% during the 2021 fourth quarter, up from 48.5% in the prior year period. The improvement was driven by the increased revenues and reduced cost of revenues primarily contributed by improved operating efficiencies from the ongoing shift of ACG's portfolio training programs mix to project-based programs and related cost optimization efforts. Net loss attributable to ACG improved to RMB2.5 million compared to net loss attributable to ACG of RMB24.8 million in the prior year period. This notable improvement was primarily a result of an RMB16.0 million increase in gross margin as well as significantly decreased operating expenses. While we continued to invest in our R&D, we were able to reduce G&A expenses by approximately RMB6.2 million. The decrease in the operating expenses was also a result of an RMB3.1 million decrease in impairment loss of intangible and other noncurrent assets and RMB5.9 million provision loan receivable and other receivables. Turning to the full year 2021 results, net revenue was RMB202.2 million, up 24.7% from RMB162.2 million in 2020. This increase was driven primarily by growth in portfolio training, as well as research-based learning services. Gross margin improved to 51.8% from 39.2% in the prior-year period. Net loss attributable to ACG improved to RMB33.6 million compared to net loss of RMB92.2 million. This improvement was primarily driven by an investment gain of RMB33.5 million from the disposal of ACG's K-12 education assessment business during the second quarter of 2021, and an RMB41.1 million improvement in loss from operations. Moving to the balance sheet, we continued to be in a solid financial position with US$11.2 million in cash and cash equivalents. Working capital deficit was US$30.2 million, and total shareholders’ equity was US$30.0 million at December 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 pleased to deliver solid top line growth in fiscal year 2021, which along with our ability to increase the scale of our business and realize efficiency, enabled the company to significantly narrow the loss compared to the prior year. In 2021, study abroad continued to be a challenge for our students due to certain travel restrictions related to the ongoing global pandemic. Our enrollments remained stable during the fourth quarter despite increased competition in the creative arts education market in the second half of 2021. There was also some uncertainty related to regulatory changes for companies involved in the China education industry. The new Opinion released by the government in late July has led to many after-school academic tutoring companies either closing their doors or changing their business focus. Due to the nature of our business, ACG was not directly impacted by the Opinion, but we did see a need to continue differentiating ACG from our competitors. As Amy noted earlier, we are seeing increased demand for our research-based learning services, which tend to be shorter programs that provide project-based hands-on learning experiences. You may recall that we developed research-based learning services in response to the pandemic and are pleased to see this business potential for future growth. At the same time, we continue to explore different ways to expand our offerings. We believe we are well positioned to grow our existing lines of business with our current portfolio of program offerings. While we are mindful of the fierce competition within the market, we remain focused on serving our students and addressing their evolving needs. We are optimistic about the opportunities ahead of us in 2022 and look forward to maintaining our leading position in creative arts education as we continue to drive positive outcomes for all our students. On that related note, I’m pleased to report that of the applications submitted in 2021, ACG students who participated in the portfolio training programs and overseas study consulting programs have received a number of offers of admission and scholarships for 2022. These schools include the likes of Carnegie Mellon University, New York University, as well as prestigious arts colleges such as Rhode Island School of Design, Parsons School of Design, School of the Art Institute of Chicago, the Pratt Institute and Art Center College of Design. We are extremely proud of our students and intend to continue investing in our business and establishing partnerships within the industry, which will serve as a foundation for our future growth. 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 English translation. Jun, please go ahead.

Thank you, Kevin. Our ability to make decisions and adapt quickly has been vital to ACG's success during and after the pandemic. As some pandemic effects persisted into 2021, we focused on developing additional short-term programs prioritizing our students' and teachers' health, such as online boot camps, internships, domestic travel, and themed research-based learning initiatives. For instance, we collaborated with the RGS Guildford Nanjing School on the Nanjing Intangible Cultural Heritage program. This institution, the first Chinese international affiliate of the prestigious Royal Grammar School (Guildford), educates students from grades one to twelve. The program taught students design and craftsmanship in creating exquisite handmade silver and gold products, which received positive feedback from participants. Furthermore, we introduced new offerings to broaden our student population. The recent launch of ACG's International Arts Foundation Program Center and the Shuren-ACG Arts Center enables us to assist high school students who might not have access to study abroad opportunities in art colleges. We are pleased to offer one-year accreditation and a full-time international arts curriculum for students aiming for overseas undergraduate programs at the ACG International Arts Foundation Program Center. We are also supporting families whose children cannot attend public high school in Beijing but wish to pursue a creative arts education through our offerings at the Shuren-ACG Arts Center. The qualifications we have received approval for, such as the BTEC International Level 3 and Level 4 and A Level art and design qualifications, provide additional flexibility for students who may need more time to decide on studying abroad. By collaborating closely with international education providers, including art colleges, universities, and high schools, we are committed to meeting the diverse needs of an expanding student population in our academic and professional endeavors. We also see an opportunity to grow our research-based learning services due to current demand and strong enrollment. We are preparing to expand not only our course offerings but also the flexibility of our program structures to better accommodate our students' needs. While some companies have had to shut down or completely alter their business models in 2021, ACG successfully navigated market uncertainties. We believe this reflects ACG's strong operational foundation, characterized by high-quality education services supported by over 20 campus locations nationwide, our experienced teachers with proven records in guiding students toward their study aspirations, and our solid partnerships. Considering all these strengths, we remain confident in ACG's ability to differentiate itself from competitors. Now, I'll hand it back to Kevin.

Thanks, Jun and Alice. In closing, we're optimistic about the opportunities ahead of us in 2022 and look forward to maintaining our leading position in creative arts education, as we continue to drive positive outcomes for all our students. We continue to strive toward becoming the leading international provider of creative arts education in China by putting our students first and seizing new market opportunities. We look forward to bringing our students new experience and learning opportunities as they look to enhance their education. With that operator, let's open it up for questions.

Kevin Ma: Thanks again to all for you for joining us. If anyone has questions for us, please feel free to reach out directly to us or our investor relations firm. We are always available to speak to investors and look forward to speaking with you all during our next quarterly call. Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.