ATA Creativity Global Q1 FY2022 Earnings Call

Thank you, Hector, 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, 2022, 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 ACG's Portfolio Training Programs and other education services, mainly including research-based learning and overseas study counseling services. The impact of COVID-19 on ACG and its operations, 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 would 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 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, 2022, are converted from RMB using an exchange rate of RMB 6.3393 to USD 1, the noon buying rate as of March 31, 2022. All historical conversions are accurate as of the time reported unless otherwise noted. The company reports 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 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 Chairman and CEO, Mr. Kevin Ma will give some brief opening remarks before turning the floor over to CFO, Mr. Ruobai Sima, who will provide a brief overview of operating and financial highlights for the first quarter of 2022. Kevin 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 Chairman and CEO, Mr. Kevin Ma.

Thank you, Alice, and welcome, everyone. Good evening to those in America. I appreciate everyone's time. I'm pleased to be here today with Ruobai Sima, our newly appointed Chief Financial Officer. Sima succeeded Amy Tung, who has decided to step down as CFO for personal reasons. Amy has been with ACG for over 15 years, serving various roles within finance and operations. She has played a key role in our development over these years, and we are grateful for her expertise and various contributions over the years. However, my only concern is to ensure a smooth transition. Amy will remain with ACG in an advisory capacity over the next few quarters to ensure a smooth transition, and we appreciate her ongoing support. Mr. Sima brings to ACG 70 years of experience in finance and accounting as well as strategic financial planning and execution at public and private companies in the financial, automotive, and travel industries. We are confident that his expertise in finance will be an invaluable addition to our leadership team. With that, I will turn it over to Sima for our first-quarter highlights.

Okay, and thank you, Kevin, for the kind introduction. I'd like to begin by sharing my excitement in joining ACG at this point in its history. While we are experiencing challenges caused by the ongoing pandemic environment and increasing competition, ACG has a strong track record of delivering positive student outcomes, and it is a reputable institution in the creative arts education space. We are well-positioned to overcome the short-term hurdles, and I'm very grateful for this opportunity to be part of ACG's incredibly bright future. 2022 got off to a good start. We saw a modest increase in student enrollment. Although credit hours delivered remained stable during the fourth quarter, we achieved a 12.1% increase in net revenues, as well as notable year-over-year improvement in gross profit and margin. This was primarily driven by increased revenue from our portfolio training and overseas study counseling services, as well as continued product shifts from time-based to project-based programs. In addition, our research-based learning opportunities have been well received by students and continue to be in high demand. As a few of our core cities continue to face pandemic-related lockdown restrictions, we are shifting our delivery methods to online where appropriate, offering students greater flexibility and ongoing support despite not being able to take in-person classes. Our core portfolio training program enrolled 537 students during the fourth quarter of 2022 compared to 528 students in the prior year period. Enrollment tends to indicate future credit hours delivered, and we are pleased that enrollments remained stable year-over-year despite the resurgence of COVID-19 in certain cities. During the fourth quarter of 2022, we delivered 27,494 credit hours for our portfolio training programs. Total credit hours remained flat, and we have continued to see a shift in our portfolio training toward project-based programs versus traditional time-based programs. Project-based programs increased by 23%, while traditional time-based programs decreased by 19%. Our efforts to enhance the program have contributed to improved operational efficiencies, allowing us to grow revenue while also improving our gross margin. We have also continued to explore ways in which ACG can better serve a diverse population of students. We have received positive feedback from students who attended our International Arts Foundation Program centered in Beijing and Shuren-ACG Arts Center, both of which opened their doors in September 2021. To help students with diverse needs pursue further studies in the creative arts, let’s move to financials for the fourth quarter of 2022. Total net revenue for the fourth quarter of 2022 increased by 12.1% to RMB 42.1 million, up from RMB 37.6 million in the fourth quarter of 2021. This growth was primarily driven by an increase in services delivered for portfolio training and overseas study counseling. Portfolio training services were delivered either through ACG's nationwide training center network or via our online platform, which represented around 63.3% of total net revenue during the period. Gross margin improved to 45.7% during the 2022 first quarter, up from 39.6% in the prior year period. The improvement was primarily due to the increased proportion of revenues from portfolio training and overseas study counseling services and our ongoing optimization efforts. Net loss attributable to ACG improved to RMB 15.9 million during the first quarter of 2022, compared to RMB 19 million in the prior year period. Moving to the balance sheet, we continue to be in a solid financial position and raised USD 9.8 million in cash and cash equivalents. Working capital deficit was USD 32.3 million, and total shareholders' equity was USD 27.6 million at March 31, 2022, compared to a working capital deficit of USD 30.2 million and shareholders' equity of USD 3 million, respectively, at December 31, 2021. With that, I'd like to turn it over to Kevin, who will discuss our outlook and growth strategy.

Thank you, Sima. We were pleased with the stable performance delivered in the first quarter of 2022. During this period, China experienced challenges related to local COVID-19 transmission in a few of our key cities like Shanghai, Shenzhen, and Suzhou, which also led to certain travel restrictions across the country. The situation has since worsened with mandatory lockdowns taking place in major cities. Some of our learning centers have had to close and cease in-person instruction, while we are still providing services to our students in the cities where our campus remains open. We are providing online class delivery options for students impacted by lockdowns in certain cities. In the short term, this may impact business, as there will always be students who prefer in-person instruction. However, we believe we will adapt to overcome the ongoing challenges presented by the pandemic. The majority of our students are determined to continue pursuing their studies, and we are committed to supporting them to the best of our abilities. As Sima noted earlier, our research-based learning services, which tend to be good programs that provide project-based learning experiences, remain quite popular. They originated before the pandemic, which adapted to the evolving needs of our students. We are pleased to see a growing sentiment towards online research-based learning programs and are excited about the growth potential beyond the post-pandemic era. We are extremely proud of our students and intend to continue investing in our business and its partnerships within the industry, which will serve as a foundation for our long-term growth. We believe we are well-positioned to grow our business with the current portfolio of programs as more countries begin to ease travel restrictions. We are optimistic about the opportunities ahead of us in 2022 and look forward to maintaining our leading position in creative arts education. I would 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.

Given the current portfolio of programs, we expect to expand our business as more countries relax travel restrictions. We are hopeful about the opportunities in 2022 and aim to uphold our leadership in creative arts education. Now, I will pass it over to Jun Zhang, ACG's President, for an update on our growth initiatives. Jun will speak in Mandarin, followed by an English translation. Jun, please proceed.

Thank you, Kevin. Since the beginning of the pandemic in early 2020, we have worked to continue developing our online platform. The need to be nimble and flexible, along with the need for technologically adaptable delivery methods for our courses, became absolutely clear when the unprecedented circumstances of COVID-19 affected people all over the world over two years ago. We have continued to develop resources to quickly react to COVID-related fluctuations in our operations. We have remained focused on providing the best quality education services for our students, even when some of our campuses are temporarily closed due to local resurgences. ACG has continued to develop additional short-term programs, both online and in-person where feasible, including online boot camps, internships, domestic travel, and certain team research-based learning programs. For example, during the first quarter, we organized an environmental protection culture and creative design camp in Sanya, Hainan province, offering a unique experience for over 20 students who were able to create recycling marine products and learn from a local artist. The students had the opportunity to work on individual and group projects, and some of their work was selected for exhibitions at the environmental protection center. This program was well received by the participating students. We believe that the public health situation in China may improve over the next several weeks and remain optimistic about the remainder of 2022 as more major cities can resume some level of normalcy. We continue to plan for short-term summer camps and team travels in the coming summer. We are determined to continue developing programs that cater to the needs of different student populations and to support them in every way possible, as we always do, with quality education and teaching experiences. Our operational strength and growth prospects are based on the experience of our veteran faculty, our continuously evolving sales and marketing strategies to better resonate with the appropriate student populations, our ongoing efforts to improve operating efficiencies, as well as to establish relationships with domestic and international partners, including universities, colleges, education institutions, and international high schools in China. We believe we are well-positioned financially in the near term but have been exploring financing, investing, and M&A opportunities where appropriate to enable our long-term growth. ACG's mission is to provide quality learning experiences that cultivate and enhance students' creativity. We're confident in our ability to maintain our competitive advantages and leading position in the creative arts education market in China. In 2022, we look forward to serving a growing population of students with diversified needs in pursuing creative arts education. With that, I'll turn it back over to Kevin.

Thanks, Jun and Alice. In closing, we are optimistic about ACG's prospects in 2022 and look forward to continuing our stance regardless of the local situation. We are committed to our mission of empowering students to achieve success in the creative arts, and we'll continue exploring ways in which we can expand our offerings to help more students in their pursuit of creative arts education. With that, operator, please open the floor for questions.

Thank you all for your participation. If anyone has questions for us, please feel free to reach out directly to us or our Investor Relations team from 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.

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 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 conference. You may disconnect your lines at this time. Thank you all for your participation.