ATA Creativity Global Q2 FY2022 Earnings Call

Greetings, and welcome to the ATA Creativity Global's Second Quarter 2022 Financial Results Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alice Zhang of the Equity Group. Please proceed.

Thank you, Hector, and hello, everyone. Thank you for joining us. The press release announcing ATA Creativity Global or ACG's results for the second quarter and six months ended June 30, 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 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, could, estimate, expect, forecast, future, intent, 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 meant 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 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 second quarter and six months ended June 30, 2022, are converted from RMB using an exchange rate of RMB 6.6981 to USD 1, the noon buying rate as of June 30, 2022. All historical conversions are accurate as of the time reported unless otherwise noted. The company reports its financial results on U.S. GAAP and R&D, 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 email to the company. You may send emails to me, Alice Zhang, by emailing avhang@equityny.com. On today's call, the company's CFO, Mr. Ruobai Sima, will provide a brief interview of operating and financial highlights for the second quarter of 2022; 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, Mr. Ruobai Sima. Please go ahead, Sima.

Thank you, Alice, and welcome, everyone, and good evening to those in America. We appreciate everyone's time. During the second quarter of 2022, we were pleased that we continued supporting our students who chose to continue fulfilling their creative art education while online deliveries due to the local resurgence of COVID-19 in some of our core cities, including Shanghai and Beijing. From late March to early June, we temporarily closed some of our training centers to comply with local lockdown procedures. We are pleased that these restrictions have since been lifted, and we are able to serve our students in person once again. Total studio enrollment remained stable at 1,018 during the period compared to 1,051 in the second quarter of 2021. As a result of the temporary training center closures and future lockdowns, total credit hours delivered for portfolio training programs decreased by 10.8% compared to the prior year period, which impacted our financials during the period. The impact on portfolio training and research-based learning revenues was partially offset by increased revenue contributions from overseas study counseling services with the public health situation in China improving once again. We expect demand for our portfolio training and research-based learning programs to rebound. We continue to see significant demand for the overseas study program, and we are confident in ACG's ability to increase its market share in the international Creative Arts education industry. During the second quarter of 2022, we delivered a total of 25,387 credit hours for our portfolio training programs. We have continued to encourage the ongoing shift in our portfolio training mix in favor of project-based programs versus time-based programs. This is evident in the breakdown, with project-based program credit hours accounting for 57.8% of total credit hours delivered during the period. With that, let's move to financial highlights for the second quarter and the first half of the year. Total net revenue for the second quarter of 2022 was RMB 34 million compared to RMB 36.9 million in the second quarter of 2021. As mentioned earlier, the decrease was primarily due to the decreased contribution from the portfolio training and research-based learning services that were affected by local COVID-19 resurgence and subsequent lockdowns in some of our key cities, including Shanghai and Beijing. Gross margin was 35.6%, compared to 43.4% in the prior year period. The decrease was primarily due to decreased revenues during the period, while the cost of revenues remained relatively stable year-over-year. Net loss attributable to ACG was RMB 22.1 million, compared to a net income attributable to ACG of RMB 14.1 million in the prior year period. The difference here was primarily due to a one-time investment gain of RMB 33.5 million as a result of the disposal of the company's K-12 education assessment business in the second quarter of 2021. Turning to the first half of 2022, net revenue increased slightly to RMB 76.2 million compared to RMB 74.4 million in the same period of 2021. Gross margin remained stable at 41.2% compared to 41.5% in the prior year period. Net loss attributable to ACG was RMB 37.9 million compared to RMB 4.9 million. Moving to the balance sheet, we continue to be in a solid financial position with USD 9 million in cash and cash equivalents. Working capital adjusted was USD 33.4 million, and total shareholder equity was USD 22.9 million at June 30, 2022, compared to a working capital deficit of USD 30.2 million and shareholder equity of USD 30 million, respectively, at December 31, 2021. With that, I'd like to turn it over to Kevin, who will expand upon our outlook and growth strategy.

Thank you, Sima. While the ongoing environment continues to present challenges, we are pleased with ACG's ability to adapt. This is where our training centers were impacted by local lockdowns in second-tier cities as well as top-tier cities like Shanghai and Beijing, where many of our students chose to continue their studies with ACG using online formats. Our vision is to deliver quality support for our students regardless of whether it is in-person or remote. In the second quarter of 2022, we continued to create a high-quality learning experience via online formats such as the ACG Overseas Master Program. We introduced the program to our students when it began in early 2020, and we have seen interest in this program grow over the past two years even as the public health situation improved. During the quarter, we've also deployed the strategy to streamline our organizational structure. We have begun introducing full-time teaching staff to ACG's internal management roles to help drive potential growth by integrating our sales and product development efforts with their day-to-day teaching responsibilities. This enables us to quickly incorporate feedback from our students into improving our operations. We believe this presents an opportunity for us to create a more direct line of communication with our students to better understand and be prepared to meet their evolving needs. We believe our current portfolio of offerings and our efforts to enhance our programs will continue to elevate ACG in the creative arts education marketplace. We are optimistic about our outlook in the second half of 2022 and look forward to the upcoming application season, which we expect will drive positive outcomes for our students. I would now like to hand it 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 the English translation. Jun, please go ahead.

I would now like to hand it 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 the English translation. Jun, please go ahead.

Thank you, Kevin. The systems and procedures that we have put in place in response to the COVID-19 pandemic in early 2020 have provided a strong foundation for our organization and have enabled us to be flexible when faced with unexpected circumstances. Since 2020, we have continued to invest in building, maintaining, and advancing the technology that supports our service delivery to ensure a seamless and pleasant learning experience for enrolled students. We understand that we continue to operate in an ongoing pandemic environment that could worsen at any given moment, and we remain alert in monitoring the situations at our training centers. This summer, we cooperated with one of the famous ceramic art centers in Jingdezhen to launch an exclusive program through which our students learn about blue and white porcelain ceramic shaping, glass painting, and hot melting techniques. The students also visited the studios of some world-renowned artists to experience the creation process of masterworks and had the opportunity to exhibit their own work towards the end of the program. On the operations side, ACG continues to invest in upgrading our teaching system and developing new programs across major business lines. We will continue to provide online offerings and remain committed to being flexible and responsive in adjusting, upgrading, and customizing our educational products as we acknowledge the various needs of our student population. Additionally, ACG will introduce new programs that reflect the ever-evolving creative industry, including programs with cutting-edge content related to the Metaverse, NFTs, and more. In the remainder of 2022, we will continue to focus on supporting our students in their creative arts studies. As Kevin mentioned, we expect to enter a busy application season for those who choose to pursue their education overseas. We're also committed to solidifying our relationships with our institutional partners and remain confident that our first-class teaching staff, new marketing strategies that allow us to target our potential student audience precisely, and our efforts to streamline our internal organizational structure will enable us to grow the business. ACG's mission is to provide quality learning experiences that enhance students' creativity. We continue to believe that our offerings and the quality of help we provide our students in achieving positive outcomes will differentiate us from our competitors. With that, I'll turn it back over to Kevin.

Thanks, Jun. In conclusion, we are proud to be serving a diverse student population and are pleased with the financial results we have been able to achieve despite the challenges faced in 2022. ACG is committed to assisting our students in their growth in the creative arts, and we expect to continue improving and expanding our portfolio of offerings to better serve them over the long term. With that, operator, let's open it up for questions.

Thank you. If anyone has questions for us, please feel free to reach out to our Investor Relations firm, the Equity Group. We are always available to speak to investors and look forward to speaking with you all 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 to our Investor Relations firm, the Equity Group. 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 all for your participation.