Earnings Call Transcript - AACG Q3 2021

Operator, Operator

Greetings, welcome to the ATA Creativity Global's Third Quarter 2021 Financial Results 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. And I'll now turn the conference over to your host, Carolyne Sohn. Thank you. You may begin.

Carolyne Sohn, Host

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 third quarter ended September 30, 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, 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 demand for and market acceptance and competitiveness of ACG's portfolio training programs and other education services, the impact of the COVID-19 pandemic and the acumen 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 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 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 02 of the conference call presentation for further information. All U.S. dollar amounts in this conference call relating to financial results for the third quarter ended September 30, 2021, are converted from RMB using an exchange rate of RMB6.4434 to US$1, the noon buying rate as of September 30, 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 03. 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 third quarter of 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.

Amy Tung, CFO

Thank you, Carolyne, and welcome, everyone. Good evening to those in America. We appreciate everyone's time. We are pleased to have achieved strong top-line growth while increasing gross margins year-over-year during the first quarter of 2021. This was primarily contributed by increased services delivered during the period across all of our major lines of business: mainly the portfolio training programs and research-based learning services. This growth was also supported by stable enrollment in the variety of programs we offer. Specifically, we saw increased interest and positive feedback in our results-phase learning offering. Our primary offering, the portfolio training program, enrolled 625 students during the period, which remained consistent from the same period last year. We delivered 24,148 credit hours for the portfolio training program, which is a slight increase from the third quarter of 2020. We were pleased to see project-wise program credit hours increased over 29% year-over-year during the third quarter; a result of our conscious effort to shift our portfolio training mix to project-based programs versus time-based programs, which has increased operational efficiency that has translated into revenue and margin improvement. We continue to explore ways in which we can assist our students by effectively developing new offerings and our IT platform, which we believe will serve as the foundation for future growth. Our revenues generated from the research-based learning services business saw a notable increase from the prior year period, and we anticipate the demand for these types of experiential learning opportunities to continue to grow. This summer, we offered summer internships, academic projects, as well as writing online bootcamps and onsite workshop programs in partnership with overseas distribution partners as well as certain industry partners. We look forward to making these types of offerings available throughout the year. With that, let's move to the financials for the third quarter and first nine months of the year. Quarterly revenues for the first quarter of 2021 increased 31% to RMB55.3 million, from RMB42.2 million in the first quarter of 2020. This was primarily driven by increased contributions from portfolio training and research-based learning services, for which we could refer to more services when compared with the prior year period when more restrictions on service delivery were in place due to the COVID-19 pandemic. Gross margin increased to 51.4% during the 2021 first quarter, up from 37.4% in the prior year period. The improvement was primarily driven by the increased revenues and operational efficiency from the ongoing shift of ACG's portfolio training program toward project-based programs and related cost optimization efforts. Net loss attributable to ACG was RMB26.2 million compared to a net loss attributable to ACG of RMB14.9 million in the prior year period. This was primarily a result of increased operating expenses related to the funding of ACG's research project with the Institute of Future Education and Assessment at Tsinghua University this year, which was deferred from the previous sequential quarter. There were also increased selling expenses related to higher performance bonuses and increased legal and professional expenses. Turning to the first nine months of 2021, net revenue was RMB129.6 million, up 28% from RMB101.3 million in the same period of 2020. Gross margin increased to 45.7% from 33.7% in the prior year period. The net loss attributable to ACG increased to RMB31.1 million compared to a net loss of RMB67.4 million. Moving to the balance sheet, we continue to be in a strong financial position with US$11.7 million in cash and cash equivalents. The working capital deficit was U.S. dollar showed with US$31.3 million and total shareholders' equity was US$30.1 million at September 30, 2021, compared to working capital deficits of US$23.6 million and shareholders' equity of US$30.5 million at December 31, 2020. With that, I would now like to turn it over to Kevin who will highlight our outlook and growth strategies.

Kevin Ma, CEO

Thank you, Amy. We are very pleased with our performance during this period of uncertainty in the Chinese education industry. The global pandemic had a significant impact, as several institutions were unable to fully execute their routines due to restrictions. We were focused on our ability to provide off-school academic courses, which we affiliate with students receiving computer education. I think we were able to successfully mitigate the impact of COVID-19 and navigate the anticipated material impact on our business. Despite the challenges, we achieved strong results in the third quarter of 2021, highlighted by a significant percentage growth in our top line and improved gross margins year-over-year. As Amy noted, we are experiencing increased demand for our research-based offerings, which tend to be short-term programs delivering project-based, hands-on learning experiences. We are exploring different options for expanding our offerings while being mindful of the changing educational landscape and the evolving needs of our students. While the overall market remains competitive, we believe we are well-positioned to enhance our existing line of business and to promote our current growth strategies. The demand for education in China remains steady, and we continue to see positive trends. We believe we have the potential to support the evolving education model here, and this positions us well for future growth. I will 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 English translation. Jun, please go ahead.

Jun Zhang, President

Thank you, Kevin.

Carolyne Sohn, Host

Thank you, Kevin. We are pleased with the resounding favorable response to alternative programs this summer. Even though we were unable to offer our traditional international study art programs, students remained eager to learn and engage with new experiences. We explored various sites for themed domestic travel programs during the past summer, such as Chuzhou in the province of Anhui. We also partnered with new collaborators in the arts-related industry, both domestically and overseas, to launch new offerings. For example, we launched the OpenHack series program, which provided students with hands-on learning experiences at various enterprises, including car design and fashion design workshops. These students participated in a showcase competition at the end of the program, and top students were invited to apply for future work or internship positions in these companies. These programs have been very well received by our students. We see opportunities to expand our research-based learning services business due to the current pent-up demand, and enrollment in these programs has remained strong beyond the summer months. As Kevin mentioned, the education landscape is changing, and we are working not only to expand our course offerings but also to adapt how we structure our art programs to offer students more flexibility to meet their needs. While some companies have had to close their doors and others continue to struggle due to the pandemic, we believe we have turned a corner and are well-positioned to serve students seeking education and pursuing the creative arts. With over 20 campus locations nationwide and a proven track record of our students attending well-known creative institutions around the world, we remain confident in ACG's ability to stand out from our competitors. With that, I'll turn it back to Kevin.

Kevin Ma, CEO

Thank you, Jun and Carolyne. In closing, ACG has demonstrated its ability to overcome challenges and perform strongly in a difficult environment. We are focused on mitigating the changes and uncertainties from a regulatory perspective but remain confident that we can continue our growth initiatives despite the complexities surrounding the education industry in China today. We are striving to become the leading international provider of creative arts education in China by prioritizing our students. We look forward to offering new experiences and learning opportunities that will enhance their education. Thank you for your attention.

Operator, Operator

Thank you again to all of you who have joined 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 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 evening.