Earnings Call Transcript - AACG Q1 2023

Operator, Operator

Greetings. Welcome to ATA Creativity Global’s First Quarter 2023 Financial Results Call. All participants are in a listen-only mode at this time. A brief question and answer session will follow the formal presentation. This conference call is being recorded. It is now my pleasure to introduce your host, Alice Zhang with the Equity Group. Thank you, Alice. You may begin.

Alice Zhang, Host

Thank you, Camilla, 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, 2023, 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, intend, look forward to, outlook, plans, 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 including initiatives taken by ACG as the Chinese public health situation has improved, market demand for and market acceptance and competitiveness of ACG’s portfolio training program and other education services, and the impact of the COVID-19 pandemic on ACG and its operations. 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 two of the conference call presentation for further information. All U.S. dollar amounts announced in this conference call relating to financial results for the first quarter ended March 31, 2023, are converted from RMB using an exchange rate of RMB6.8676 to $1, the noon buying rate as of March 31, 2023. 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 the company PowerPoint presentation, there is an overview of the company on Slide three. In addition, we are more than happy to take investor questions during today’s Q&A session or via email to the company. If you wish to ask questions, you can send your questions to the email address azhang@equityny.com. And please specify whether you would like to have your name read during the Q&A session. On today’s call, the company’s CFO, Mr. Ruobai Sima, will provide a brief overview of operating and financial highlights for the first quarter 2023. As Chairman and CEO, Mr. Kevin Ma is unable to be here today due to personal reasons. Mr. Sima will join President, Mr. Jun Zhang, in providing an update on the company’s outlook and 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, Mr. Sima.

Ruobai Sima, CFO

Thank you, Alice, and welcome, everyone. Good evening to those in America. We appreciate everyone’s time. In 2023, we got off to a soft start at ACG; we still have teaching staff back in the classroom across our 21 training centers nationwide. We are pleased to report a 10% increase in student enrollments during the first quarter, which was driven by a notable increase in portfolio training students. We have stable total net revenue of RMB42.3 million, which was supported by the portfolio training services and overseas study counseling services business. Everyone at ACG is working hard in anticipation of launching our overseas summer camps and pilot programs that will be held during the summer for the fourth time since the pandemic began in 2020. And we have seen strong demand from students for the summer programs. Total student enrollment for the first quarter 2023 was 1,097, an increase of 10% from 997 in the prior year period, excluding the 171 students who enrolled for foreign language training business ACG disposed of in the third quarter 2022. The enrollment increase, which has been 32.8%, enrollment in our core portfolio training programs increased more than 20% with 648 students enrolled during the first quarter 2023 compared to 537 students in the prior year period. We delivered 27,630 credit hours for our portfolio training programs. We are more flexible project-based portfolio training programs accounting for approximately two-thirds of our portfolio training credit hours delivered. We continue to encourage our students to opt for project-based programs, and a more favorable mix shift is contributing to improved operational efficiencies, giving us an opportunity to grow revenue without sacrificing the quality of teaching. With that, let's move to financials for first quarter 2023. Total net revenue for the first quarter 2023 remained stable at RMB42.3 million compared to RMB42.1 million in the fourth quarter of 2022. This was primarily driven by portfolio training and overseas study counseling services. Portfolio training services represented 64.6% of total net revenue during the period. Gross margin was 44.3% during the first quarter 2023 compared to 45.7% in the prior year period. The decrease in gross margin was primarily due to increased costs of service related to higher compensation expenses incurred for certain teaching staff engaged in enhancing efficiency and the quality of service delivery, an initiative that began in the second quarter of 2022. The net loss attributable to ACG was RMB17.8 million during the first quarter 2023 compared to RMB15.9 million in the prior year period, which was a preliminary result of increased sales expenses related to performance bonuses awarded in line with enrollment growth during the period. Moving to the balance sheet, we continue to be in a solid financial position with US$9.6 million in cash and cash equivalents. The working capital deficit was US$35.5 million, and total shareholders' equity was US$18.4 million at March 31, 2022, compared to a working capital deficit of US$43 million and shareholders' equity of US$20.8 million respectively as of December 31, 2022. Now, turning our attention to ACG outlook and capital growth strategy. We are delighted to welcome all of our students back in person at our training centers at the start of 2023. The pandemic is largely behind us, and we are pleased to have achieved such strong enrollment being driven by our core portfolio training service business, resulting in consistent revenues for the quarter driven by the portfolio training and overseas study counseling services, managing students preparing to apply for overseas education, as many countries including China have relaxed travel restrictions. We recently launched a long-term strategy, introducing a new contemporary logo and motto "Beyond the Differences." We believe these new elements reflect our goal of helping students find the courage and determination to be their authentic selves and embrace original thought and expression. Today, we think students will identify with our philosophy and approach to creative education. If you pride yourself on being an innovative and forward-thinking organization, we hope to instill in our students the allowance for creativity and the sharing of ideas among people from different places and life circumstances. Enrollment during the first quarter 2023 appears to mark the start of a positive trend within our research-based learning services business, as many students have signed up for our various overseas camps they had planned for this summer. This program for overseas student college runs in the summer season, and we anticipate taking full advantage of the strong demand for these programs in 2023. We continue to work closely with our overseas institutional partners, and teaching staff, and look forward to delivering rewarding experiences to our students. Clearly, we'll expand upon our portfolio of offerings. We would also like to congratulate students who are holding different college application processes and are finally being rewarded for their efforts with admission letters from their training schools. For the applications submitted in the academic year 2022, ACG's students have had continued success with offers of admission coming from College of Norwich, Royal College of Art, Howard University, Columbia University, and others through the uncertain pandemic environment, and we are thrilled to see them continue fulfilling their creative education at schools for their term. We are optimistic that we are largely operating in a post-pandemic year. We are also observing slow growth in our business due to the improved public health situation and the opening up for international travel. We believe we are well-positioned to continue exactly accelerating our growth initiatives, including extending our partnerships as well as our portfolio of offerings. With the help of our institutional partners and our ability to continuously adapt our offerings to serve the changing market, we are eager to continue delivering positive outcomes and strengthen our reputation in the creative arts education industry. I'd 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.

Jun Zhang, President

Thank you, Mr. Sima. We're honored to have served so many students who have remained committed to creative service education during the past few challenging years. Our goal during this time has been to continue providing a quality curriculum, access and support from teachers and staff, guiding them from start to finish on a competitive portfolio, and then reaching their education with hands-on art-related experiences. Our hope is that all of this will eventually result in a student having a well-rounded education and experience that would set them apart from others applying for school. We believe a track record of positive student outcomes distinguishes us from the competition, and we aim to build on the current momentum and continue to grow our business by providing superior art education experiences to our students. ACG has continued to offer immersive, research-based learning projects. We're excited about the overseas summer camps we're currently enrolling students in. One of the projects is a summer school at the University of the Arts London; all participating students will be able to take courses designed for each stage of their art study on a UAL campus and immediately engage in an English-speaking environment. We're also offering a Future of Design exploration workshop hosted in the Netherlands and Denmark, through which students will learn about current and future design trends and be exposed to interdisciplinary methodologies. The goal is for students to independently create a design proposal. Students who participate in this project will receive certificates of completion at the end of the camps and one-on-one study opportunities with some leading experts in their respective areas of creative arts. We're very excited to be offering these summer programs this year and cannot wait to hear from students about their experiences. We continue to be committed to offering valuable, insightful research-based learning experiences to our students. We believe the first quarter 2023 marks a turning point for our business. With a favorable operating environment due to relaxed domestic and international travel restrictions at the beginning of the year, we're witnessing an increasing number of students re-engaging in the pursuit of a creative arts education and study abroad opportunities. We're confident in our ability to serve a wide range of students, both those who have followed a more traditional education and those who have opted for a non-traditional path of study, and we continue to proactively explore various service options to meet the needs of all student types. Our mission continues to be to provide quality learning experiences that cultivate and enhance students' creativity. In a post-pandemic environment, we believe we're well positioned to take advantage of the recovering market and strengthen our leading position in the creative arts education market in China. With that, I'll turn it back over to Mr. Sima.

Ruobai Sima, CFO

Thanks, Zhang. In closing, we are excited about the opportunities for us in 2023, and we feel confident in our ability to seize the opportunities ahead of us. Our top priority remains our students, and we look forward to continuing to explore ways in which we think we can improve our services to better support their creative art journey. With that, operator, let's open it up for questions.

Operator, Operator

Thank you. We will now be conducting a question and answer session.

Alice Zhang, Host

As we wait for questions to queue, I received some questions via email from William Gregozeski from Greenridge Global that I would like to post to the management team. I'll start with this one. Was there any COVID-related impact on the first quarter numbers? Or is it a true reflection of the period?

Ruobai Sima, CFO

Thank you. I think, yes, of course, I think there was some impact during the post-COVID period. But maybe for one figure, I think the sales volume, which is very directly reflected. But I think it will continue—comparing to the same quarter last year, I think we have seen a very big increase. The total sales were around RMB50 million and to around RMB80 million. But also if we compare this to the same period in 2019, I mean, the period before the COVID-19 occurred, I think we have also taken a significant increase from RMB60 million to RMB90 million. I think this average means that this increase is not only from the COVID impact, but it's also from some natural increase. Besides these, I think we notice that this increase is not only a similar increase from enrollment numbers but also based on unit pricing. So in that way, I think that figure can reflect the real situation of increase during the period of the year. Thank you.

Alice Zhang, Host

Thanks, Mr. Sima for the answer. The second question I have is, can we expect to see student enrollment and credit hours increase on a year-on-year basis for the remainder of 2023?

Ruobai Sima, CFO

Yes. I think we hope that this trend can continue. Our portfolio is getting bigger and bigger. And currently, we still believe that the increase in our key businesses will remain positive.

Alice Zhang, Host

Great. Appreciate the answer. One last question from Bill is, where do you think you need to be in terms of enrollment or credit hours to reach profitability? And do you have the cash to get there?

Ruobai Sima, CFO

I think, in order to achieve profitability, it is not a simple question of simply increasing enrollment or credit hours. I think, of course, in terms of marketing, our sales volume increase is one way, and besides this, we also try to develop more new business lines and have adjusted our pricing methodology to be more aligned with the class marketing situation changes. In addition, we will also focus on our internal controls. I think we've made our operations more efficient, and we'll concentrate on cost controls and teaching management to enhance our operational efficiencies. By employing those approaches, I think we are going to manage our cash balance effectively, and this way we can gather data to achieve profitability. Thank you.

Alice Zhang, Host

Great, thank you. That's all the questions from Bill. I'll hand it back to the main Q&A session now. Thank you.

Operator, Operator

Thank you. There are no questions at this time. I would like to turn the floor over to Mr. Sima, CFO, for closing comments.

Ruobai Sima, CFO

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 relation team. We are always available to speak to you afterward and look forward to speaking with you all during our next quarter call. Thank you.

Operator, Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.