Earnings Call Transcript - AACG Q4 2022

Operator, Operator

Greetings and welcome to ATA Creativity Global’s Fourth Quarter and Year-End 2022 Financial Results. Please note that this conference is being recorded. I will now hand it over to Alice from the Equity Group. Thank you. You may begin.

Alice Zhang, IR Representative

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, 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 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, market demand for and market acceptance and competitiveness of ACG’s portfolio training program 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 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. dollars amounts announced in this conference call relating to financial results for fourth quarter and year ended December 31, 2022, are converted from RMB using an exchange rate of RMB6.8972 to $1, the noon buying rate as of December 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 the company 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. If you wish to ask questions, you can send your questions to the e-mail 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 fourth quarter and full year 2022. As Chairman and CEO, Mr. Kevin Ma is unable to be here today. Mr. Sima will join President, Mr. Jun Zhang, in providing an update of 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. Certainly, our students remain our top priority in 2022, and we were proud of the continued resilience of both our students and teaching staff throughout the year, given the unpredictable ongoing pandemic environment, despite our core portfolio training business being impacted by periodic lockdowns in some of our key cities in response to local COVID-19 resurgence. We were pleased to see stable demand for those programs and increased demand for research-based learning programs, overseas study counseling, and other educational services. During the fourth quarter of 2022, we achieved an 8.2% increase in total revenue to RMB78.5 million, which contributed to the positive bottom line result for the period. Net income attributable to ACG was RMB2 million. Total revenue saw a modest 2.3% increase for the full year 2022, which was primarily due to increased contributions from other educational services and portfolio training services, excluding the one-time RMB33.5 million in investment gain from the disposal of our K-12 business recognized in fiscal year 2021, with significantly narrowed losses year-over-year. Total student enrollment for the fourth quarter of 2022 was 908 compared to 1,052 in the prior year period. Keep in mind, the 908 is the number of enrolled students in the foreign language training service, which primarily operated under an entity that ACG has consolidated those in the third quarter of '22. Excluding these 167 students in the prior year period, total enrollment increased year-over-year. Of the 908 students, 574 were enrolled in our portfolio training program compared to 569 students in the prior year period. We were pleased to see a continued shift in credit hours delivered from time-based programs to project-based programs. This project-based credit hours increased 31.9% year-over-year, accounting for nearly two-thirds of total credit hours delivered during the quarter. We have continued to confidently shift students toward a more flexible project-based program, designed to be tailored to build needs and potentially with a higher unit price. Portfolio training program revenue increased to RMB57.8 million in the fourth quarter of 2022 compared to RMB54.2 million in the prior year period. With that, I’d like to move to financials for the fourth quarter and full year 2022. Total net revenue for the fourth quarter of 2022 increased 8.2% to RMB78.5 million from RMB72.6 million in the fourth quarter of 2021. It was primarily driven by increased contributions from portfolio training services and other educational services, which is related to service delivery for new cooperation projects with schools and training organizations. Revenues from portfolio training services represented approximately 73.6% of total net revenue during the period. Gross margin was 60.6% during the fourth quarter of 2022 compared to 62.8% in the prior year period. The gross margin decrease was primarily a result of increased cost of service related to higher compensation expenses for ACG’s teaching staff as they became more engaged in ACG’s international management process to enhance the efficiency and quality of service delivery as well as help drive sales and business engagement. Net income attributable to ACG was RMB2 million compared to net loss attributable to ACG of RMB2.5 million in the prior year period. Turning to the full year of 2022 results, net revenue was RMB206.8 million, up 2.3% from RMB202.2 million in 2021. This increase was driven primarily by increased revenue contributions from other educational services, which is mainly related to services delivered for new cooperation projects with schools and training organizations and portfolio training services, as noted earlier. Gross margin was 49.6% from 51.8% in the prior year. Net loss attributable to ACG was RMB47.9 million compared to net loss of RMB33.6 million. It was primarily due to RMB33.5 million investment gains related to the disposal of the K-12 education assessment business in the prior-year period, which was offset by decreased general and administrative expenses of RMB10 million related to the Tsinghua University funding support paid in the prior year period as well as RMB6 million impairment loss on investments recorded in the prior year period. Going to the balance sheet, we continue to be in a solid financial position with our $8 million in cash and cash equivalents. The working capital deficit was $33 million and total shareholders equity was $20.8 million at December 31, 2022, compared to working capital deficit of $30.2 million and shareholders’ equity of $30 million respectively at December 31, 2021. Now I turn our attention to ACG’s outlook and growth strategy. Over the course of 2022, ACG remained steadfast in its commitment to helping students achieve positive outcomes. We are very pleased that our students have continued to pursue their studies with ACG, thereby demonstrating their confidence and faith in our ability to provide them with the quality programming and emotional support they deserve for them to realize their creative value, as this has been more challenging by the ongoing pandemic environment. But I would like to recognize our teaching and support staff for their dedication to the students, regardless of whether classes are delivered in person or online. The remote class delivery platform has the flexibility to change the classes delivered format overnight as necessary in recent years. This has been valuable to students and teachers during the periodic lockdown and temporary campus closures that occurred in 2022. Our portfolio training programs continue to see stable demand and students delivered modest revenue growth despite the impact COVID-19 continues to have on our business in 2022. Because of our ability to deliver stable top-line results while controlling costs, we have continued to narrow losses excluding one-time items. During 2022, ACG continued to curate and launch various research-based learning programs for students to enhance students’ creative journeys. As international travel was highly restricted in China during the year, we focused our attention domestically on health programs such as environmental protection in the Design Camp held in Xidao, Hainan province; the ceramics arts and exclusive health program in Jingdezhen; and interest training class for the 2022 UWEE International Art Exhibition. We also offered programs around more contemporary topics, such as NFTs and the Metaverse. All these programs were created with the idea that participating students walk away with an enhanced understanding of a particular subject matter through our real lab experience. Some of those may also result in increases that can be added to build our portfolio. We continue to serve as a trusted adviser to students looking to apply to overseas colleges and universities, providing high-quality curriculum and hands-on experience to admission counseling services. We are thrilled to share some of the initial 2023 admission results; we have heard from our students that began to receive offers from prestigious institutions, such as fashion design programs at Parsons School of Design, which is known to be quite competitive. Other schools include Rhode Island School for Design, Junior College of Arts New York University, and the University of Oxford. We opened the ACG International Art Foundation program center in Beijing in 2021, and I’m pleased to share that all the enrolled students at the center have started their first year in college in the UK. We expect that ACG’s program designed for students that are able to follow the traditional high school path has played a crucial role in helping these students achieve the next step of their creative part education journey. We continue to believe that our growth relies on the continued investment in our institution and focused relationships with our institutional partners. I look forward to 2023, and we are optimistic about the near-term outlook for our students as international travel continues to pick up, and more students realize that their desire to study overseas is more possible today than perhaps it was after a couple of years. We look forward to continue to driving positive outcomes for all students. I’d like to hand the floor over to Jun Zhang, ACG’s President, to provide an update on our current growth initiatives. Zhang will make his remarks in Mandarin, which will be followed by English translation. Jun Zhang, please go ahead.

Jun Zhang, President

Thank you, Mr. Sima. Our students have demonstrated a great deal of dedication and determination in the pursuit of art study. And as the trusted corner along this journey, ACG has strived to ensure that our offerings remain first-rate, educational, and relevant to real-world experience. In the first quarter of 2023, one of our future programs is the Open Hack Project designed for Shanghai Fashion Week 2023. During this 5-day long project, participating students will create branding proposals, start a fashion lookbook from scratch, and have an opportunity to interview fashion icons and influencers. Students could also win VIP access to Shanghai Fashion Week 2023, which takes place this month. Additionally, as this project is designed for students who are looking to add highlights to their resume, not only would they gain first-hand experience working as part of a professional Fashion Week team, but also complete the project instruction letters and internship certificates. ACG initially introduced online research-based learning programs during the COVID-19 pandemic. We were able to do so primarily, thanks to a strong partnership base with international education providers, including our colleges and universities. These programs have been well received by participating students. As international travel was now feasible for many students over the past couple of years, we developed programs to encourage students to explore cultural heritage by visiting cultural heritage sites in China. Intangible cultural heritage is a term used by UNESCO to describe culture beyond monuments and collections of objects; as described by UNESCO, intangible cultural heritage also includes traditions or living expressions inherited from our ancestors and passed on to our descendants, such as our traditions, performing arts, social practices, videos, festive events, knowledge, practices concerning nature and the universe, and all skills to produce traditional crafts. We understand how valuable this type of learning experience is for students applying to overseas art schools. In 2023, we plan to continue offering these programs to our students as well as other programs to keep up with the latest trends in the arts world. Just like what we did with the Metaverse in the post-pandemic era program. As international travel continues to pick up and as China has lifted its zero-COVID policy, we’re working closely with our international partners and resuming international summer school programs for the first time since 2020. As Mr. Sima mentioned earlier, the ACG International Arts Foundation Program Center had achieved great success in its initial classes, all of whom are currently in the first year of college in the UK. We are pleased to enroll a larger class of students in 2022 and look forward to guiding them in the year ahead. We’re excited about the new opportunities that the ACG International Arts Foundation Program Center has created for students with non-traditional study paths. We remain confident in our competitive position in the creative arts education industry in 2023. We’re prepared to optimize ACG’s instructional resources by seeking different forms of cooperation with existing and potential academic partners in regional markets. We look forward to serving more students with the diverse needs of our growing portfolio coverage. This is supported by our strong operational foundation with on-site access in various cities nationwide, first-rate teaching staff, a track record of delivering positive student outcomes, as well as our strong partnership base.

Ruobai Sima, CFO

Thanks, Zhang. In closing, we are excited about the opportunities ahead of us in 2023. We remain optimistic about taking the lead in the race on the runway of China’s creative art education industry, and we will continue striving to become an international leader. We cannot wait to see what our students will achieve in 2023 and are committed to providing new experiences, valuable guidance, as well as the coach along their arts study journey. With that, operator, let's open up for questions.

Operator, Operator

This will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Sima 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 our investor relations from 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.

Operator, Operator

Thank you. This will conclude today’s conference. You may disconnect your lines at this time and thank you for your participation.