Earnings Call Transcript - AACG Q4 2023

Operator, Operator

Greetings, and welcome to the ATA Creativity Global Fourth Quarter and Year End 2023 Financial Results. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Carolyne Sohn, Vice President. Thank you, Carolyne, you may begin.

Carolyne Sohn, Vice President

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, 2023, is available at the IR section of the company's website at www.ata.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, guidance, 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, ACG's 2024 guidance, market demand for and market acceptance and competitiveness of ACG's portfolio training programs and other education services. Although the company believes that the expectations reflected in 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 2 of the conference call presentation for further information. All US dollar amounts in this conference call relating to financial results for the fourth quarter and year ended December 31, 2023 are converted from RMB using exchange rate at RMB7.0999 to USD1, the new buying rate as at December 31, 2023. All historical conversions are accurate as of the time reported, unless otherwise noted. The company reports its financial results under US 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 3. 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 avhang@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, Ruobai Sima, will provide a brief overview of operating financial highlights for the fourth quarter and full year of 2023. 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 on the company's 2024 guidance, 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, Mr. Sima.

Ruobai Sima, CFO

Thank you, Carolyne, and welcome, everyone. Good evening to those in America as well, and we appreciate everyone's time. 2023 was an important year for ACG. It marked the fourth year since the COVID-19 pandemic, during which we were able to deliver a complete year of in-person class delivery. We are continuing to make selected courses available via online delivery. I'm pleased to report that the company achieved RMB221.6 million in revenue for the full year 2023, a 7.2% increase year-over-year. This was a result of renewed student interest in our portfolio training, overseas study consulting, and research-based learning services, as COVID-related travel restrictions and local shutdowns were lifted at the start of 2023, enabling children to return to campus for the period and resume planning for overseas study. Over the course of 2023, we also continued to realign our operating costs, and we were able to marginally decrease our operating expenses. As a result of the increased revenues and decreased operating expenses, we significantly improved our bottom line, narrowing our net loss by 29.7% for the full year 2023. We were excited to hold overseas summer camp for the fourth time since the pandemic. And we’re pleased that children continue to find our offerings valuable to their overall experience at ACG, enriching their academic study while reinforcing our role in helping them pursue careers in the arts. Total student enrollment for the fourth quarter of 2023 was 1,011 compared to 908 in the prior year period. Student enrollment increased 11.3% year-over-year, mainly as a result of more students enrolling in our portfolio training services and overseas study counseling services. During the period, portfolio training credit hours delivered increased 3.3% to 48,421. At the same time, we continue to deliver a variety of experiential programs to our students. We have received positive feedback from the students regarding this offering, and we expect to introduce additional relevant hands-on programs in the future. With that, I will quickly review financials. Total net revenues for the fourth quarter of 2023 increased 6.5% to RMB83.6 million compared to RMB78.5 million in the fourth quarter of 2022. This was primarily driven by increased revenues from portfolio training and overseas study consulting services. Portfolio training services represented 77.4% of total net revenues during the period. Gross margin improved to 62.6% during the fourth quarter of 2023 compared to 60.6% in the prior year period. The increase in gross margin was primarily due to increased net revenue. We reported net income attributable to ACG of RMB8.6 million during the fourth quarter of 2023, an increase of 324.1% from RMB2 million in the prior year period. Turning to the full-year results of 2023, net revenues increased 7.2% to RMB221.6 million from RMB206.8 million in the prior year period. Gross margin improved to 51.7% from 49.6% in the prior year. Net loss attributable to ACG narrowed to RMB33.7 million compared to a net loss of RMB47.9 million, primarily due to the increase in revenue and decreased operating expenses. Moving to the balance sheet, we continue to strengthen our financial position, ending the year with USD8.5 million in cash and cash equivalents, a 9.4% increase from the end of 2022. The working capital deficit was USD34.4 million and total shareholders' equity was USD15.9 million as of December 31, 2023, compared to a working capital deficit of USD33 million and shareholder equity of USD20.8 million, respectively, as of December 31, 2022. Now, turning our attention to ACG's outlook and growth strategy. With the lifting of pandemic-related restrictions at the start of 2023, we were really pleased to resume in-person class deliveries at all our training center locations throughout China, especially as our locations witness increasing visitor numbers. There is no substitute for face-to-face collaboration between children and their peers, as well as between children and their professors. We believe this is a critical element of our mission to deliver positive student outcomes. In 2024, our portfolio training services offering remains the core component of our business. This is also the key part of our curriculum that prepares students to create a complete portfolio of their work built at ACG, which is essential for applying to overseas arts colleges and graduate schools. Therefore, portfolio training services are promoted alongside our offerings in research-based learning and overseas study counseling services, which together provide a comprehensive and well-rounded education for students at ACG. In addition to focusing on growing our existing business, we are also proactively exploring partnerships with creative arts institutions around the world. During the fourth quarter of 2023, we successfully hosted multiple winter programs, including our regular Master Class, the October Shanghai Fashion Week program, and the part-time assist program. These programs allow participating students to put some of their academic knowledge into practice by providing them with opportunities to work in a professional setting and gain a better understanding of how the content they explore in the classroom can be applied in real-world scenarios. We are pleased with the positive reception from both our students and our enterprise partners with whom our students worked closely. As of March 2024, many of our students have received favorable admission results from renowned arts institutions and programs worldwide. These positive outcomes inspire our continued efforts in helping students achieve their academic goals. We look forward to hearing more good news from our students, who have demonstrated tremendous determination and creativity throughout their journey. In closing, we are pleased to provide the following revenue guidance for fiscal year 2024. For the year ended December 31, 2024, we expect total net revenue of between RMB233 million to RMB255 million, which represents a 5% to 15% increase from fiscal year 2023. Please note that the revenue guidance for fiscal year 2024 does not consider any potential acquisitions or other business transactions we may complete in 2024. As any material developments arise, we will be sure to update the market and evaluate guidance as appropriate. I'd 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.

Jun Zhang, President

Thank you, Mr. Sima. 2023 was a fantastic year for our students, as we were pleased to be able to deliver a full year of stable operation, which we believe is important for our community's peace of mind and capacity for delivering outstanding work. I would like to take a moment to thank our teaching staff for their commitment to driving positive student outcomes and our students for their perseverance and interest in ACG during their creative arts journey. We are proud to have served all types of themes with our quality offerings, which would not have been possible without the dedication of our entire staff and our strong network of institutional partnerships. Since the beginning of 2024, we have enrolled students into our regular research-based learning programs such as the March open hack Shanghai Fashion Week program. Participating students will have the opportunity to interview designers and explore global fashion trends while creating branding proposals and fashion lookbook designs. The first Shanghai Fashion Week program takes place in late March, and the second will be in October. We also offered several Master Classes with professors and lecturers from prestigious art schools such as the University of Arts London and Rhode Island School of Design, covering a wide range of arts topics, including architecture design, user interface design, animation, and comics, and so on. We strive to introduce offerings that reflect interest and demand by continuously listening to feedback from the student community and ensuring that we understand new trends in arts academia and industry, with the belief that such offerings are not only relevant and state-of-the-art but also bring value for students interested in various art forms. In addition, for the first time since the pandemic, we resumed our study trips to US universities during this winter break and brought 12 students to the campuses of eight top arts institutions in Rhode Island, New York, and Los Angeles, including Parsons New School for Design, Rhode Island School of Design, and Pratt Institute, among others. We were pleased to provide students with an opportunity to experience a variety of different campuses, allowing them to better envision what it would be like to study at these institutions. I would also like to highlight our efforts in expanding the student population we serve by providing additional offerings to students coming from non-traditional academic backgrounds. For example, the ACG International Arts Foundation Program Centre, which we founded in 2021, initiated a new diploma program in cooperation with Singapore-based Raffles College of Higher Education, introducing a four-year bachelor's program for junior high school graduates. Enrolled students will spend a year in our Beijing center for a foundation program and then study in Singapore for a three-year bachelor's program, after which they will receive a bachelor's degree. This new diploma program as well as other offerings currently available by the foundation center support students in building a solid foundation with the ultimate goal of applying and gaining admission to select colleges in the UK, Italy, and Japan. The ability to expand these programs and enroll more students into the ACG Foundation Center has strengthened our confidence in serving a growing group of potential students and driving positive outcomes for them. In 2024, we remain focused on serving our students. We believe our comprehensive portfolio of quality academic and ancillary offerings, our history of enabling excellent student outcomes, and our growing network of institutional partnerships represent our core competency in the creative arts education market in China. We are well-positioned to continue growing our share in this fragmented market and look forward to continuing to strive for better on behalf of all our stakeholders. With that, I'll turn it back over to Mr. Sima.

Ruobai Sima, CFO

Thanks, Jun, and Carolyne. In closing, we are excited about the positive outlook for 2024. As a leading player in the China creative arts education space, we are committed to providing high-quality, relevant, and valuable experiences to our students. We also continue to explore opportunities to enhance our business and value proposition, which we believe will increase shareholder value, and we are enthusiastic about some of these prospects. With that, operator, let's open it up for questions.

Operator, Operator

There are no further questions at this time. I'd like to turn the floor 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 us or our Investor Relations firm. We are always available to speak to investors and look forward to speaking with you all during our next earnings call. Thank you.

Operator, Operator

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