ATA Creativity Global Q1 2023 Earnings Call Transcript

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May 11, 2023

There are 3 speakers on the call.

Operator

Greetings, and welcome to the ATA Creativity Global's First Quarter 2023 Financial Results Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Alice Zhang with The Equity Group.

Operator

Thank you, Alice. You may begin.

Speaker 1

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 Q1 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 site presentation available on its website. A replay of this broadcast will also be made available at ACG's website for the next 90 days.

Speaker 1

Before we get started, I would like to remind everyone that this conference call and any accompanying information discussed herein contains certain forward looking statements within the meaning of the Safe Harbor provisions 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, plan, should, will and similar terms that 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 China's public health situation has improved, market demand for and market acceptance and competitiveness of ACG's portfolio training programs and other education services and the impact of the COVID-nineteen 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 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.

Speaker 1

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 related to financial results for the Q1 ended March 31, 2023 are converted from RMB using an exchange rate of RMB6.8676 to US1 dollars the non buying rate as of March 31, 2023.

Speaker 1

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's PowerPoint presentation, there is an overview of the company on Slide 3.

Speaker 1

In addition, we're more than happy to take investor questions during today's Q and 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, azhangequityny.com. And please specify whether you would like to have your name read during Q and A session. On today's call, the company's CFO, Mr. Roy Bai Sima, will provide a brief overview of operating and financial highlights for the Q1 2023.

Speaker 1

As Chairman and CEO, Mr. Kevin Ma is unable to be here today due to personal reasons. Mr. Sun Ma 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.

Speaker 1

With that, I'll turn the call over to ACG's CFO, Mr. Robail Suma. Please go ahead, Mr. Suma.

Speaker 2

Thank you, Alex, and welcome, everyone. Good evening to Zohsi America. We appreciate everyone's time. 2023 got to a strong start of ACG with students and the teaching staff back in the classroom across our 21 training centers nationwide. We were very pleased to report a 2% increase in student enrollment during the Q4, which was driven by a notable increase in portfolio trading students.

Speaker 2

The realized stable total net revenue of RMB42.3 million, which was supported by the portfolio trading services and overseas study counseling services business. Everyone at ACG is working hard in anticipation of launching our overseas summer camp and other progress that will be held during the summer for the 4th time since the pandemic began in 2020, and we have seen strong demand from students for these summer programs. Total student enrollment for Q4 2023 was RMB1097, an increase of 10% from RMB997 in the prior year period. FRA exclude RMB171 1,000,000,000 who were enrolled in the full ring language training business that we disposed of in the Q3 of 2022. The enrollment increase would have been 32.8%.

Speaker 2

Enrollment in our core portfolio trading programs increased more than 20% with 648 students enrolled during Q4 2023 compared to 537 students in the prior year period. We delivered 27,630 credit hours for our portfolio training programs with more flexible project based portfolio training programs accounting for approximately 2 thirds of all portfolio training credit hours delivered. We continue to encourage our students to opt from the project based programs and more favorable mix have contributed 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 Q4 2023. Total net revenue for Q4 2023 remained stable at RMB42.3 million compared to RMB42.1 million in Q4 of 2022.

Speaker 2

This was primarily driven by portfolio training and overseas DALI content services. Portfolio training services represented 64.6% of total net revenues during the period. Gross margin was 44.3 percent during the Q4 of 2023 compared to 45.7% in the prior year period. The decrease in gross margin was primarily due to the increased cost of service related to higher compensation expenses incurred for certain teaching staff who were engaged in enhancing the efficiency and the quality of service delivery, an initiative that began in the Q2 of 2022. Net loss attributable to ACG was RMB17.8 million during Q4 of 2023 compared to RMB15.9 million in the prior year period, which was primarily a result of increased sales expenses related to performance bonus awarded in line with the enrollment growth during the period.

Speaker 2

Moving to the balance sheet. We continue to be in solid financial position with US9.6 million dollars in cash and cash equivalents. Working capital deficit was US35.5 million dollars and total shareholders' equity was US88.4 million dollars at March 34, 2022, compared to working capital deficit of US33 $1,000,000 and shareholders' equity of US20 $800,000 respectively, at December 34, 2022. Now turning our attention to ACG's outlook and growth strategy. We are delighted to welcome all of our students back in person at our training centers at the start of 2023.

Speaker 2

With the pandemic largely behind us, we were 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 portfolio training and overseas guided consulting services as many students are preparing to apply for overseas education since many countries including China have relaxed travel restrictions. We recently launched a branding strategy introducing a new contemporary logo and model beyond the difference. We believe these new elements better reflect our goal of helping students find the courage and the determination to be very authentic self and employees' original thought and extension. And we think today's students will identify with our philosophy and approach to creative education. ACG Pride itself is on being an innovative and forward thinking organization and may help to instill in our students a lot for creativity and sharing of ideas among different people from different places and live circumstances.

Speaker 2

Enrollment during Q4 2023 appeared to mark the start of a more positive trend within our research based learning services business as many students have signed up for our various overseas plans for this summer. These programs were historically strong drivers for our business during the summer season, and we anticipate seeking full advantage of the strong demand of these programs in 2023. We continue to work closely with our overseas digital partners and teaching staff and looking forward to delivering rewarding experiences to our students. Jun will expand upon our efforts here shortly. We would also like to congratulate students who endured a different college application process and are finally being rewarded for their apples with admission letters from their dream schools.

Speaker 2

For the application submitted in academic year 2022, ACT students have had continued success with offers of admission coming from prestigious art schools such as Berkeley College of Music, Royal College of Art, Howard University, Columbia University, and the list goes on. We are proud of these students who have been aware through an uncertain pandemic environment and are thrilled to see them continue pursuing their creative education at schools and for their choice. We are optimistic that we are by end large operating post pandemic year as we are observing trends in our business due to the improved public health situation and opening up for international travel. We believe we are well positioned to continue executing our growth initiatives, including expanding our partnership base as well as our portfolio of offerings. With the help of our reputable institution partners and our ability to continuously adapt our offerings to serve the changing market, we are eager to continue delivering positive building outcomes and strengthen our reputation in the creative arts education industry.

Speaker 2

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. Tim, please go ahead. Thank you,

Speaker 1

Thank you, Mr. Suna. We're honored to have served so many students who have remained committed to the creative startup 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 in reaching their education with hands on arts related experiences. Our hope is that all of this will eventually culminate in a student having a well rounded education and experience that would set them apart from others who are applying for our school.

Speaker 1

We believe our track record of positive student outcomes sets us apart from the competition, and we expect to be on the current momentum and continue to grow our business by providing superior arts 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 the summer school at University of the Arts London, where participating students will be able to take courses designed for each stage of their art study on the UAL campus and immediately engage in an English speaking environment. We're also offering a future of design exploration work camp hosted in the Netherlands and Denmark through which students will learn about the current and future design trends and be exposed to the interdisciplinary methodologies.

Speaker 1

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 camp and 1 on 1 study opportunities with some of the greatest minds in the particular 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 Q1 2023 marks an inflection point for our business.

Speaker 1

With a favorable operating environment given relaxed domestic and international travel restrictions at the beginning of the year, we're seeing an increasing number of students reengage 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 to follow a non traditional path of study and continue to actively 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 prepared to take advantage of the recovering market and strengthening our leading position in the creative arts education market in China. With that, I'll turn it back over to Mr.

Speaker 1

Sume Ma.

Speaker 2

Thanks, Jun and Alex. In closing, we are excited about ACG's prospects in 2023 and feel confident in our ability to see the opportunities ahead of us. Our top priority remains our students and we look forward to continuing to explore ways in which we can expand our services to better support their creative path journeys. With that, operator, let's open the

Speaker 1

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 Q1 numbers or is it a true reflection of the period?

Speaker 2

Thank you. I think, yes, there are some of course, I think there are some pent up demand during the after the COVID period. But maybe for one figure, I think for the sales volume, I think, which is very directly reflects the market might be too too, it's been changed. I think compared for the last quarter for the same quarter last year, I think we have taken a very great increase and maybe the total sales bond is around RMB50 1,000,000 to RMB80 1,000,000. But also we compare with the same figure for the same period in 2019 I mean the period before the COVID-nineteen occurred.

Speaker 2

And I think we also take a very big increase that's from the total sales volume is increased from RMB60 1,000,000 to RMB90 1,000,000. I think in that way it means that this increase is not only from the COVID impact, it's also from some natural increase. Besides of these, I think we noticed that the increase is not the similar increase from enrollment numbers, but also increase about the unit price. In that way, I think that that figure can reflect the real situation about the increase during the period of this year. Thank you.

Speaker 1

Thanks, Mr. Sino 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?

Speaker 2

Yes. I think we hope that this trend can be continued since our portfolio got bigger and bigger. And currently, we are still believe that this increase will keep increased track and further following months of security.

Speaker 1

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?

Speaker 2

I think in order to get capability, it's not a simple question to suggest simply an increase of the enrollment of 30 hours. I think of course, and for the marketing side, I think we get our sales volume and increase is one way. And besides of these, we also try to develop more new business lines and also we have made our pricing methodology and more closer to the flat marketing situation changes. And besides of these, maybe we will also focus on our internal controls. I think we will make our operating more efficiency and we will focus on cost controls and the teaching management more efficient in this year.

Speaker 2

In that way, we can enhance our operating efficiencies. By those approaches, I think we will make our tax management balance and exactly I think we can guide the base and to make our profitability. Thank you. Great.

Speaker 1

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

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.

Speaker 2

Thanks again to all of you for joining us. If anyone have questions for us, please feel free to reach out directly to us or our investors related from the Equity Group. We are always available to speak to investors and look forward to speaking with you all during our next quarter call. Thank you.

Operator

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

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