ATA Creativity Global Q1 2024 Earnings Call Transcript

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May 15, 2024

There are 5 speakers on the call.

Operator

Greetings. Welcome to ATA Creativity Global's First Quarter 2024 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.

Operator

I will now turn the conference over to Alice Zhang with Equity Group. Thank you. You may begin.

Speaker 1

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 Q1 ended March 31, 2024, 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 would 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 provision of the Private Securities Litigation Reform Act of 1995. These forward looking statements can be identified by terms such as anticipate, belief, could, estimate, expect, forecast, future, intend, look forward to, outlook, guidance, 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, 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 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 filings with the Securities and Exchange Commission, which we encourage you to review before making the 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. Dollars amounts in this conference call relating to financial results for the Q1 ended March 31, 2024 are converted from RMB using exchange rate of RMB7.2203 to $1 to noon buying rates as of March 31, 2024.

Speaker 1

All historical conversions are accurate as of the time reported unless otherwise noted. The company reports its financial results under the 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 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 the Q and A session. On today's call, the company's CFO, Mr. Robert Sima, will provide a brief overview of operating and financial highlights for the Q1 of 2024.

Speaker 1

As President, Mr. Jun Jiay is unable to be here today. The company's Chairman and CEO, Mr. Kevin Ma and Mr. Sima will follow with an update on the company's guidance, outlook and its long term growth strategy before opening the floor for questions.

Speaker 1

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

Speaker 2

Thank you, Alex, and welcome, everyone, and good evening to the U. S. Of America. We appreciate everyone's time. We are pleased to start 2024 on a strong note, achieving a 13.47% increase in total net revenues in Q4 2024, driven by significant growth in portfolio training services as a result of increased student enrollment and credit hours delivered.

Speaker 2

We continue to review portfolio training as our primary growth driver and granted to see continued growth students' interest in our premier creative art offerings. To better support our growing student population, we recruited additional teaching staff. We have also expanded our sales team to meet growth demand. We'll continue to enhance our research based learning and overseas study counseling services to provide students with a comprehensive portfolio of offerings that provides a strong foundation in creative arts and extensive choice of areas in which to specialize with ample opportunities to experience history and culture and showcase their learnings in the real world. Total student enrollment for Q4 2024 was 1370, up nearly 25% from 1097 in prior year period.

Speaker 2

Enrollment in our core portfolio training programs increased more than 33% with 853 students enrolled during the Q4 2024. Compared to 648 students in the prior year period, we also delivered 33,527 portfolio training credit hours, an increase of 21.3% year over year. With that, let's move to financials for Q4 2024. Total net revenues for Q4 2024 was RMB48.1 million, up 13.7% from RMB42.3 million in the Q4 of 2023. This was primarily driven by increased contributions from the portfolio trading services, which represented 73.7% of total net revenues during the period.

Speaker 2

Gross margin improved to 45.5 percent during Q4 2024 from 44.3% in the prior year period. We realized increased efficiencies in our operations despite increased cost of services related to the hiring of additional teaching staff to support enrollment growth. Net loss attributable to ACG was RMB17.9 million during the Q4 of 2024 compared to RMB7.8 million in the prior year period, which was primarily a result of increased sales expenses related to the hiring of additional sales personnel to support the continued growth for our portfolio training services business. Moving to the balance sheet, we continue to be in solid financial positions with US8 US8 $1,000,000 in cash and cash equivalents. Working capital deficit was US33.9 million dollars and total shareholders' equity was US13.3 million dollars at March 34, 2024 compared to working capital deficit of US34.4 million dollars and shareholders' equity of US15.9 million dollars respectively at December 34, 2023.

Speaker 2

With that, I'd like to turn it over to Kevin who will expand upon our outlook and growth strategy. Kevin? Thank you, Sima.

Speaker 3

We opened the 2024 with a solid Q1, achieving top line growth supported by our expanding core portfolio training service business, while we made investments in our teaching staff and sales team to continue supporting operational growth. Having completed a full year of in person class delivery without interruption, we received a valuable feedback from 2023, which will help us improve existing and design new program with a focus on our mission of enabling top student outcomes. Given a strong start to the year, we are reiterating our revenue expectations for the year ending December 31, 2024 of between RMB273 33 1,000,000 to RMB25 1,000,000, which represents a 5% to 50% increase from fiscal year 2023. We continue to grow our existing business and explore potential acquisitions or other business opportunities. And as any material developments arise, we will be sure to update their marks and leveraging guidance as appropriate.

Speaker 3

Our elements, efforts and commitment to supporting students academically and emotionally lies at the heart of our business development. Student interest in ACE's portfolio training was not only reflected in increased student elements and service delivered during the Q1 2024, but also in our long term sales results. As China continues to encourage students to take on different study case after junior high school graduation, the demand for a non traditional pathway to pursuing higher education opportunities have improved the visibility of China's arts education institution. We believe the achievements of our students and our reputation for our quality offerings and support position us well in this favorite for market environment. During the Q1 2024, we hosted the March Open Talk Shanghai Fashion Week program.

Speaker 3

This program was well received by the participating students and we were pleased to see their experience and will perform during this program incorporated into student portfolios for overseas art institution applications. Our other research based learning offering, including a master class we introduced during that period, Aired more than 100 students in multiple projects across the variety of arts topics, which we believe is a testament to ACG's unparalleled expertise in understanding and addressing students' needs in specific other subcategory of categories. As a rich education service provider, we believe that the best outcomes are driven by creative, hard work and determination. To that end, I would like to congratulate our students whose efforts have been rewarded with less admission from prestigious schools such as the Royal College of Arts, University of the Arts London, the Rhode Island School of Design and Operating Institute, as well as Harvard University, University of Pennsylvania and Cornell University. Among others, we look forward to continue to support our students through graduation and a kind of a way to see what they accomplish beyond SDG.

Speaker 3

And now I'd like to hand the floor over back to Mr. Suma to provide an update on our PRI growth initiatives. So Mao, please go ahead.

Speaker 2

Thank you, Kevin. And ACG's mission has always been to empower creative individuals to reach their full potential in their educational and creative goals. We are honored by the continued trust from our students, their families, and our institutional partners who recognize our roles and our teachers' dedication in supporting students in their art. In addition to our portfolio training and overseas study health and services, we are pleased to announce a new project launch in this month, the United Nations Art Boots Camp. This 2 week boot can focus on sustainable development goals, a concept created by the United Nations to address global development issues concerning social, economic, and environmental sustainability.

Speaker 2

Students are able to take classes taught by UNESCO officers and arts professors from 4 Italian institutions. They also complete accretive projects that can become part of their overseas school application portfolio. Upon completion, participating students will receive a certification of completion issued by UNESCO, and students who performed exceptionally will receive an internship certificate from UNESCO as well as reference letters. Select students will also be invited to attend the United Nations University Annual Conference this summer. We designed a boot camp for students of all arts backgrounds with the hope that students will benefit in several ways when it comes to their overseas study applications, including portfolio, application ID, reference letter, and internship experience.

Speaker 2

Currently, we are hosting master classes with specialties such as interior design, photograph and visual design, and students are excited to have the opportunity to study their discipline with professors from universities, including the University of Art London and Rhode Island School of Design. We believe that various types of research based learning programs are a reflection of ACG's capability to expand students' horizons no matter what discipline they have chosen to focus on or where they are in their arts education journey. It is also a reflection of our ability to strengthen and expand our institutional partnerships. In the remainder of 2024, we remain focused on growing our core portfolio training service business and ensuring that we have the operational infrastructure to support the growth. We believe ACG's competitive advantages are built upon our track record of empowering students to reach their full potential, which is only possible because of our dedicated instructors and support team and our network of institutional partners.

Speaker 2

We continue to explore potential merge and acquisition opportunities and are excited by what we are seeing in the industry. We will be sure to update their market with any developments. With that, I'll turn it back to Kevin. Thanks, Tom.

Speaker 3

For years, ATG has strived to become a leading player in China Creative Education Month and we take pride in guiding our students along the way for better education opportunities and experience. We remain optimistic about ATG's prospects for 2024 and look forward to reporting progress on our strategic growth initiatives in the coming months. With that, operator, let's open it up for questions.

Operator

Thank Our first question comes from Lewis Fan with The Benchmark Company. You may proceed.

Speaker 4

Hi, thank you for taking my call. Congratulations on a solid quarter. I just have a couple of questions. First of all, you mentioned Q1 revenue growth was primarily due to portfolio training services. Could you tell us how we should think about enrollment in portfolio training and your thoughts on its growth trajectory?

Speaker 4

I Do you feel it can continue to grow at its current rate? I believe you mentioned about 30% in Q1.

Speaker 2

Hi, Luz, and thanks for your question. And yes, we have a strong Q4 with revenues from the business increased nearly 50% due to a 24.9% increase in student enrollment and 21.3% increase in KPI Hours delivered. And the program of our portfolio training services business can be measured through different ways and student enrollment, the number of credit hours delivered and the union price per credit hours delivered. For the union price, we have continued to encourage students to optimistic for the project based programs over time basis and they are designed to be more flexible and customizable and adjustable according to students' needs. For this reason, we changed a higher unit price and for project based programs.

Speaker 2

And enrollment growth was primarily a result of our full footprint in our sales team and with digital hearings, and we are able to successfully deliver more credit hours and with the hiring of more full time teaching staff, which will also support future growth in the line of business. We have continued to realize economics of scale and this business has grown and students have continued to express interest in our portfolio training services. And we believe that ongoing investment in teaching resources will enable us to meet students' demands and drive sustainable growth. In addition, our sales team has been working closely with teaching staff who have been increasingly engaged in program design and sales efforts. For the sales members that we have gathered internally, we believe there's certain room to grow our portfolio trading services business, which remain our core business and we will sequentially and be a key growth driven from AT and T in 2024.

Speaker 4

Okay. Thank you. That's very good information. Now, you reiterated your revenue guidance for the full year of 2024. So, given that we are nearly halfway through the year, is there any additional color you could provide on cadence, whether revenue will be relatively consistent from Q2 to Q4 or whether there will be some lumpiness?

Speaker 4

Where do you see this 5% to 15% growth coming from? Thank you.

Speaker 2

Thank you. Actually, I think for the next 2 or 3 quarters, I think the first part of our corporate portfolio sustainable growth in the following period. And besides of this, as things our portfolio gets bigger and bigger, I think for next 2 or 3 quarters, our main revenue and the sales benefit will still come from this part. And besides these, I think we also try to get some more derivative income, including study based learning and also in other overseas study counseling. I think that 2 part also will contribute another part of the additional revenues and for the next following area.

Operator

There are no further questions at this time. I would like to turn the conference back over to Kevin Ma.

Speaker 3

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, the Abtigroup. We are always available to speak to investors and look forward to speaking with you all during our next earnings call. Thank you.

Operator

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

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