ATA Creativity Global (AACG) Q3 2019 Earnings Report, Transcript and Summary

Good day and welcome, everyone, to the ATA Creativity Global 2019 Third Quarter Financial Results Conference Call, hosted by Carolyne Sohn. My name is Chris, and I'm your event manager today. [Operator Instructions] I would also like to advise all parties that this conference call is being recorded. And now I'd like to pass the call over to Carolyne. Please go ahead.

Thank you, Chris. And hello, everyone. Thank you for joining us. The press release announcing ATA Creativity Global's or ACG's results for the third quarter ended September 30, 2019, 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 the company's 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. 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 any 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. dollar amounts in this conference call relating to financial results for the third quarter and 9 months ended September 30, 2019, are converted from RMB using an exchange rate of RMB 7.1477 to USD 1, the noon buying rate as of September 30, 2019. 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 accompanying PowerPoint presentation, there is an overview of the company on Slide 3. In addition, we are more than happy to take investor questions through our webcast portal or via e-mail to the company. On today's call, the company's CFO, Ms. Amy Tung, will provide a brief overview of operating and financial highlights for the third quarter of 2019. And then ACG's Chairman and CEO, Mr. Kevin Ma; and newly appointed President, Mr. Jun Zhang, will conclude the remarks with a discussion of Huanqiuyimeng's latest developments, the company's outlook as well as its long-term growth strategy before opening the floor for questions. With that, I'll turn the call over to ACG's CFO, Ms. Amy Tung. Please go ahead, Amy.

Thank you, Carolyne. And welcome, everyone. Good evening to those in America. We appreciate everyone's time. To those of you following along with the presentation, I will begin on Slide 5, which lists reads operating highlights for the third quarter of 2019. On our previous call, we had noted that we had closed the acquisition of 87.46% equity interest in Beijing Huanqiuyimeng Education Consultant Corp., or Huanqiuyimeng, a leading provider of educational services for students in China interested in applying for overseas studies. On October 17, 2019, our company had the pleasure of visiting the NASDAQ MarketSite and ringing the opening bell. That day, the company announced the closing of the acquisition of the remaining 12.54% equity interest in Huanqiuyimeng. As a result, Huanqiuyimeng is now a wholly owned subsidiary of ACG. Details on this acquisition can be found in the Forms 6-K filed by ACG on August 6, 2019, and October 17, 2019. In September, at our Annual General Meeting, shareholders approved the company's name change to ATA Creativity Global. The company's stock ticker symbol also changed to AACG with its American depositary shares commencing trading under the new symbol as of market open on October 17, 2019. We made these changes to signify the ushering in of a new era for the company, beginning with our first major acquisition of Huanqiuyimeng. With the completion of this acquisition, we will begin sharing certain operating metrics with the investment community on a quarterly basis. For the third quarter, it is important to note that these results only include those from Huanqiuyimeng from August 6 through September 30, 2019, as August 6 is the date that ACG assumed control of the company. We have been working closely with Huanqiuyimeng to integrate all of its existing personnel and processes into ACG's operations and have essentially completed this process. As you can see on Slide 6, we are looking to expand partnerships with institutions while adding programmatic offerings and services by leveraging the economic strength of our business with investments in education resources. By doing so, we intend to accelerate Huanqiuyimeng's enrollment growth strategy in 2020. Given this is the first quarterly call we have had since the closing, we wanted to outline the metrics we intend to provide investors going forward. We evaluated what we, as managers, budget for on a regular basis and outline what are particularly insightful statistics. First is credit hours, which we define as the standard unit measuring educational credit for Huanqiuyimeng's Portfolio Training Program. Each credit hour translates into roughly 1 hour of time committed. The second figure is student enrollment, which takes into account the particular individual that signs up for our programs. For example, if a student enrolls in both portfolio training and educational travel services, the student is counted twice in enrollment as one student in portfolio training and one student in other programs. Huanqiuyimeng achieved 16.1% year-over-year growth in credit hours delivered during the partial third quarter, delivering a total of 34,988 credit hours. Student enrollment for the period was 838, out of which 550 were enrolled in the Portfolio Training Program, Huanqiuyimeng's main line of business that primarily consists of one-on-one training for students focused in arts and creative studies. You will see a breakout of the credit hours delivered during the period compared to the prior year comparable period on Slide 7. The Portfolio Training Program consists of time-based programs and project-based programs. Students who elect the time-based program enroll in a certain number of consulting or training hours over the contract term, whereas students who elect the project-based program are not limited by the number of consulting or training hours. Instead, they will be guided through a certain number of projects needed to complete a portfolio which will be predetermined and agreed upon the signing of a contract. Under project-based programs, the number of credit hours required to complete a project may vary depending on the background and requirements of the students. As we execute on Huanqiuyimeng's growth initiatives, we expect to evaluate enrollment growth in the portfolio training and other business segments going forward. Moving to Slide 8 and key financial highlights. As with the enrollment and credit hour information I just shared, the financials shared here include contributions from Huanqiuyimeng for only a portion of the third quarter from August 6 through September 30, 2019. Total net revenues for the period increased to CNY 42.4 million compared to CNY 1 million in the third quarter of 2018 as a result of revenue contributions from the Huanqiuyimeng business acquisition, which consisted primarily of revenues from its portfolio training segment. Gross margin was 39.1% during the 2019 third quarter compared to negative gross margin of 46% in the prior year period, when the company did not have substantive operations. Net loss from continuing operations attributable to ACG was CNY 24.4 million for the period compared to CNY 8.9 million in the prior year period, primarily due to increased operating expenses. This includes higher SG&A expenses of CNY 26.8 million from the newly acquired Huanqiuyimeng operations and increased operating expenses consisting of CNY 1.5 million in professional and consulting fees related to the Huanqiuyimeng acquisition and higher share-based compensation expense of CNY 1.8 million. Lastly, we continue to be in a solid financial position with USD 14.7 million in cash and cash equivalents. We provide a more detailed summary of our financial results for the third quarter and year-to-date compared with the respective prior year periods on Slides 9 and 10. However, as I mentioned before, the prior year periods reflect financials when the company did not have substantive operations. We provide additional detail on our capital positions and balance sheet on Slide 11. The information shown here does not -- does take into account the closing of the Huanqiuyimeng acquisition. Working capital deficit was USD 19.7 million and total shareholders' equity was USD 43.4 million at September 30, 2019 compared to working capital of USD 28.2 million and shareholders' equity of USD 40.2 million, respectively, as of December 31, 2018. We believe we are well positioned to execute on several growth initiatives using internal capital. And I would now like to turn it over to Kevin, who will expand upon our outlook and growth strategies.Kevin?

Thank you, Amy. We are very pleased to have completed the acquisition of Huanqiuyimeng and we -- and are working towards a seamless integration of its personnel and operations into ATA Creativity Global. As Amy noted earlier, our company is embarking on a new beginning, having changed our name and ticker symbol to reflect the direction in which ACG is now headed at. We are fully focused on the growing international education market where China is the largest source of students studying internationally. I'd now like to hand the floor over to Jun Zhang, ACG's President, to provide updates on our strategic growth initiatives for Huanqiuyimeng. Jun will make his remarks in Mandarin, which will be followed by English translation.

Thank you, Kevin. [Interpreted] Thank you, Kevin. Slide 13 may look familiar to some of you, as we first introduced these initiatives on our last earnings call. We are working to accelerate enrollment at our existing centers in China, implementing technologies and exploring ways in which we can better support our students both in person and remotely. We are also looking to maximize utilization of our existing centers in China while looking at opportunities to selectively open new centers in China and overseas in the future. As Amy mentioned, Huanqiuyimeng's main line of business at the moment is portfolio training. While we aim to expand this program through geographic growth and maximizing capacity at existing centers, we look to enhance our products and business lines by establishing art classes at partnership schools and offering art-themed educational travel and overseas study counseling overseas. We are excited about the opportunities ahead and believe ACG is well positioned to become the largest provider of quality art and creativity education and study abroad experiences in China. We look forward to updating the investment community on our progress as we approach the end of 2019. Kevin?

Thanks, Jun and Carolyne. In closing. The acquisition of Huanqiuyimeng marks the first major step forward in our long-term growth strategy of becoming a leading international education service provider with a special focus on the rapidly expanding art and creativity education market. With nearly 3,000 offers from overseas institutions extended to Huanqiuyimeng students, we believe they have earned their reputation for excellence in arts and creativity education. Slide 14 outlines our overarching growth strategy. We look forward to lending our expertise to begin serving more students all over China who are passionate about pursuing a future in arts and other creative fields as well as those students who would simply like to learn about and experience other parts of the world. And as we continue working closely with Huanqiuyimeng, we are also exploring other M&A opportunities within the education space that may be a good fit with our business portfolio. With that, operator, let's open it up for questions.

[Operator Instructions] I have no questions in the queue. Back to you, management.

Thanks again to all of you for joining us. If anyone has questions for us, please free -- feel free to reach out directly to us or our investor relations firm, The Equity Group. We look forward to speaking with you all during our next quarterly call and, as always, welcome any visitors to our office in Beijing. Thank you.

Thank you, everyone. That concludes your conference call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day. Goodbye. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]