ATA Creativity Global (AACG) Q1 2020 Earnings Report, Transcript and Summary

Good day and welcome everyone to the ATA Creativity Global 2020 First Quarter Conference call hosted by Carolyne Sohn. My name is Greg and I'm the event manager for today's call. During your presentation, your lines will remain on listen-only. [Operator Instructions] Now, I'd like to hand over to Carolyne. Please proceed.

Thank you, Greg and hello everyone. Thank you for joining us. The press release announcing ATA Creativity Global’s or ACG’s results for the first quarter ended March 31, 2020, 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 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, believe, expect future, plan, outlook and will include, among other things, statements regarding ACG's future growth and results of operations, ACG's strategy of becoming a leading international education service provider, ACG's plans for mergers and acquisitions generally, the benefits of the financial among acquisition, ACG's ability to operate efficiently and maintain continued financial strength under unusual circumstances, ACG's growth strategy and subsequent business activities, market demand for ACG's portfolio and training programs and other ACG's services, the impact of the COVID-19 outbreak on ACG's operations and ACG's plan and anticipated benefits of the measures implemented in response to the COVID-19 outbreak. Although the company believes that the expectations reflected in the 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 an investment decision. The company does not assume any obligation to update any forward looking statements as a result of new information and 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 first quarter ended March 31, 2020 are converted from RMB using an exchange rate of RMB7.0808 to US $1, the noon buying rate as of March 31, 2020. All historical conversions are accurate as of the time reported unless otherwise noted. The company reports 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 and management will be referring back to this deck throughout the prepared remarks. In addition, we are more than happy to take investor questions through our webcast portal or via email to the company. On today's call the company CFO Amy Tung will provide a brief overview of operating and financial highlights for the first quarter of 2020. And then ACG's Chairman and CEO Mr. Kevin Ma and President, Mr. Jun Zhang will conclude the remarks with a discussion of 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. Our results for the first quarter of 2020 were impacted by seasonality as a result of the Spring Festival holiday as well as the effects of COVID-19. When we last spoke to investors at the end of March businesses in China were beginning to open and while cautious were returning to normal operations following the impact of the pandemic. We made a conscious decision to transition all Huanqiuyimeng’s coursework to a completely online format beginning February 1, as a measure of prioritizing the health and safety of our students, faculty, staff, and employees during this time. At that time, we provided all of our students the option to fulfill the classes online. On the portfolio training site, several students did opt to continue with their study, but some decided to postpone the coursework. Our educational travel services business was also impacted during the period as the majority of tours were cancelled. As a result of these headwinds, we reported an 8.7% year-over-year decrease in credit hours delivered for our portfolio training programs, from approximately 28,900 credit hours in quarter 1 2019 to approximately 26,400 in quarter 1 2020. We provide a breakdown of these credit hours and additional operating metrics on the next slide. Later in the presentation Kevin and Jun will provide an update on current operations and where they stand. As an overview, a credit hour is the standard unit measuring educational credit for our portfolio training program and translates into roughly one hour of time committed, when it comes to enrollment head count, a student maybe counted twice in enrollment if he or she enrolls in both portfolio training and educational travel services in any given period. Student enrollment for the period was 681, out of which 404 were enrolled in the Portfolio Training Program. The Portfolio Training Program consists of time-based programs and project-based programs and we provide a breakdown of the credit hours delivered during the period compared to the prior year comparable period in our presentation. Revenue is recognized proportionately per credit hour delivered, however, as the actual credit hours of project-based programs are not predetermined, the progress of a project-based program which is measured by credit hours delivered compared against the total credit hours expected to be delivered as we evaluate it at each quarterly and annual financial reporting date. As in partial quarter three and quarter four of 2019, we continue to observe the same trend of students increasingly opting for the project-based program versus time-based program. We noted on the last earnings call that each program has its benefits depending on the particular students need. A student that already possesses some basic skills and wishes to only complete a portfolio will tend to favor the project based program, as it appears to be the less expensive option for completing a portfolio with a defined cost. Meanwhile, the time-based program caters to students that may want additional guidance and opportunity to work with teachers with some basic foundation skills before beginning on their portfolio. With that, let's move to financials for the quarter. I wanted to remind everyone that for the results shown for this period, we have applied acquisition accounting and made purchase price allocation adjustments PPA to various assets acquired and liabilities assumed from the Huanqiuyimeng acquisition. As a result, certain line items will include adjustments from amortization of the difference between the carrying value in Huanqiuyimeng's book and the fair value assets from the PPA process applied to the Huanqiuyimeng acquisition. I will highlight where we saw some impact on our financial due to this PPA adjustment for the 2020 first quarter. Total net revenues for the first quarter of 2020 increased to RMB32.7 million compared to RMB1.6 million in the first quarter of 2019 as a result of revenue contributions from Huanqiuyimeng, which consisted primarily of revenues from Portfolio Training Program. NET revenues for this quarter include a PPA adjustment decrease of RMB6 million. Gross margin was 35.8% during the 2020 first quarter compared to gross margin of 25.3% in the prior year period when the company did not have substantial operations. Excluding the PPA adjustment to net revenues, gross margin for the 2020 first quarter would have been 45.8%. Net loss attributable to ACG was RMB20.5 million remember for the period compared to a net loss of RMB12.9 million in the prior period as a result of increased operating expenses incurred related to the day-to-day operations of the Huanqiuyimeng business. Finally, we continue to be in a solid financial position with US$21.6 million in cash and cash equivalents on the balance sheet. Working Capital deficit was US$13.3 million and total shareholders' equity which US$14 million at March 31, 2020, compared to working capital deficit of US$11.7 million and shareholders' equity of US$43.9 million respectively at December 31, 2019. With that, I would now like to turn it over to Kevin, who will expand upon our outlook and growth strategy. Kevin?

Thank you, Amy. Just unprecedented times, as Amy noted we continue to operate our business in this new environment and focus on continuing to provide the quality art and creativity instruction to our students, enabling them to continue working towards their goals even while much of the work that remains on the shelter in place. We're fortunate to be in a solid financial position that will allow us to navigate the challenges business all over the world are facing as a result of COVID-19 for the amount of time it will take surface tests to return to new normal. ACG has a great deal of operating flexibility as our infrastructure allows us to scale to meet challenges in demand from our student base. We have been taking advantage of this operating flexibility to streamline costs when it comes to teaching variability and associated teaching cost arrangements. At the same time, we're able to almost immediately remap to satisfy an increasing demand with students that had decided to postpone their status resume their programs once again. With regard to educational travel, we do know that many of our partner institutions will not be holding their regular summer programs which will have an impact on our business. We regret that. Our students will not be able to take advantage of our tours and programs this summer. But we want to emphasize that the public health and the safety of our students and employee is of the utmost importance. We are in close contact with all our partners. And we'll keep an eye on the global situation in the coming weeks and months. We're prepared to continue supporting our students we are on that platform and are looking into ways in which we can maximize the potential online technologies to grow our business and the base for students. Additionally, we announce today that our board of directors approved a share repurchase program, which will allow the company to repeat it to US$1 million of its issued and outstanding ADS from time to time in the open market and proactively negotiated transactions. The play is effective now, through the end of the year. We are pleased that the board is shy of our confidence in the long-term growth potential of ACG's business and our commitment to building value for shareholders. I'd now like to hand it over to Jun Zhang, ACG's President to provide an update on our current growth initiatives for Huanqiuyimeng. Jun will make his remarks in Mandarin, which will be followed by an English translation.

[Foreign Language] [Interpreted] Thank you, Kevin. As you might imagine, our immediate goals have changed somewhat in light of the COVID-19 pandemic. Improving our technologies has become a major priority as we are seeing that many students still wish to pursue their studies in art and creativity. We aim to provide reliable access to our best instructors around the country via remote learning platform while also providing the necessary academic and emotional support our students need to succeed. In addition, we have begun looking at how we can take advantage of online beyond a service delivery method. For example, we plan to offer online classes as trials that will allow students to get a firsthand sense of Huanqiuyimeng's offerings to generate sales. We plan to continue offering the traditional offline mode for portfolio training but are exploring the possibility of converting some offline classes to online delivery. Introductory classes that focus on the fundamentals tend to have a more standardized curriculum which lends itself to online delivery. Doing so will offer students added flexibility while lowering costs. Online delivery also offers the potential for expanded academic offerings and access to internationally acclaimed instructors who can conduct classes remotely without the need for travel. With regards to educational travel, we mentioned earlier that most of our partner institutions have cancelled their regular summer programs. We are working to develop alternative options for students this summer, including online summer school programs, partnering with certain well known overseas art schools and institutions and newly developed art themed domestic travel programs. Our sales pipeline has begun to regain momentum now that nearly all of our sales and marketing personnel in Beijing are able to return to the office. Some of our local offices have not yet fully reopened, but we expect they will in the next couple of weeks. We are well positioned financially and operationally to weather the challenges businesses all over the world have been presented. We continue to push forward on our growth initiatives where it makes the most sense forging partnerships, improving our technology, and growing enrollments. In doing so we believe we will emerge as one of the largest providers of quality art and creativity education and study abroad experiences in China. With that I'll turn it back to Kevin,

Thanks Jun and Carolyne. To conclude ACG has a strong foundation needed to survive the current situation. We continue to look for M&A opportunities, but it's a slow process in a current environment. We have recommended a strategy when it comes to evaluating potential opportunities internationally, which is somewhat challenged inside of ACG and in person meeting prohibit. Above all we'll remain focused on serving students to the best of our ability and prioritizing well-being of all our stakeholders. I would once again like to extend my gratitude to all of our employees, associates, family and friends for their support during these times. ACG wouldn't be what it's today without you. With that operator let's open it up for questions.

Certainly, everyone your question-and-answer session will now begin. [Operator Instructions] And as we do not have any questions that are coming in, I would like to turn it back to management for closing remarks.

Thanks again to all of you for joining us. If anyone has questions call us, please feel free to reach out directly to us or our Investor Relations firm The Equity Group. We're always available to speak to investors and look forward to speaking with you all during our next quarterly call. 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.