ATA Creativity Global (AACG) Q2 2020 Earnings Report, Transcript and Summary

Good day, and welcome everyone to the ATA Creativity Global 2020 Second Quarter and Six Months Financial Results Conference Call hosted by Carolyne Sohn. My name is Mathew, and I'm your event manager. During the presentation, your lines will remain on listen-only. [Operator Instructions] I'd also like to advise all parties that this call is being recorded. And with that I'd like to hand it over to your host, Carolyne, please proceed.

Thank you, Mathew and hello everyone, thank you for joining us. The press release announcing ATA Creativity Global's or ACG's results for the three and six months ended June 30, 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 and 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 Huanqiuyimeng 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 education services, the impact of the COVID-19 outbreak on ACG and its 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 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 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 U.S. dollar amounts in this conference call relating to financial results for the three and six months ended June 30, 2020, are converted from RMB using exchange rate of RMB7.0651 to $1, the noon buying rate as of June 30, 2020. 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 accompanying PowerPoint presentation, there's 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 webcasts 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 financial highlights for the second quarter and first-half of 2020. And then ACG's Chairman and CEO, Mr. Kevin Ma, and President, Mr. Jun Zhang will conclude the remarks with 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. During the second quarter of 2020, we continued to deliver the majority of coursework to our students through online methods, which we have done since February 1. It was encouraging to see some local governments authorized the offline delivery of certain trainings late in the second quarter. And while we understand many students still prefer face time with their teachers and peers, we feel it is very important that we put the health and safety of our students, faculty staff and employees first, under these unprecedented conditions. As with quarter 1, we continued to see several portfolio training students pursue their studies during quarter 2, while others decided to postpone the coursework. Our educational travel services business continued to be impacted in quarter 2, as almost all tours were canceled. But we are pleased to be partnering with a fiercely led prestigious overseas art institutions in offering some short-term online summer school, and master training boot camp programs, which generated RMB1.3 million in quarter 2 with increased contributions expected in quarter 3. Our results for the second quarter of 2020 were impacted by the ongoing pandemic environment, as important teaching remains unavailable in certain areas. We are encouraging students to continue pursuing their studies remotely. And we are also pleased that since we last spoke in late May, the public health situation in China has improved to where nearly all of our employees are able to report to work in the office. With our sales teams being able to operate at capacity, our business pipeline is seeing every challenge, which for the world for our future periods. For the second quarter of 2020, we reported a 7.4% year-over-year decrease in credit hours delivered for our portfolio training programs, from approximately 30,200 credit hours in quarter 2, 2019 to approximately 27,900 in quarter 2, 2020, the decrease was primarily a reflection of the continuing COVID-19 environment. 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 employment headcounts, 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 772, out of which 444 were enrolled into portfolio training program. The portfolio training program consists of time-based programs and project-based programs. And we provide the breakdown of the credit hours delivered during the period compared to the prior year's comparable periods in our presentation. Revenue is recognized proportionately per credit hour benefit. However, as the total credit hours of project-based programs are not predetermined, the progress of our project-based program, which is measured by credit hours delivered compared against the total credit hours expected to be delivered, is evaluated at each quarterly and annual financial reporting dates. As in previous quarters, we saw a year-over-year increase in students, opting for the project-based program versus the time-based programs. As previously discussed, each program has its benefits depending on the particular student needs. A student that already possesses some basic skills and wishes to own a complete portfolio will tend to favor the project-based program, as it appears to be the less expensive option for completing portfolio with a defined cost. Meanwhile, the time-based program caters to students that may want additional guidance and opportunity to work with teachers for some basic foundational skills before beginning on their portfolio. With that, let's move to the financials for the quarter. I wanted to remind everyone that the results shown for this period, we have applied acquisition accounting and made Purchase Price Allocation adjustments, or 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 financials due to this PPA adjustment for the 2020 second quarter. The net revenues for the second quarter of 2020 increased to RMB26.4 million, compared to RMB1.4 million in the second quarter of 2019, as a result of revenue contributions from Huanqiuyimeng, which consisted primarily of revenues from portfolio training programs. Net revenues for this quarter include a PPA adjustment decrease of RMB6 million. I would also like to note the sequential decrease in total net revenues from RMB32.7 million in quarter 1, to RMB26.4 million in quarter 2, which is mainly a result of RMB6.1 million decrease in revenue contributions from overseas study counseling services. Quarter 1 is the quarter during which students receive the majority of their overseas study offers, which result in higher revenues from overseas study counseling services. Gross margin was 25.1% during the 2020 second quarter, compared to gross margin of negative 1.8% in the prior year period, when the company did not have substantive operations. Excluding the PPA adjustments in that revenues, gross margins for the 2020 second quarter would have been 39%. Net loss from continuing operations attributable to ACG was RMB32.1 million for the period, compared to a net loss of RMB18.2 million in the prior year period, as a result of increased operating expenses incurred related to the day-to-day operations of the Huanqiuyimeng business. Moving to financial highlights for the first-half of 2020, total net revenues for the year-to-date, YTD period increased to RMB59.1 million, compared to RMB3 million in the prior year period. Total net revenues for the period includes the PPA adjustment decrease of RMB12 million. Gross margin was 31.1% for the first-half of 2020, compared to 12.9% in the prior year period. Excluding the PPA adjustment in net revenues, gross margin for the first-half of 2020 would have been 42.7%. And net loss from continuing operations attributable to ACG was RMB52.5 million in the first-half of 2020, compared to a net loss of RMB31.1 million in this prior year period, primarily due to increased operating expenses related to the Huanqiuyimeng operations, as mentioned earlier. Finally, we continue to be in a solid financial position with $16.9 million U.S. in cash and cash equivalents on the balance sheet. Working capital deficits was $16.9 million U.S. and total shareholders' equity was $35 million U.S. at June 30, 2020, compared to working capital deficits of $11.7 million U.S. and shareholders' equity of $43.9 million U.S., respectively, at December 31, 2019. This past May, our Board of Directors authorized the repurchase of up to $1 million U.S. of the company's issued and outstanding ADS from time to time in open market, and proactively negotiated transactions. By August 1, 2020, the company had repurchased 450,337 ADS at an average stock price of $1.2631 U.S. This share repurchase plan is in effect until December 31, 2020. 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. 2020 has forced many of us in education to reevaluate how we provide, let's say, about learning to the various types of students in China, while the public health situation in China has improved dramatically over the course of the past few weeks. In-person teaching remains unavailable in many areas as the pandemic continues to impact several countries around the world. ACG is now for its one-on-one portfolio training programs and individualized attention our students receive, as highlighted in recent reviews of [Indiscernible] in China. Also, with the majority of our teachers are unable to interact with students face-to-face, we continue to strive to deliver the correct instructions and personal support for which we have gained recognition over these past several years. I am pleased to see, that many of our students have continued to pursue their studies in one form or another and have been happy with the level of attentiveness they have been receiving. With traveling abroad is no longer being a viable option given the pandemic environment, students are choosing to pursue language studies, or other types of foundational education to better prepare themselves for when the opportunity presents itself again. And many are even finding those types of courses to be quite well-suited to being taught online. ACG continues to being solid financial position as we continue to navigate the challenges presented by the global pandemic. What that means, leveraging our operating flexibility or providing students with alternatives to our regular summer study above the programs. We continue to put the health and safety of our students and employees first. And we continue providing students with the support they need to succeed via online platform from email, WeChat, and [indiscernible] as we monitor how the ongoing situation unfolds globally. I'd now like to hand the call 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 English translation.

Thank you, Kevin. As both Kevin and Amy mentioned, ACG has worked to adapt to the situation we've been presented with the global pandemic. We were pleased to see incremental improvement in portfolio training enrollment and credit hours from Q1 to Q2, and continue to encourage students to pursue their coursework via remote learning platform. Our sales pipeline continues to improve as nearly all our sales and marketing personnel in Beijing have returned to the office, and are able to operate at optimal productivity. Additionally, we have begun utilizing diversified online platforms such as Douyin, also known as TikTok in the States as a marketing tool, enabling potential students to experience firsthand what our art and creative education offerings are like before making a decision on where to enroll. Even after in-person classes can be conducted once again, we believe the effects of the pandemic will remain. It has reaffirmed the crucial role technology plays in education as well as the overall efficacy of the delivery method. While we believe nothing quite replaces meeting in-person, many students are enjoying the flexibility and added efficiency of being able to take certain courses online. As a result, we are planning to convert some offline classes for portfolio training, particularly those at introductory level that tend to have a more standardized curriculum to online, but we'll still make traditional offline delivery and option. With regard to educational travel, we are pleased to be offering some alternatives to our usual travel tourism program. Working closely with a few well-known overseas art schools and institutions, we have been offering some short-term online summer school programs, which offer certifications upon the completion of the program, as well as bootcamps led by teachers from these overseas institutions and we have invited to cooperate with ACG's own teachers. Most of the summer school program offerings and certain master bootcamps will have taken place in July and August, which will have a positive impact on our topline in Q3. Most importantly, we are focused on our students and providing them with the creative education they signed up to receive before the pandemic began, while ensuring their and our staff safety. With that I'll turn it back to Kevin.

Thanks Jun and Carolyne. To conclude it, ACG continues to be well-positioned financially and operationally. We have worked tirelessly to adapt to the evolving situation and continue to do so, while moving forward with our strategic growth initiatives. I believe ACG has rising through a challenge and while our business has certainly felt the impact of this unusual circumstance. It has proven result and we are optimistic about the future growth potential of our campaigning. There is a great deal of uncertainty in the world today. But we'll remain focused on continue to serve our students and prioritizing the well-being of all our stakeholder. I would like to thank all our employees, associates, family and friends for their ongoing support, and I hope everyone continues to stay safe and healthy. With that operator, let's open it up for questions.

[Operator Instructions] Currently, we don't have any incoming questions. : :

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 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 very much, everyone. This concludes your conference call for today. You may not disconnect. Thank you for joining and enjoy the rest of your day.