ATA Creativity Global (AACG) Q1 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to the ATA Creativity Global First Quarter 2022 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alice Zhang of the Equity Group. Please go ahead.

Thank you, Hector, 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, 2022, 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, could, estimate, expect, forecast, future, intend, look forward to outlook, plan, should, will and similar terms and 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, market demand for ACG's Portfolio Training Programs and other education services, mainly including research-based learning and overseas study counselling services. The impact of COVID-19 on ACG and its operations, ACG's plan and anticipated benefits of the measures implemented in response to COVID-19. 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 would 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. 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 first quarter ended March 31, 2022, are converted from RMB using an exchange rate of RMB 6.3393 to USD 1, the noon buying rate as of March 31, 2022. 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 is an overview of the company on Slide 3. In addition, we are more than happy to take investor questions during today's Q&A session or via e-mail to the company. On today's call, the Company's Chairman and CEO, Mr. Kevin Ma will give some brief opening remarks before turning the floor over to CFO, Mr. Ruobai Sima, who will provide a brief overview of operating and financial highlights for the first quarter of 2022. Kevin and President, Mr. Jun Zhang, will follow with an update on the company's outlook and its long-term growth strategy before opening the floor for questions. With that, I'll turn the call over to ACG's Chairman and CEO, Mr. Kevin Ma. Please go ahead, Kevin.

Thank you, Alice, and welcome, everyone. Good evening to those in America. I appreciate everyone's time. I'm pleased to be here today with Ruobai Sima, our newly appointed Chief Financial Officer. Sima succeeded Amy Tung, who has decided to step down as CFO for personal reasons. Amy has been with ACG for over 15 years, serving various roles within finance and operations. She has played a key role in our development over these years, and we are grateful for her expertise as I say and mainly variable contributions over the years, but only do I concern is to [indiscernible] college or their friend. Amy will remain with ACG in advisor capacity over the next few quarters to ensure a smooth transition, and we appreciate our ongoing support. Mr. Sima brings to ACG 70 years of experience in finance and accounting as well as strategic financial planning and execution at public and private companies in the financial, automotive and travel industries. We'll be way to doing ACG Mr. Sima as CFO at various automotive service campaigns. We are competing to that is expense -- expertise [impress] and accounting will be invaluable addition to our leadership. With that, I will turn it over to Sima to our first quarter highlights.

Okay. And thank you, Kevin, and for the kind introduction instruction. And I'd like to begin by sharing [indiscernible] and to be joining ACG at the time in its history. While we are being pleased with some challenges and caused by the ongoing pandemic environment and increasing competition. ACG has a strong track record of delivering positive student outcomes, and it is a reputable institution in the creative arts education space. And we are well positioned to overcome the short-term hurdles, and I'm very grateful to have this opportunity and to be a part of ACG's incredible bright future. 2022 got off to a very good start. And we saw a modest increase in student enrollment. Although credit hours delivered remaining stable during the fourth quarter, and we were able to achieve a 12.1% increase in net revenues as well as notable year-over-year improvement in gross profit and margin. This was primarily driven by increased revenue contribution and from our portfolio training and overseas study counseling services as well as continued product shifts and from time-based programs and towards project-based programs. In addition, our research-based learning opportunities have been well received by students and continue to be in high demand. As a few of our core cities are continue to face pandemic-related lockdown restrictions, and we are shifted our deliver method to online where appropriate, offering students and greater flexibility and ongoing support despite not being able to take in-person classes. Our core portfolio training program enrolled 537 students during the fourth quarter of 2022 and compared to 528 students in the prior year period. Enrollment tend to be an indicator and the future credit hours delivered, and we were placed that enrollments remaining stable year-over-year in parallel with resurgence of COVID-19 certain cities. During the fourth quarter of 2022, we delivered 27,494 credit hours for our portfolio training programs. Lower total credit hours remaining flat and we have continued to see an ongoing shift in our portfolio training and making favor of project-based programs versus realtime-based programs. And project-based programs or increased 23% and realtime-based programs decreased by 19%. Our continued effort to share the program is contributed to improve operational efficiencies and giving us the opportunity to grow revenue while improving gross margin. We have also continued to explore ways in which it ACG can better serve a great population of students from diverse backgrounds. We have received a positive feedback from the students and who are attending our International Arts Foundation Program centered in Beijing and Shuren-ACG Arts Center, both of which opened their doors in September 2021. In order to help students with diverse needs to pursue their further study goals in creative arts. And with that, let's move to financials and for the fourth quarter of 2022. Total net revenue for the fourth quarter of 2022 increased 12.1% and to RMB 42.1 million and from RMB 37.6 million in the fourth quarter of 2021. This was primarily driven by an increase in service delivered for portfolio training and overseas study counselling. Portfolio training services and were delivered either important through ACG's nation-wide training center network or were online platform, which represented around 63.3% of total net revenue during the period. Gross margin improved to 45.7% during the 2022 first quarter, up from 39.6% in the prior year period. The improvement was primarily driven by various paths the increased proportion of revenues from portfolio training and overseas study counselling services. And improve our operating efficiencies and from ongoing shape of ACG's portfolio training program and mix towards project-based programs and related cost of optimization efforts. Net loss attributable to ACG improved to RMB 15.9 million and during the first quarter of 2022 and compared to RMB 19 million in the prior year period. And moving to the balance sheet, and we continue to be a solid financial position and raised USD 9.8 million in cash and cash equivalents. Working capital deficit was USD 32.3 million, and total shareholders' equity was USD 27.6 million at March 31, 2022, compared to working capital deficit of USD 30.2 million and shareholders' equity of [USD 3 million], respectively, and at December 31, 2021. And with that, I'd like to turn it over to Kevin, and he will depend upon our outlook and growth traffic. Kevin?

Thank you, Sima. We were pleased with the stable performance delivered in the first quarter of 2022. During the period, China experienced post loan related to local COVID-19 transmission in a few of our key cities like Shanghai, Shenzhen and Suzhou, which also led to certain travel restrictions across the country. The situation has since worsened with the mandatory lockdown, taking place in major cities. Some of our learning centers have had to close and cease in person's instruction, while we are still reinforcing service to our students in the cities where our campus has remained open. We are providing online class delivery option for students impacted by lockdowns in certain cities. In the short term, this may have an impact on business, there will always be students who prefer in-person instruction. However, we believe we will acted to overcome the ongoing challenges presented by the pandemic. The majority of our students are determined to continue pursuing their studies in the [peso divested], and we are [indiscernible] support them to the best of our business. As Sima noted earlier, our research-based learning service, which tend to be good program that provides the project-based and learning experience remain quite popular. They originate the [indiscernible] to the pandemic, which drove more set to each of the students in terms of learning objectives to delivery forms and clear the project time. We are pleased to see a growing sentiment of online research-based learning programs in 2020 and are excited about it through growth potential beyond the post pandemic era. We are extremely proud of our students and intend to continue investing in our business and it's finishing partnership within the industry, which will serve as a foundation for our first future growth. We believe we are well positioned to grow our business with the current portfolio of program offerings as more countries began to ease travel restrictions. We believe that research-based learning and overseas counselling services business will be able to reach their full potential. While we are mindful of the -- there's computation within the -- remains our focus on serving our students and achieving their evolving needs. We are optimistic about the opportunities ahead of us in '22 and look forward to maintaining our leading position in creative arts education as we continue to drive positive outcomes for our students. I'd now 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 mark in Mandarin which will be followed by English translation. Jun, please go ahead.

[Foreign Language]

Thank you, Kevin. Since the beginning of the pandemic in early 2020, we have work to continue developing our online platform. We need to be nimble and flexible, the need to have a technologically [indiscernible] Delivery methods for our courses became absolutely clear when the unprecedented circumstances of COVID-19 affected people all over the world over 2 years ago. We have continued to develop resources into quickly reacting to COVID-related [influxes] on our operations. And have remained focused on providing the best quality education services for our students, even when some of our campuses are temporarily closed due to local resurgence. ACG has continued to develop additional short-term programs, both online and in person where feasible, including online book camps, internships, domestic travel and certain team research-based learning programs. For example, during the first quarter, we organized an environmental protection culture and creative design camp at Xidao in Sanya, an island in Hainan province, offering a unique experience for over 20 students who are able to create recycling marine products and learn from local artist. The students have the opportunity to work on individual and group RPs and projects, and some of their work was selected into the exhibitions at the [indiscernible] protection center. This program was well received by the participating students. We believe the public health situation in China may improve over the next several weeks and remain optimistic about the remainder of 2022 as the situations pain and more cities -- major cities can resume some level of normalcy. We continue to plan for short-term summer camps and team travels in the coming summer. We're determined to continue to developing programs that cater to the needs of different student populations. And to support them in every way we can, like we always do, with the best quality education and teaching experiences. Our operational strength and growth prospects are based upon the experience of our veteran features are continuously evolving sales and marketing strategies to better resonate with the appropriate student population, our ongoing efforts to improve operating efficiencies as well as to establish relationships with domestic and international partners, including university and colleges, education institutions and international high schools in China and more. We believe we are well positioned financially in the near term, but have been exploring financing, investing and M&A opportunities where appropriate, to enable our long-term growth. ACG's mission is to provide quality learning experiences that cultivate and enhance students' creativity. We're confident in our ability to maintain our competitive advantages and leading position in the creative arts education market in China. In 2022, we look forward to serving a growing population of students with diversified needs in pursuing the creative arts education. With that, I'll turn it back over to Kevin.

Thanks, Jun and Alice. In closing, we are optimistic about ACG prospects in 2022 and look forward to continue our stance regardless of what the situation is locally. We are committed to our mission of empowering students to achieve success in the creative arts and we'll continue exploring ways in which we can expand our offering to help more students in their pursuit of creative arts education. With that operator, please open for question.

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

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