ATA Creativity Global (AACG) Q2 2025 Earnings Report, Transcript and Summary

Greetings. Welcome to ATA Creativity Global Second Quarter 2025 Financial Results. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Alice Zhang with the Equity Group. Thank you. Alice, you may begin.

Thank you, operator. Good evening to all of you joining us from the United States, and good morning to all of you joining us from China. Please be advised that the discussions on today's call may include forward-looking statements. Such forward-looking statements involve certain risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the company's most recent SEC filings for a more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligation to update forward-looking statements as a result of new information, future events or otherwise. Regarding the disclaimer language, I would also like to refer you to Slide 2 of the conference call presentation, which is accessible via the IR section of ACG's website. A simultaneous audio webcast is also accessible via the IR section of ACG's website, including the replay, which will be available for the next 90 days. ACG's CFO, Mr. Ruobai Sima, will start this call by highlighting the company's key operational achievements and financial highlights for second quarter 2025, and we will provide an overview of financial and operating results for second quarter and first half 2025 and briefly discuss expectations for full year 2025. President, Mr. Jun Zhang, will conclude the prepared remarks with an update on the company's long-term growth strategy before opening the floor for questions. For those of you following the accompanying slide presentation, please refer to the slides for further details. With that, I'll turn the call over to ACG's CFO, Mr. Ruobai Sima. Please go ahead, Mr. Sima.

Thank you, Alice, and welcome, everyone. Good evening to those in America, and we appreciate everyone's time. As Alice mentioned, we -- please refer to our earnings deck available on the IR side of our website, and we go through our prepared remarks. Second quarter 2025 was marked by year-over-year increase in net revenues and gross profit. Growth in net revenues was mainly attributed to increased contribution from overseas study counseling services, other educational services and research-based learning services, combined revenue of which increased by more than 50%. Continuing to first half 2025, we delivered strong growth for the 6-month period, highlighted by double-digit increase in both net revenues and gross profit. While we recorded growth across all business lines, our value-added offerings, including research-based learning, overseas study counseling and other educational services were the primary drivers. Moving on to second quarter operational highlights. During second quarter 2025, our main revenues contributor remain portfolio training services, accounting for 68% of total net revenues. Our project-based programs credit hours delivered increased by 25.7% compared to the second quarter of 2024 and contributed to about 76.7% of total credit hours delivered. Revenues from research-based learnings, overseas study counseling and other educational services accounted for an increasingly important part of net revenues, which grew by 54.2% compared to the prior year period as a result of more services delivered during the period. Despite Q2 normally being a slower quarter for its parential offerings, we delivered a variety of high-quality research- based learning projects to ACG students, including several master classes and a new session of our signature program, the United Nations Sustainable Goals Article 10. In addition, we introduced film festival United Tour, bringing students interested in film production to the forefront of our -- one of the world's most prestigious and influential film festival from an immersive experience. We recorded significant revenue growth in overseas study counseling services. As a result of more services delivered, all students continue to explore study abroad options in world-class universities and college. For 2025 admission results, we are more than excited to announce that ACG students have received more than 4,000 offers. And these offers and scholarship come from prestigious institutions across all of our 6 major art disciplines. Highlight results, including offers in computer design at Cornell University and Carnegie Mellon University, Architecture at Columbia University and Appen, Music at Royal College of Music and [ Le ] conservatoire, film, games and animation at California Institution of Arts and Sheridan College, Fine Art and -- Fine Art at Royal College of Arts and RCA as well as Fashion and Patent School of Design and Central Saint Martins College of UAL. We also have students being accepted into the Master of Arts in Design Engineering, a double major program codesigned by Boral University and Rhode Island School of Design, where students will have access to academic resources from both an everly schools and top art institutes. Moving on to the second quarter 2025 key financial metrics. Total net revenues for second quarter 2025 were RMB 55.9 million, an increase of 8% of RMB 51.8 million in second quarter 2024, which were primarily due to increased revenue contributions from overseas study counseling programs, other educational services and research-based learning services. Gross profit for second quarter 2025 was RMB 28.3 million, an increase of 10.2% from RMB 25.7 million in second quarter 2024, primarily due to higher net revenues. Gross margin also improved to 50.6% during second quarter 2025 from 49.6% in the prior year period. Total operating expenses was RMB 42.1 million in second quarter 2025, a decrease of 9.4% from RMB 46.5 million in second quarter 2024. Well, as a percentage of net revenues, total operating expenses decreased to 75.3% during second quarter 2025 compared to 89.8% in the prior year period. The decrease in operating expense was due to RMB 2.6 million decrease in sales expenses related to lower headcount in sales personnel and decreased sales incentives, and RMB 1.5 million decrease in general and administrative expenses as a result of decreased professional fees as well as RMB 0.3 million decrease in research and development expenses as ACG system development was completed in Q2 2024. As a result of higher net revenues and slightly lower operating expenses, loss from operational in second quarter 2025 narrowed to RMB 13.7 million from RMB 20.8 million in second quarter 2024. Net loss attributable to ACG during second quarter 2025 was RMB 10.8 million compared to RMB 16.8 million in the prior year period. During the first half 2025, total net revenues increased to 11.8% to RMB 111.7 million from RMB 99.9 million in the prior year period. The increase was primarily attributable to increased contribution from research-based learnings and overseas study counseling and other educational services. Gross profit for first half 2025 were RMB 53.7 million, an increase of 12.8% from the RMB 47.6 million in first half 2024. As a result of increased revenue during the period, gross margin also improved to 48.1% from 47.7% in first half 2024. Total operating expenses was RMB 84.3 million in first half 2025, a decrease of 6.4% from RMB 90.1 million in the first half 2024. As a percentage of net revenues, total operating expenses decreased to 75.5% from 90.2% in the prior year period. The decrease was primarily due to a RMB 3.8 million decrease in sales expenses as a result of lower headcount in sales personnel and decreased sales incentives compared to first half 2024 and RMB 0.6 million decrease in research and development expenses and was partially offset by RMB 2.5 million increase in general and administrative expenses related to development of new projects carried out in fourth quarter 2025. As a result of increased revenues and decreased operating expenses, loss from operations in first half 2025 narrowed to RMB 30.5 million compared to RMB 42.4 million in first half 2024. Net loss attributable to ACG in first half 2025 was RMB 24.1 million compared to RMB 34.7 million. Moving to the balance sheet highlights. As of June 30, 2025, we had RMB 34.7 million in cash and cash equivalents, total assets of RMB 444.2 million, total liabilities of RMB 388.4 million and total shareholders' equity of RMB 55.8 million. Moving on to year-to-date enrollment trends. Starting with student enrollment. For second quarter 2025, total student enrollment was 1,050, decreased by 3.1% from the prior year period. The decrease in student enrollment was a result of normalized demand in our service in 2025 versus the rebound of student demand in 2023 and first half of 2024. Portfolio training student enrollment for second quarter 2025 was 553 and student enrollment for all other programs for second quarter 2025 was 494. Moving on to credit hours delivered. For second quarter 2025, credit hours delivered slightly increased by 0.3% compared to prior year period. We reported a 25.7% increase in project-based programs, which in recent years have accounted for a continuously increasing percentage of total credit hours due to their flexibility and customization by design and growth in total credit hours delivered was offset by decreased time-based programs credit hours as majority of newly enrolled students opt for the project-based track. With that, let's move to our expectations for full year 2025. We expect to report total net revenues of between approximately RMB 276 million to RMB 281 million for the year ended December 31, 2025, which represents a year-over-year increase of around 3% to 5% from full year 2024. We anticipate portfolio training to remain the main pillar of revenues accompanied by increased contributions from all other lines of business. As we continue to improve current offerings and introduce new programs, our fiscal year 2025 guidance range and related assumptions are based on the company's current business options initiatives and rate for the year end December 31, 2025, and the current and preliminary view of existing domestic and international market conditions, are all subject to change. I'd like to turn it over to Jun, who will expand upon our long-term growth strategy. Jun, please go ahead.

[Interpreted] Thank you, Sima. I will now discuss some recent execution highlights of our long-term growth initiatives. We remain confident in our market position as a leading provider of high-quality creative art education services. While we see intensified competition this year after the release of pent-up demand in 2024, we believe we're well positioned to achieve expected growth and continue to be a trusted partner to our students. Our financial and operational focus for the remainder of 2025 is on driving organic expansion across all lines of business and enhancing cost discipline and overall efficiency to improve bottom line results. Organic growth remains at the core of our business expansion. We take pride in the quality and value our portfolio of offerings provide with ACG students. And keep in mind that these offerings are to be continuously improved and supplemented with new services and classes that address evolving student demand. As we have discussed over the past quarters, our project-based programs have become a dominant contributor to our portfolio training services with a conscious effort, and our students have expressed their appreciation towards this efficient, flexible and customizable track, which can be easily adjusted based on students' needs and application time lines. We're catering to a growingly diversified student population with different backgrounds and all levels of knowledge and experience in their interested art majors. The expansion of our student base is not limited to reaching older adults and younger generations, but also includes supporting a growing number of students who come from different arts backgrounds and possess hybrid skill sets across disciplines. Our job is to help students amplify how to demonstrate both the breadth and depth of their artistic capabilities in their application portfolios and our strong, knowledgeable and competent teaching team enables us to excel in this job. In a time of increased global competition, we help students plan for early preparation, building flexible and long-term pathways from the moment they begin exploring the idea of starting artic broad. For summer 2025, we have an exciting pipeline of new research-based learning projects for ACG students. These include our regular recurring offerings such as the summer school camps to Japan and the U.S. through domestic theme travel programs focused on Chinese and tangible cultural heritages in Donghai Jiangsu province and West Sichuan province as well as various in-person sessions with master classes in Beijing, featuring a wide range of art topics topped by lectures from reputable international colleges, including MIT, Yale University, University of Southern California and Oxford University. In third quarter 2025, we also launched several new theme travel programs to further diversify our offerings and enhance student experience, which include the Singapore Top School Art Study camp, Berkeley Music Performance Intensive camp as well as an ACG exclusive Harvard University Studio for Electroacoustic Composition Summer School codeveloped with Harvard University and UNESCO. Additionally, in response to the evolving student interest in career-oriented and practical disciplines, we're planning and launching more new projects and experiences that align with the long-term career path, such as those with a focus on computer design and/or those that are interdisciplinary. In 2025, we will continue to strengthen and expand our geographic footprint. Expanding our international partnership network across the globe is an ongoing strategy of ACG, especially in the regions where we observe growing student interest. Besides traditionally popular countries like the U.S. and the U.K., we have noticed more students applying to top schools in South Korea and Northern Europe, alongside slightly more developed and better known markets such as Australia, France, Italy, Japan and Singapore. We have explored and deployed additional approaches to streamline our business following the existing initiative to strategically allocate marketing resources to higher-performing campus locations. For the remainder of the year, we hope to continue implementing cost-conscious methods, which include maintaining a lean sales team and using cost-efficient student acquisition channels such as online marketing and partner platforms. In addition, we have begun organizing online group classes led by our most popular teachers in regional centers like Beijing to maximize classroom utilization, giving more students across the country access to best-in-class support in portfolio creation and application counseling. These initiatives have led to reduced operating expenses, and we believe will serve as effective ways to improve our bottom line for the rest of 2025. In the balance of 2025, we remain focused on driving success for our students by helping them achieve their full potential. We're optimistic that we'll finish the year with a strong note and believe that our competitive advantages and the execution of multi-track growth strategies will continue to strengthen our role as a leading player in China's creative art education market. With that, operator, let's open it up for questions.

[Operator Instructions] There are no questions at this time. I would like to turn the conference back over to Mr. Sima for closing remarks.

To us or our Investor Relations firm, the Equity Group. We are always available to speak to investors and look forward to speaking with you all during our next earnings call. Thank you.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]