ATA Creativity Global

NASDAQ:AACG

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Greetings. Welcome to ATA Creativity Global's Third Quarter 2023 Financial Results Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Alice Zhang of the Equity Group. Thank you. You may begin.

[Alice Zhang]

Thank you, operator, and hello, everyone. Thank you for joining us. The press release announcing ATA Connectivity Global's or ACG's results for the third quarter and 9 months ended September 30, 2023, is available at the IR section of the company's website at www.atai.net.cn. After 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, including initiatives and adjustments by ACG as China is COVID-19 pandemic-related restrictions, market demand for and market acceptance and competitiveness of ACG's portfolio training programs and other education services. 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 the 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 third quarter and 9 months ended September 30, 2023, are converted from RMB using an exchange rate of RMB 7.2960 to USD 1, the noon buying rate as of September 30, 2023. 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 during today's Q&A session or via e-mail to the company. You can send your questions to the e-mail address [e-mail], and please specify whether you would like to have the name read during the Q&A session.

On today's call, the company's CFO, Mr. Ruobai Sima will provide a brief overview of operating and financial highlights for the third quarter of 2023. As Chairman and CEO, Mr. Kevin Ma, is unable to be here today due to personal reasons, Mr. Sima with Joint President, Mr. Jun Zhang, in providing 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 CFO, Mr. Ruobai Sima. Please go ahead, Mr. Sima.

[Ruobai Sima, executive]

Thank you, Alice, and welcome, everyone, and good evening to the Americas, and I appreciate everyone's time. We were pleased with our solid financial performance for the third quarter 2023, reporting a 14.1% increase in net revenue, primarily as a result of increased contribution from portfolio training and research-based learning services as we were able to resume in-person overseas summer camp this summer for the first time since the COVID-19 began in 2020.

Revenues from research-based learning services more than doubled from the prior year period, and we have been thrilled with positive still feedback received, increasing in revenues coupled with decreased operational expenses enabled to significant narrow losses during the quarter. Total student enrollment for third quarter 2023 was 1,093 compared to 1,106 in the prior year period. However, we did see a slight increase in enrollment in our core portfolio training programs. During the period, portfolio training credit hours delivered increased 24.1% to 44,723 with credit as delivered for project-based programs, increasing nearly [ 25% ] year-over-year.

We believe this demonstrates that our students have been leveraging ACG's teaching resources more efficiently as project-based credit hours account for [ 69.5% ] of our portfolio training credit hour delivered. During the summer, the [indiscernible] overseas program, bringing students to countries such as the U.K. and Japan, where they had the opportunity to explore a variety of our general strategies university campuses and engage in real-world applications.

The successful delivery of these programs have reinforced our belief that it is fulfilling a growth in demand of -- for overseas learning programs, and we are excited to continue presenting these opportunities to our students in the future.

With that, I will quickly review financials. Total net revenues for third quarter 2023 increase 14.1% to RMB 59.9 million compared to RMB 52.1 million in the third quarter of 2022. This was primarily driven by increasing revenues and from portfolio training and research-based learning services. Portfolio training services represented 77.5% of total net revenues during the period. Gross margin improved to 49.2% during third quarter 2023 compared to 45.1% in the prior year period. The increase in gross margin was primarily due to increased net revenues compared to the prior year period. As a result of increased gross profit and decreased operating, net loss attributable to ACG narrowed to RMB 7.3 million during the third quarter of 2023 compared to RMB 12 million in the prior year period.

Turning to year-to-date results for the 9 months ended September 30, 2023. Net revenue increased 7.6% to RMB 138 million from RMB 128.3 million in the prior year period. Gross margin improved to 45.1% from 42.8% in the prior year period. Net loss attributable to ACG narrowed to RMB 42.2 million compared to RMB 49.9 million, primarily due to increased revenues and decreased operating expenses.

Moving to the balance sheet. We continue to be a solid financial position with USD 9 million in cash and cash equivalents. Working capital deficit was USD 36 million and the total shareholders' equity was USD 14.2 million at September 30, 2023, compared to working capital deficit of USD 33 million and shareholders' equity of USD [ 20.8 million ] respectively at December 31, 2022.

Now turning our attention to ACG's outlook and growth strategy. We were pleased to see a positive momentum from the first half year of the year continued into the second half of encouraging operating results coming from our core portfolio training services business. As a result, ACG achieved a solid 14.1% increase in total net revenues, improved gross margin and significantly narrowed losses during the third quarter of 2023. Our sales results during the period indicates that students remain interested and initiating and continuing educations and have chosen ACG as their trusted institution to guide and support them as it makes the way longer creative journey.

During this quarter, ACG also reported positive cash flow from operations. We've increased our cash and cash equivalents by 19.1% to RMB 65.5 million. Total portfolio training credit hours delivered increased by 24.1% in third quarter 2023 where the number of students enrolled increasing from 616 to 651 year-over-year. We continue to build portfolio training as our primary line of business, which serves as the main channel through the reach powered enrolled students can take part in value-added services to further enrich their creative education experience. This includes our experiential learning offerings and reserve-based learning services, overseas study consulting and so on. All of these services together offers a comprehensive expenses for students who are working towards completing their personal portfolios again planning to apply to other institutions.

We successfully hosted a total of 11 in-person summer programs during third quarter 2023, 6 overseas and 5 domestic. We were excited to bring these offerings back in this year. And given the tremendous and positive reception, we look forward to plan and execute more overseas research-based learning programs in the future, providing attractive and rapid learning programs on a variety of our topics. As we enter the 2023 to '24 academic year and start to prepare for the upcoming application season, we are thrilled to announce preliminary admission results for students that submitted applications in 2023.

Thus far, ACG students have received offers from prestigious institutions worldwide from both our focused and non-focused university in 2023, including MIT, Howard, University of Oxford as well as [indiscernible] Island School of Design and Royal College of Art. We are incredibly and proud of all the hard work our students have put in to yield these impressive results, and we are grateful to have and be a part of their journey.

We remain committed to serving students and enable these types of positive education in outcomes for those wishing to pursue our study. 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 remarks in Mandarin, which will be followed by an English translation. Jun, please go ahead.

[Jun Zhang, executive]

[Foreign Language]

[Alice Zhang]

[Interpreted] Thank you, Mr. Sima. 2023 has been an important year for ACG. We have been able to build some positive momentum in our business as China and the rest of the world continue to operate in a post-pandemic near normal type of environment, which enabled us to fully resume in-person instruction at our network of training centers and offer our overseas summer programs for the first time since 2020, bringing more than 100 students to various countries of interest and allowing them to receive an immersive experience in creative ARP study and application. ACG prides itself not only on the quality of its academic programming, but also on the support it provides from professional development perspective. We continue to explore ways in which we can cooperate with more institution firms that can help provide students with various opportunities to harness skills and utilize them in real-world scenarios. In the remainder of 2023, we have a regular online master class programs lined up, along with other experiential offerings. For students looking to gain some professional experience, we're introducing a part-time assisted PTA program through still work with global well-established brands on real-world projects in an engaging environment. Participating students will have the opportunity to work and support various positions, covering architecture design, [indiscernible] interaction design, fashion design and so on. Students will walk away with world-class company working experience as well as reference letter that will improve their college deplication competency.

We believe programs like this are critical in providing students with hands-on experience by being part of a real-world professional team at companies. This October, we also held our annual Shanghai Fashion Week program. providing students with Fashion Week VIP tickets and an opportunity to intern at Fashion Week with Chinese artist brands. Selected students were able to experience the runway backstage and other meetings as well as working with marketing and branding teams. We believe this kind of experience crucial for students interested in a career in fashion design and fashion brand operations. And we're pleased that participating students received positive feedback from the brands they work with.

They then be entering a business side of application submission for many schools. At ACG, we strive to provide our students with the best-in-class support in the respective art field as well as during the admission process. It is a critical time for many of our students and watching our teaching staff working closely with them to finalize and perfect their portfolios have been truly exciting. As Mr. Sima mentioned, our students have received tremendous success with offers for a number of renowned schools worldwide, and we look forward to helping this next class of students garner similar success in 2024.

For years, we have worked to become a leading player in China's creative arts education industry. competency stems from a deep understanding and constant monitoring of the market and academic trends, and experienced teaching came with proven track record and our continuous efforts in forming and maintaining our institutional partner network. On top of these capabilities, we're focused on providing relevant, high-quality offerings that are substantial in content, which we believe lies at the center of our business growth. We remain committed to offering products that cultivate and nurtured appreciation and of arts the younger generation and continue to explore ways to serve a growing base of students with diverse needs in creative art study.

With that, I'll turn it back over to Mr. Sima.

[Ruobai Sima, executive]

Thanks, Jun and Alice. We look forward to concluding 2023 stronger. We remain focused on providing our students with carefully curated class offerings and believe we are in a position where we can execute our growth strategy by leveraging our advantage.

With that, operator, let's open it up for questions.

[Operator]

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

[Ruobai Sima, executive]

Okay. Thank you, operator, and thanks again to all of you for joining us. If anyone has questions for us, please feel free to reach directly to or our Investor Relations form and The Equity Group. We are always available to speak to investors and look forward to speaking with you all during the fiscal 2023 earnings call. Thank you.

[Operator]

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.]