ATA Creativity Global

NASDAQ:AACG

Earnings Call Transcript 2024-Q1

[Operator]

Greetings. Welcome to ATA Creativity Global's First Quarter 2024 Financial Results Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Alice Zhang with The Equity Group. Thank you. You may begin.

[Alice Zhang]

Thank you, operator. 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, 2024, 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 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, guidance, plans, should, will and similar terms that 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, ACG's 2024 guidance 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 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 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, 2024, are converted from RMB using exchange rate of RMB 7.2203 to $1 to new buying rate as of March 31, 2024. All historical conversions are accurate as of the time reported unless otherwise noted. The company reports its financial results under the U.S. GAAP in RMB, and all percentages calculated in the presentation are based on RMB unless as 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. If you wish to ask questions, you can send your questions to the e-mail address [e-mail]. And please specify whether you would like to have your 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 first quarter of 2024. As President, Mr. Jun Zhang is unable to be here today, the company's Chairman and CEO, Mr. Kevin Ma; and Mr. Sima will follow with an update on the company's guidance, 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. Please go ahead.

[Ruobai Sima, executive]

Thank you, Alice, and welcome, everyone, and good evening to the America. We appreciate everyone's time. We are pleased that to start 2024 on strong note exceeding our 13.7% increase in total net revenues in the fourth quarter 2024, driven by significant growth in portfolio training services as a result of increased student enrollment and credit hours delivered. We continue to reveal portfolio training as our primary growth driver and grafted to see continued growth in students interest in our primary credit hour offerings. To better support our growing student population, we recruited additional teaching staff. We have also expanded our sales team to meet growth demand. We'll continue to enhance our research-based learning and overseas study counseling services to provide students with a comprehensive portfolio of offerings that provide a strong foundation in creative arts and extensive choice of areas in ways to specialize with ample opportunities to encourage history and culture and showcase their learnings in the real world. Total student enrollment for fourth quarter 2024 was 1,370, up nearly 25% from 1,097 in prior year period. Enrollment in our core portfolio training programs increased more than 33% with 863 students enrolled during the fourth quarter 2024 compared to 645 students in the prior year period. We also delivered 33,527 portfolio trading credit hours, an increase of 21.3% year-over-year. With that, let's move to financials for fourth quarter 2024. Total net revenue for fourth quarter 2024 was RMB 48.1 million, up 13.7% from RMB 42.3 million in the fourth quarter of 2023. This was primarily driven by increased contributions from the portfolio training services, which represented 33.7% of total net revenues during the period. Gross margin improved to 45.5% during fourth quarter of 2024 from 44.3% in the prior year period. We realized increased efficiencies in our portfolio -- in our operations despite increased cost of services related to the hiring of additional teaching staff to support enrollment growth. Net loss attributable to ACG was RMB 17.9 million during the fourth quarter of 2024 compared to RMB 17.8 million in the prior year period, which was primarily a result of increased sales expenses related to the hiring of additional sales personnel to support the continued growth for our portfolio training services business. Moving to the balance sheet, we continue to be in a solid financial position with USD 8 million in cash and cash equivalents. Working capital deficit was USD 46.9 million, and total shareholders' equity was USD 13.3 million at March 31, 2024, compared to working capital deficit of USD 34.4 million and shareholders' equity of USD 15.9 million, respectively, at December 31, 2023. With that, I'd like to turn it over to Kevin, who will expand upon our outlook and growth strategy. Kevin?

[Xiaofeng Ma, executive]

Thank you, Sima. We are open [indiscernible] with a solid first quarter achieving top line growth supported by our expanding core portfolio training service business, while we made investments in our teaching staff and the sales team to continue supporting operational growth. Having completed a full year of increasing costs delivered without the interruption, we received a variable setback from 2023 results, which will help us improve the existing and design new programs with a focus on our mission of enabling [indiscernible] student outcomes, given the strong start to this year we are reiterating our revenue expectations for the year ending December 31, 2024, of RMB 233 million to RMB 255 million, which represents 5% to 15% increase from fiscal year 2023.

We continue to grow our existing business and explore potential acquisitions and other business opportunities. And any material development arise, we will be sure to update the market and reiterating guidance as appropriate. Our [indiscernible] efforts and commitment to supporting students academically and emotionally lies at the heart of our business development. Student interest in ACG's portfolio training was not only reflected in increased students [indiscernible] deleverage during the first quarter 2024, but also in our long-term sales results. As the China continues to encourage students to take on different after junior high school graduation, the demand for a long traditional pathway to pursuing higher education opportunities have improved visibility of China's arts education institution. We believe the achievements of our students and our reputation for our quality offerings and support the positions were in this very market environment. During the first quarter of 2024, we hosted in March open hall Shanghai Fashion Week program. This program was well received by the participating students and we were pleased to see their experience and will perform during this program incorporates the interest-related portfolios for overseas [indiscernible] applications. Our other research-based learning offerings, including the masterclass we introduced during that period -- more than 100 students in multiple projects across various [indiscernible] topics, which we believe is a testament to ACG's [indiscernible] expertise in understanding and addressing students' needs in specific [indiscernible] categories. As a rich education service provider, we believe that the best outcomes are driven by grit, hard work and determination.

To that end, I would like to congratulate our students whose efforts have been rewarded with less of the admission from prestigious schools such as the Royal college of Arts, University of the Arts London [indiscernible] school design and operating institute as well as Harvard University, University of Pennsylvania and the [indiscernible] University. We look forward to continue to support our students through graduating and [indiscernible] way to see what they accomplished beyond ACG. I'd now like to hand the floor over back to Mr. Sima to provide an update on our [indiscernible] initiatives. Sima, please go ahead.

[Ruobai Sima, executive]

Thank you, Kevin. And ACG's mission has always been to empower creative individuals to reach their full potential in their educational and critical. We are honored by the continued trust from our students, their families and our institutional partners who recognize our roles and our teachers' dedication in supporting students in their art -- in addition to our portfolio training and overseas study helping services. We are pleased to announce a new project line business. The United Nations [indiscernible] 2 weeks we can focus on sustainable development goals accounts created by the United Nations to drive global development issues concerning social, economic and environmental sustainability. Students are able to take classes taught by UNESCO officers and our professors from [indiscernible] institutions. They also completed accretive projects that can become part of their overseas school application portfolio. Upon completion, participating students will receive a certification of completion issued by UNESCO and students who performed exceptionally will receive an internship certification from UNESCO as well as the reference letters. Selected students will also be invited to attend the United Nations University Annual Conference this summer. We developed a boot camp for students of [indiscernible] background with the hope that students will benefit in several ways when it comes to their overseas study applications, including portfolio application [indiscernible] reference letter and internship experience. Currently, we are hosting master classes in specialties such as interior design, photograph and [indiscernible] design and students are excited to have the opportunity to [indiscernible] with professors from universities including the University of Art London and [indiscernible] school of design. We believe that various type of research-based learning programs are a reflection of ACG's capability to expand students horizons, no matter what discipline they have chosen to focus on or where they are in their education journey. It is also a reflection of our ability to strengthen and expand our institutional partnerships. In the remainder of 2024, we remain focused on growing our core portfolio training service business and ensuring that we have the operational infrastructure to support the growth. We believe ACG's competitive advantages are built upon our track record of empowering students to reach their full potential, which is only possible because of our dedicated instructors and support teams and our network of institutional partners, we continue to explore potential merge and acquisition opportunities and are attracted by what we are seeing in the industry. We will be sure to updating the market with any developments. With that, I turn it back to Kevin.

[Xiaofeng Ma, executive]

Thanks. Yes, ACG has strived to become a leading player in China operative education market, and we take pride in guiding our students along the way [indiscernible] educational opportunities and experience. We remain optimistic about the ACG's prospects for 2024. And look forward to reporting progress on our strategic growth initiatives in the coming months. With that, operator, let's open it up for questions.

[Operator]

[Operator Instructions] Our first question comes from Lewis Fan with The Benchmark Company.

[Lewis Fan, analyst]

I just have a couple of questions. First of all, you mentioned Q1 revenue growth was primarily due to portfolio training services. Could you tell us how we should think about enrollment in portfolio training and your thoughts on its growth trajectory. I mean do you feel it can continue to grow at its current rate. I believe you mentioned about 30% in Q1.

[Ruobai Sima, executive]

Lewis, thanks for your question. And yes, we have a strong fourth quarter with revenues from the business increased nearly 50%. Due to a 24.9% increase in student enrollment and 21.3% increase in credit hours delivered. And the program of our portfolio training services business can be measured through different ways and the student enrollment, the number of credit hours delivery and the unit price per credit hour delivered. For the unit price we have continued to encourage students to [indiscernible] for the project-based programs over time basis, and they are designed to be more flexible and custom and just go according to students' needs. For the [indiscernible] higher unit price and for project-based programs and enrollment growth was primarily a result of [indiscernible] and our sales team and with digital hiring, and we are able to successfully deliver more credit hours and with the hiring of more full-time teaching staff which will also support future growth in the line of business.

We have continued to realize economics of scale and business has grown and students have continued to express interest in our portfolio training services, and we believe that ongoing investment in teaching resources will enable us to meet students demand and drive sustainable growth. In addition, our sales team has been working closely with teaching staff who have been increasingly engaging program design and the sales efforts. For the sales number, we have gathered internally. We believe there is certain room to grow our portfolio training services business, which remains our core business, and we will subsequently be a key growth driven from [indiscernible].

[Lewis Fan, analyst]

Thank you. Okay. That's very good information. Now you reiterated your revenue guidance for the full year of 2024. So given that we are nearly halfway through the year, is there any additional color you could provide on cadence, whether revenue will be relatively consistent from Q2 to Q4 or whether there will be some lumpiness, where do you see this 5% to 15% growth coming from?

[Ruobai Sima, executive]

Actually, I think for the next 2 or 3 quarters, I think the first part of our [indiscernible] sustainable growth and in the following period. And besides of this since our portfolio gets bigger and bigger, I think for next 2 or 3 quarters, our main revenue and the sales benefits will still come from this part. And besides this, I think we would also try to get some more directive income, including [indiscernible] learning and overseas study company. I think that 2-part also will contribute another part of the additional revenues and for the next following period.

[Operator]

There are no further questions at this time. I would like to turn the conference back over to Kevin Ma.

[Xiaofeng Ma, executive]

Thanks again to all of you for joining us. If anyone has questions for us, please feel free to reach our directly 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 all during our next 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.