ATA Creativity Global's (AACG) CEO Kevin Ma on Q2 2021 Results - Earnings Call Transcript

ATA Creativity Global (NASDAQ:AACG) Q2 2021 Earnings Conference Call August 12, 2021 9:00 PM ET

Company Participants

Carolyne Sohn – Investor Relations

Amy Tung – Chief Financial Officer

Kevin Ma – Chief Executive Officer

Jun Zhang – President

Conference Call Participants

Lewis Fan – Benchmark Company

Operator

Greetings, and welcome to the ATA Creativity Global’s Second Quarter 2021 Financial Results Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Carolyne Sohn. Thank you, Carolyne. You may begin.

Carolyne Sohn

Thank you, operator, and hello, everyone. Thank you for joining us. The press release announcing ATA Creatively Global’s or ACG’s results for the second quarter ended June 30, 2021, 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 contain 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 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, the impact of COVID-19 pandemic and the guidelines on ACG and its operations and ACG’s plan and anticipated benefits of the measures implemented in response to the COVID-19 pandemic.

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 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 second quarter ended June 30, 2021, are converted from RMB using exchange rate of RMB6.4566 to US$1, the noon buying rate as of June 30, 2021.

All historical conversions are accurate as of the time reported, unless otherwise noted. The company reported 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.

On today’s call, the company’s CFO, Ms. Amy Tung, will provide a brief overview of operating and financial highlights for the second quarter and first half of 2021. Chairman and CEO, Kevin Ma, 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 CFO, Ms. Amy Tung, please go ahead Amy.

Amy Tung

Thank you, Carolyne, and welcome, everyone. Good evening to those in America. We appreciate everyone’s time. We are pleased to have continued our growth into the year, reporting a 36.1% increase in total student enrollment to 1,051 students in the second quarter of the year. We believe the momentum we have seen in enrollment in the first half of the year bodes well for revenue growth in the second half. During the second quarter, we saw significant year-over-year enrollment growth across our major programs: Portfolio training, overseas study counseling, research-based learning and foreign language training. Our primary offering, the portfolio training program, enrolled 561 students during the period, up 26% from 444 in the same period last year. We delivered 28,445 credit hours for the portfolio training programs which is a slight increase from quarter two 2020.

As we have made a conscious effort in recent years to shift our portfolio training mix towards project-based programs versus time-based programs. Project-based program credit hours increased over 20% year-over-year during the second quarter, although total credit hours delivered stayed relatively flat. With our conscious shift toward project base programs, we have also restructured our full-time instructors’ compensation to be more focused on the number of projects completed instead of the credit hours delivered. This grants instructors greater autonomy and flexibility in competing projects and has consequently resulted in improved operating and cost efficiencies while maintaining the same level of quality education and support for our students. This shift has not only contributed to our top line growth, but also our bottom line improvement

We do anticipate credit hours delivered for the portfolio training programs to gradually increase along with enrollment as this increased shift to project-based programs eventually stabilizes over time, with project-based programs credit hours comprising the majority of overall portfolio training credit hours. At this time, we are working closely with overseas partner institutions in delivering our summer programs. We were pleased to offer themed domestic tours similar to those we held last summer, internships, academic projects as well as various online boot camps and on-site workshop programs in partnership with our overseas partners.

With that, let’s move on to financials for the second quarter and first half of the year.

Total net revenues for the second quarter of 2021 increased 39.4% to CNY36.8 million from CNY26.4 million in the second quarter of 2020. This was primarily driven by increased contributions from portfolio training and other educational services for which we delivered more services when compared with the prior year period when more restrictions on service delivery were in place due to the COVID-19 pandemic.

Gross margin improved to 43.4% during the 2021 second quarter, up from 25.1% in the prior year period. The improvement was contributed by the increasing shift towards project-based programs in portfolio training, which has led to improved operating efficiencies and cost optimization in service delivery. Net income attributable to ACG was CNY14.1 million, which compares to a net loss attributable to ACG of CNY32.1 million in the prior year period. This was primarily a result of the increase in net revenues and decreased operating expenses related to the deferral of the final CNY10 billion that will be used to fund our research project with the Research Institute of Future Education and Assessment of Tsinghua project as well as decreased professional fees, which was partially offset by increased selling expenses related to sales performance bonuses.

Turning to the first half of 2021. Net revenue was CNY74.4 million, up 25.9% from CNY59.1 million in the same period of 2020. Gross margin increased to 41.5% from 31.1% in the prior year period. Net loss attributable to ACG improved to CNY4.9 million compared to CNY52.5 million.

Moving to the balance sheet, we continue to be in a solid financial position with US$14.2 million in cash and cash equivalents. Working capital deficit was US$28.4 million, and total shareholders’ equity was US$34.1 million at June 30, 2021, compared to working capital deficit of US$23.6 million and shareholders’ equity of US$30.5 million relatively at 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?

Kevin Ma

Thank you, Amy. We are pleased to see the positive trends surrounding enrollments continue into the second quarter of 2021. We achieved over 36% year-over-year growth in total enrollments as a result of increase across all our lines of business, which bodes well for the remainder of the year. The public health situation in China remained stable during the second quarter, and we were able to see the tangible results year-to-date by our new sales management platform across several of our business lines during this period. However, the Delta variant has introduced some uncertainty as we have seen certain outbreaks in China in late July and early August, which coincides with our usual peak season for research-based learning service. We are monitoring the situation very carefully and are mindful of putting our students’ and employees’ safety first.

As with last summer, we did not offer international study abroad programs this summer given the lingering impact of the pandemic. However, we are very pleased with the demand and the positive reception of the alternative programs we have developed mainly in cooperation with our international partner institutions. We successfully launched several themed domestic air travel programs with one of our long-standing international school partners in July. One of those tours was visited to Pingyao City in Shanxi Province, one of the most ancient cities in Chinese history. Students had the opportunity to conduct their own research and study the design of ancient buildings in old China. We have also developed various on-site workshops programs on topics such as the future of design, culture, relics, restoration and others.

I do now like to take a moment to address the significant events that have impacted the education industry in China over the past few weeks. The guidelines jointly issued on July 24 by the General Office of the Communist Party of China Central Committee and the General Office of the State Council will primarily focus on companies providing after-school academic course tutoring service for graduate school students. As we shared a week ago, ACG believes that there will be no materially adverse impact on our business given our focus on creative arts education and experiential learning. We continue to monitor the situation closely and are committed to remaining in compliance with all applicable rules and regulations in providing education service in China and the places where ACG’s partner institutions are located.

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

[Foreign Language]

Thank you, Kevin. We have continued to offer quality alternative programs this summer, partnering with reputable domestic and overseas institutions and are pleased to have received positive feedback from our students.

During the second quarter, ACG made the strategic decision to sell one of its legacy businesses and K-12 education assessment services. This will enable us to focus on our core creative education and experiential learning business. We believe the curriculum and various programs we offer differentiate us from many of our peers, and while typical academic subjects of reading, writing, math, science, history, et cetera, are critical to one’s education, the arts and learning outside of the classroom have been demonstrated to be just as important to a student’s overall development.

We are seeing increased demand for our offerings during the gradual post-pandemic recovery compared with the prior year period and, combined with the development of our centralized sales platform and increased promotional and marketing activities, we are seeing a positive impact on our enrollment numbers. We continue working to expand our course offerings, looking to our students to see what interests them and would be most beneficial to them as they work towards their goal of pursuing studies at overseas institutions.

We remain optimistic about the global recovery despite some uncertainties infused by the Delta variant. We will continue to work closely with our partners around the globe while prioritizing the safety and well-being of our students and staff. We are also remaining watchful as uncertainties impact the after-school academic tutoring industry given the recent guidelines released by the government. With that, I’ll turn it back over to Kevin.

Kevin Ma

[Foreign Language]

In closing, ACG believes we remain hope – our demand will position it to execute on our growth initiatives, particularly the effects of the pandemic continue to diminish over time. We are pleased to continue to be an organization that the students trust and recognize for its quality education and excellent support both during the worst of the pandemic and the as the world recovers. Our students continue to inspire us with their determination and perseverance through these challenges, and we look forward to serving a growing population of students looking to enrich themselves with creative arts and experiential learning opportunities. Everyone, please stay safe and healthy.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Thank you. Our first question comes from Lewis Fan with The Benchmark Company. Please proceed with your question.

Lewis Fan

Hi. Thanks for taking my call. First of all, congratulations on a very solid quarter. My first question is with regard to your operation numbers. I’ve noticed that you have achieved a positive net income for the quarter as opposed to a net loss over a year ago. So in this context, could you please provide some estimate or color if this positive net income is going to be – become a trend going forward, or if we will have more volatilities in the upcoming quarters?

Amy Tung

Thank you, Lewis for your question. Well, the positive net income realized in quarter two 2021 was actually mainly contributed by the CNY33.5 million investment income recognized upon the deconsolidation of our legacy K-12 education assessment services. Our core business was still at a net loss status, but has shown improvement compared with the prior year period. Given the uncertainty caused by the global pandemic and Delta variant resurgence in China in summer, it would not be prudent for us to make predictions about when we might achieve profitability at this stage. But we do believe we will see marked improvement over the course of the year.

Lewis Fan

Great. That’s fair enough. Thank you. Thank you. My second question is more about the macro environment. Over the past month or so, we also – there have been some new guidelines issued by the Chinese government with regard to the after-school education industry. So I know the management has already had some comments on this. But could you please provide some additional colors on your view of these new guidelines’ overall impact on the Chinese after- school education industry? And more specifically, what it might mean for ACG?

Amy Tung

Certainly. Thank you, Lewis for your question again. The guidelines actually are focused on school homework and after-school tutoring for academic courses, and ACG’s primary business focus is on creative education and experimental training. We do not expect our operations to be materially affected by the guidelines in this regard. We will continue to monitor and comply with all applicable rules and regulations in China and all other jurisdictions where we conduct businesses while remaining committed to providing quality education and support services to our students.

We anticipate companies most directly affected by the guidelines will look for ways to adjust their businesses, including seeking nonacademic content for service delivery to avoid needing to issue refunds. We see these changes as an opportunity for ACG to explore new partnerships and potential avenues for growth. So we will remain tuned for what’s coming on in the future period.

Lewis Fan

Okay. Alright. Thank you. Thank you. Yes. Just one more question. So could you tell us a bit more about the industry landscape? And more specifically, who are your major competitors? And how does ACG differentiates itself from its competition? And that’s all my questions. Thank you.

Amy Tung

Thank you again, Lewis, for your questions. Well, there are a few competitors of ACG in the art training market in China, such as SIA, Swings and PSONE. Together with ACG, the four companies accounted for around 50% to 60% of the market share in China. SIA has been expanding very aggressively in recent years by selling courses at big discount and providing classroom with luxury decoration. Swings is a subsidiary being acquired by the New Oriental Group in 2016. PSONE is a young company with about less than 10 years’ experience, but growing rapidly in the market.

Compared with these three competitors, ACG has the longest history in China for international education since commencing businesses in the international art education in 2006. It has the most number of training centers in China, and is renowned for cultivating students to unleash the potential in art even with zero base background. So I think I answered your questions, Lewis.

Lewis Fan

Yes, that’s very helpful. Thank you very much.

Amy Tung

Thank you for your questions.

Operator

Thank you. There are no further questions at this time. I’d like to turn the floor back over to management for any closing comments.

Kevin Ma

Thanks again to all of you for joining us. If anyone has questions for us, please feel free to reach our director through 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 quarterly call. Thank you.

Operator

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.