ATA Creativity Global

Greetings. Welcome to ATA Creativity Global's third quarter 2023 financial results call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.

Thank you, operator, and hello, everyone. Thank you for joining us. The press release announcing ATA Creativity Global's, or ACG's, results for the third quarter and nine months ended September 30th, 2023 is available at the AI 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, intent, 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 eases 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 forelooking statements are reasonable as of today, those statements are subject to risk 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 risk 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 forelooking statements as a result of new information for 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 the slide two of the conference call presentation for further information. All U.S. dollars amounts in this conference call relating to financial results for the third quarter and nine months ended September 30th, 2023 are converted from RMB using an exchange rate of 7.2960 RMB to one U.S. dollars. The new buying rate as of September 30th, 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 company PowerPoint presentation, there is an overview of the company on slide 3. In addition, we're more than happy to take investor questions during today's Q&A session or via email to the company. If you wish to ask questions, you can send your questions to the email address azhang at equityny.com. 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 third quarter of 2023. As Chairman and CEO, Mr. Kevin Ma is unable to be here today due to personal reasons, Mr. Sima will join 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 CFO, Mr. Roby Sima. Please go ahead, Mr. Sima.

Thank you, Alice, and welcome everyone. Good evening to ZLC America, and we appreciate everyone's time. We were pleased with our solid financial performance during third quarter 2023, reporting a 13.1% increase in net revenue. primarily as a result of increased contributions from portfolio training and research-based learning services. As we were able to resume in-person overseas summer camps this summer for the fourth time since the COVID-19 pandemic began in 2020, revenues from research-based learning services more than doubled from the prior year period, and we have been thrilled with the enthusiasm and positive student feedback received thus far. Increasing revenues coupled with decreased operation expenses enabled the opt-in 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 increases 24.1% to 44,723 with credit hours delivered for project-based programs, increasing nearly 35% year over year. We believe this demonstrates that our students have been leveraging BCG's teaching resources more efficiently. Our project-based credit hours account for 69.5% of all portfolio training credit hours delivered. During the summer, we hosted six overseas programs, bringing students to countries such as the UK and Japan, where they had the opportunity to explore a variety of arts, generals, as well as teachers, universities, campuses, engaged in real-world applications. The successful delivery of these programs has reinforced our belief that ACG is fulfilling a growing demand 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 from portfolio training and research-based learning services. Portfolio training services represented 77.5% of total net revenues during the period. Growth 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 expenses, net loss attributed to ACG narrowed to RMB 7.3 million during the third quarter of 2023 compared to RMB 12 million in the prior year period. Similar to year-to-date results for the nine-months ended September 30, 2023, net revenue increased 7.6% to RMB 138 million from RMB 128.3 million in the prior year period. Growth margin improved to 45.1% from 42.8% in prior year period. Net loss attributed 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 in a solid financial position with U.S. dollar 9 million in cash and cash equivalents. Working capital deficit was U.S. dollar 36 million. and the total shareholders' equity was US$14.2 million at September 30, 2023, compared to working capital deficit of US$33 million and shareholders' equity of US$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 fourth half of the year continued into the second half with encouraging operating results coming from our core portfolio trading services business. As a result, ACG achieved a solid 14.1% increase in total net revenues, improved growth margin, and significantly narrowed losses during the third quarter of 2023. Our sales results during the period indicates that students remain interested in initiating and continuing their arts educations and have chosen ACG as their trusted institution to guide and support them as they make their way along their creative journeys. During this quarter, ACG also reported positive cash flow from operations, with inquiries on cash and cash equivalents 19.1% to RMB 65.5 million. Total portfolio training credit hours delivered increased by 24.1% in third quarter 2023, with the number of students enrolled increasing from 616 to 651 year over year. We continue to view portfolio training as our primary line of business, which serves as the main channel through which currently enrolled students can take part in value-added services to further enrich their creative education experience. This includes our experiential learning offerings and research-based learning services, overseas study counseling, and so on. All of these services together offer comprehensive expenses for students who are working toward completing their personal portfolios and planning to apply to other arts institutions. We successfully hosted a total of 11 in-person summer programs during third quarter 2023, six overseas and five 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 relevant learning programs on a variety of our topics. As we enter the 2023 to 2024 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 art-focused and non-art-focused universities in 2023, including MIT, Harvard, University of Oxford, as well as passes Rhode 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 been a part of their journeys. We remain committed to serving students and enable these types of positive education and career 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. Thank you, Sima.

For ACG, 2023 is an important year. As China and other regions of the world enter the post-pandemic era, and restore the normal operating environment, our business has also built up some positive momentum. We have fully restored the offline classes in various districts, and since 2022, we have launched the first overseas summer project, bringing more than 100 students to different countries, allowing them to gain a deep experience in the learning and application of creative arts. ACG provides support for the quality of academic courses and from the perspective of professional development. We will continue to explore and collaborate with more institutions and enterprises to provide different opportunities to help students master their skills and let them use these skills in practice. In the remaining time in 2023, we will launch a regular online master class and other experience projects. For students who want to gain some professional experience, we will launch a private experience project. Through this project, students will actively participate in the projects of world-renowned enterprises. Students who participate will have the opportunity and access to various positions, including architectural design, game design, delivery design, and fashion design. Students will gain work experience from world-class companies and be able to assist their college application. We believe that students can actually participate and become members of a well-known company's professional team, and can provide students with practical experience. In October of this year, we also held a one-year Shanghai fashion week project to provide fashion week VIP tickets for students and to hold an internship meeting with the Chinese clothing brands participating in the fashion week. Students who were selected were able to experience the backstage of the show and the engagement meeting, and to cooperate with the marketing and brand teams. We believe that this experience is very important for students who are interested in fashion design and fashion brand operations. We are also very happy that the students who participated received positive feedback from the brands they invested in. Soon, we will enter the process of applying for admission. At ACG, we work hard to provide support for students in various art fields and recruitment processes. For many of our students, this is a critical period. Watching our teaching staff interact closely with them, finally confirming and perfecting their works is a very exciting thing. As Sima mentioned, our students have received notifications from many prestigious schools. We are looking forward to helping the next generation of students to achieve similar success in 2024. For many years, we have been working hard to become the leader of the Chinese creative education industry. Our ability is due to the profound understanding and continuous monitoring of the market and academic trends, due to the rich experience and good performance of the education team, due to our continuous efforts to form and maintain the relationship between partners and institutions. In addition, we are also focused on providing Thank you, Mr. Sim. 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 arts study and application. ACG prides itself not only on the quality of its academic programming, but also on the support it provides from a professional development perspective. We continue to explore ways in which we can cooperate with more institutes and firms that can help provide students with various opportunities to hone their skills and utilize them in real-world scenarios. In the remainder of 2023, we have our 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 assistant PTA program to 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, interaction design, fashion design, and so on. Students will walk away with well-class company working experience, as well as reference letter that will improve the college application 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 reputable 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 friends. Selected students were able to experience the runway backstage and other placement meetings as well as working with marketing and branding teams. We believe this kind of experience is 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. We'll soon be entering a business student of application submission for many schools. At ACG, we strive to provide our students with the best in-class support in their respective arts 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. Suma mentioned, our students have received tremendous success with offers from 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. Our competency stems from a deep understanding and constant monitoring of the market and academic trends. Our experienced teaching teams have 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 course. We remain committed to offering products that cultivate and nurture the appreciation and enlightenment of arts of the younger generation and continue to explore ways to serve a growing base of students with diverse needs in creative arts study. With that, I'll turn it back over to Mr. Sima.

Thank you, Jane and Alice. We look forward to concluding 2023 Astronauts. We remain focused on providing our students with carefully curated class offerings and believe we are in a position where we can execute our girls' trustee by leveraging our advantage. With that, operator, let's open it up for questions.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we pull for questions. As a reminder, to star 1 on your telephone keypad if you would like to ask a question. There are no questions at this time. I would like to turn the call back over to Mr. Suma for closing remarks.

Thank you, operator, and thanks again to all of you for joining us. If anyone has questions for us, please feel free to reach out directly to us or our investor-related forms and the Appetite Group. We are always available to speak to investors and look forward to speaking with you all during the fiscal 2023 earning calls. Thank you.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.