ATA Creativity Global (AACG) Q1 2016 Earnings Report, Transcript and Summary

Good day ladies and gentleman and welcome to the ATA Incorporated Fiscal Year 2016 First Quarter Financial Results Conference Call. My name is Katina and I'll be your coordinator for today. At this time all participants are in listen-only mode. Later we will facilitate a question-and-answer session. [Operator Instructions] I’d now like to turn the presentation over to your host for today's call Ms Carolyne Sohn. Please proceed.

Thanks Katina and good morning, everyone. Thanks for joining us. Copies of the press release announcing ATA’s fiscal 2016 first quarter results are available at the IR section of the Company’s website at www.atai.net.cn. Part of this conference call, the Company has an accompanying slide presentation available on its website. You're also welcome to contact our office at 212-836-9600 and we would be happy to send you a copy. In addition, a replay of this broadcast will be made available at ATA’s website for the next 90 days. Before we get started, I'd 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. 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 ATA 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 Company’s most recent quarter ended June, 30, 2015 are converted from RMB using an exchange rate of RMB6.2000 to $1.00 the noon buying rate as of June 30, 2015. 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. The Company’s Interim CFO Ms. Shelly Jiang will provide an overview of operational and financial highlights for first quarter 2016 beginning with Slide 4. The Company’s Chairman and CEO, Mr. Kevin Ma, will then discuss ATA’s outlook and growth strategy for the remainder of fiscal year 2016, before opening the floor for questions. With that I’ll turn the call over to ATA’s Interim CFO, Ms. Shelly Jiang. Please go ahead Shelly.

Thank you, Carolyne and welcome everyone. Today I will provide an overview of our operating and financial highlights for our fiscal first quarter and then briefly discuss our outlook for fiscal year 2016 and beyond. I would like to begin on Slide 5, which lists somewhat our operating highlights. During the first quarter 2016 we delivered approximately RMB2.5 million billable an increase of 11.6% over the prior year period as a result of a significant increase in volumes delivered during the period. We continue to develop new relationships within the private sector of the banking industry and began administering campus recruitment exams for a number of local banks such as Zhongyuan Bank in Henan province and Bank of Ningxia. Additionally over the past couple of months, ATA was selected as the testing services provider for two computer based exams. The first one is the National Patent Agent Qualification Exam, which was previously conducted as a paper and pencil exam and is generally held once a year in November across merit testified and seated at the same time across China. And second, the newly instituted Fund Practitioners Certification Exam, we believe that winning this new project is a testament to its superior service offering and we are confident ATA is well positioned to take advantage of this positive momentum to continue winning new business. ATA also continued to make progress on its consumer initiatives. ATA began working closely with Zhi Shang under continued development of its positive mode by ATP Exam Inventory Navigator or Kao Shi Dao Hang. Its active user base was at 680,000 at the end of quarter 2016. Following this initial transition period, we expect to continue increasing the apps functionality and ease of use for our test centers. We're very pleased that at ATAT one of our investor companies launched its new Cece TOEFL product in July 2015 adding to its premier product center at ATA which launched in late 2014. Cece TOEFL provides online test preparation and training tools for students looking to improve their reading comprehension, listening, oral and writing skills in English as they prepare for the TOEFL, a very popular exam for foreign students seeking to start at an English speaking University or college. Cece TOEFL is now available online at www.cecetoefl.com and we're very pleased with the initial reception of the product and ATA expects to launch the mobile application for Cece TOEFL in the second quarter 2016. Moving on to our financial highlights for first quarter 2016, as shown on Slide 6. We parted net revenues of RMB97.5 million, which exceeded the top end of our net revenue guidance for the period. Gross margin was impacted slightly due to cost for certain clients exams being recognized in first quarter 2016, while current funding revenues will be recognized in second quarter 2016. The company achieved a gross margin of 55.5% in first quarter 2016 compared to 56.3% in the prior fiscal quarter. Despite the discrepancy in timing of costs and current funding revenues we achieved net income of RMB6.1 million a 33.3% increase from RMB4.6 million in the prior year period. Following a strong fiscal first quarter, the company is reiterating its previously announced net revenue and GAAP net income guidance fiscal year 2016, which I would discuss in further detail later on this call. Our next slide we break out revenues for first quarter 2016 by our businesses, which can be broken down broadly into two areas, testing services and test preparation and training solutions. Testing services accounted for about 93.7% of our revenues in first quarter 2016. On the next slide we provide a breakdown of the company’s financial results for the first quarter. Gross profit increased 13.9% to RMB54.1 million from RMB47.5 million in the prior year period. This increase was primarily a result of increased SAC exam volumes during the period, which contributed to increased revenues from the testing services business. Net income increased 33.3% to RMB6.1 million or a loss about $1.0 million, while RMB4.6 million in the prior year period. Diluted earnings per ADS were RMB0.26 or US0.04 in first quarter 2016 compared to RMB0.18 in the prior year period. On Slide 9, we provide a supplemental trial of quarterly numbers, adjusted for share-based compensation expense and foreign currency exchange gains or losses. Excluding this item, adjusted net income for first quarter 2016 were RMB10.0 million or US$1.6 million, compared to RMB8.6 million in the prior-year period. Diluted earnings per ADS during first quarter 2016 on a non-GAAP basis were RMB0.44 compared to RMB0.36 in the prior year period. We continue to be supported by free cash flow and a solid balance sheet, which we've highlighted on Slide 10. As of June 30, 2015, we had about US$35.5 million in cash. We have no long-term debt or short-term borrowings and continue to follow the strict cost structure that has served us well over the past several years. As shown on Slide 11, we expect second quarter 2016 net revenues will be in the range of RMB46 million to RMB56 million. The significant decrease from the net revenues of RMB100 million in the second quarter 2015 is due to the CPA exam taken place during third quarter 2015, for which we expect to recognize revenues during the same period. Last year, the CPA exam took place during our fiscal second quarter. We expect fiscal year 2016 net revenues to be between RMB360 million and RMB318 million and non-GAAP net income guidance to be between RMB28 million and RMB38 million. Please keep in mind that this guidance is based on our all internal projections and we will continue to evaluate our projections on an ongoing basis. With that, I would like to turn it over to our Chairman and CEO, Mr. Kevin Ma to provide some more details on our growth strategy and outlook for fiscal year 2016.

Thank you, Shelly. To accelerate the growth of our core testing business we announced in May 2015 that we are exploring their potential listing of our testing service business on a New Third Board in China. We are in the process of restricting our testing service business in a wholly owned subsidiary of ATA in preparation for their potential New Third Board listing. This business is primary conducted with organizations within China, we believe prospective clients will be more willing to engage ATA service if they recognize ATA as the next Chinese Company which will believe is listing on the New Third Board we demonstrated. I’d like to reiterate that we expect to own a substantial majority of their outstanding incurred interest of the testing service business and to continue to consolidated their financial read outs of the business into ATA following a potentially successful New Third Board listing. Slide 13, leads our overall growth strategies that potential New Third Board lifting is part of our plan to strength ATA’s position as a leader in China's testing and assessment match. We are focused on continuing to provide our existing clients with quality service and support with lots of testing technologies and are working to expand upon these relationships while it’s establishing new ones. In fiscal year 2016, we continue to work towards building our consumer initiatives. The first of these initiatives began just over a year ago and are still in this development and that increment retention stages. Through these efforts we have incurred a number of new education marks that we believe provide gross substantial as a natural extensions of our core competence in assessment technologies. As we move forward on our gross initiatives with committed to operating on the strict cost structure that has allowed the company to successfully scale its operations and generate positive cash flow to finance this long-term growth. Slide 14 lists our consumer initiatives and target markets. As Shelly mentioned earlier, we're very pleased with the recent launch of our Cece TOEFL product, our investing companion Cece in July. Cece has achieved, which Cece launched in late 2014 has being met with some much success and we aspire to the same for the TOEFL product, which combines professionals evaluation with effective learning tools to help students with improving their reading comprehension, listening, reading and writing skills in English. Cece TOEFL is currently available online and we anticipate their mobile application will soon be available as well. During first quarter 2016 we worked closely with Beijing to familiarize their team with existing capabilities of our safety aware Mobile Application Exam Inventory Navigator. The ATP was designed to provide our test papers with easy access to information on our exams and any related information to the exam process and we are thrilled that APT seems to be meeting this goal. As of June 30, 2015, the ATP had 608,000 activated users and we look forward to patterning with Jusong on improving their functionality and usefulness of the APT. Our overall growth with this initiatives is to engage the later with a consumer as a client of ATA so they recognize ATA as authoritative organization in the assessment of market place. In doing so we're expected to get access to consistently growing better that we can analyze to be able to serve our consumer of students and working professionals more effective and efficiently. We'll continue to move forward on our consumer initiative in the remainder of fiscal year 2016 and we keep our shareholders apprised of our progress during this transition. With that, operator let’s open it for the questions.

Thank you. [Operator Instructions] Your first question comes from the line of [Te Koo] representing Insight Global. Please proceed.

I’m wondering if you could give me a timeline New Third Board exercise also approximate cost for the exercise? Thank you.

Okay. Thank you for the question. The timeline for our New Third Board exercise, we are just in the process of restructuring our testing business and thus far we have completed the removal of our structure and are working to make the testing services business a wholly owned subsidiary of the company. We also plan to submit our application to New Third Board review authorities by the end of September. Assuming a normal review process, we anticipate we will be able to complete the lifting process in Q4 of 2015 calendar year. Regarding the cost we have incurred RMB5.2 million individual income tax paid to the government when entire active interest of ATA online which were transferred from the nominee individual shareholders to a learning and existing and estimated RMB4 million for the professionals involving the exercise and this is my answer and I hope this will help you.

Thank you. So I have a follow-up just something you had said earlier. So I look at the numbers, it look like Q1 was a pretty strong quarter, but Q2 appears to be a bit weak. I was wondering if you could provide some more color on just the wide right revenue pipeline and gross margin for the rest of fiscal year 2016, thanks.

Okay. Yes our Q1 net revenue increased a lot, which was mainly due to the increased testing revenues contributed from the SAC exam and regarding the Q2 guidance, we take into account our change in timing for the CPA exam in fiscal 2016 and the CAP exam was held in the fiscal second quarter last year, while it will held in Q3 this fiscal year, so excluding the CPA exam we expect second quarter 2015 will be a stronger on the topline compared with last year. With a strong Q1 result, we remain the market guidance of topline between RMB360 million to RMB380 million and the bottom line between RMB28 million to RMB38 million. For the gross margin is expected to be in the range of 50% to 53%. Yes that's my answer, Thank you.

Thank you. Appreciate your answer. So I am back in the queue now.

Okay. Thank you.

[Operator Instructions] Your next question comes from the line of [Lyn]. Please proceed.

Good morning.

Yes.

Can you give me more color on the consumer market initiatives and when will these initiatives start contributing financially?

Sorry, could you repeat your question loudly because I can't hear?

Yes, could you give me more color on the consumer market initiatives and when will these initiatives start contributing financially?

Okay. Thank you. Regarding the consumer market initiatives we continue working on this and through various partnerships and investments. As we have shared a number of these projects have been progress with Zhongyuan recently, launching their platform for financial securities professionals this past April and as a test launching its center at ATA and Cece TOEFL products over the past year. As for the Master Minds, we are negotiating the business cooperation with several key TOEFL content provides whose study materials are adopted by a number of training schools. Through this cooperation with content providers minds expect to calling to discuss and then to the students. And given the early stage of a development of this project it is also too early for us to speculate as to when these initiatives will begin to contribute to the company financially. But we believe the progress we have made thus far to be promising and I hope this answer can help you.

Yes. Thank you.

Thank you. There is a question on the website who was raised by [Peter]. The question is what was the rational for the change in auditor it has created some concern in the market. Judging by the stock price reaction, it would have to have some background. Okay. Thank you. Thanks for the questions. Regarding the change of our auditor, because recently we can see that all before a firm having transitioning their clients to their local peers practicing from. As to our auditors KPMG, this change is only administrative change and the engagement team of KPMG remains substantially the same particularly at a senior level. And both KPMG Hong Kong and KPMG Huazhen are PCAOB-Registered accounting firms. Actually we have had a few discussion with KPMG on this matter and we are comfortable that we hope that no significant impact to the company. So Peter, I hope this answer can help you to understand.

There are no further audio questions at this time. I would now like to turn the call back to management for any closing remarks.

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 Relations firm, Equity Group. We look forward to speaking with you all again during our second quarter 2016 financial results call. As always we welcome any visitors to our office in Beijing. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.