ATA Creativity Global (AACG) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentleman and welcome to ATA. Inc, Fiscal Year 2017 First Quarter Financial Results Conference Call. My name is Sandra and I’m your operator today. At this time, all participants are in a listen-only mode. We will conduct question-and-answer session towards the end of the conference [Operator Instructions]. As a reminder, this call is being recorded for replay purposes. And now, I would like to hand the call over to Katherine Yao of the Equity Group. Please go ahead.

Thanks Sandra and good morning, everyone. Thank you for joining us. Copies of the press release announcing ATA’s fiscal 2017 first quarter results are available at IR section of company’s website at www.atai.net.cn. As part of this conference call, the company’s slide presentation available on the company’s website. You are also welcome to contact our office at 212-836-9600 and we will 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 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 [Audio Gap] 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 ATA is included a filings with the Securities and Exchange Commission, which we encourage you to review before making any investment decision. The company does not assume any obligation to update any forward-looking statements as a result of new information, future events, and changes in market conditions or otherwise, except as required by law. Regarding the disclaimer language, I would also like to refer you to slide number two 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, 2016 are converted from RMB using an exchange rate of RMB6.6459 to US$1.00 the non-buying rate as of June 30, 2016. All historical conversions are accurate as of the time reported unless otherwise noted. The company reports its financial results under US 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 the operational and financial highlights for first quarter 2017 on slide number 3. The company’s Chairman and CEO, Mr. Kevin Ma, will then discuss ATA’s outlook and the growth strategy for fiscal year 2017, 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, Katherine and welcome everyone. Today, I will provide an overview of our operating and financial highlights and then briefly provide an update on our outlook for fiscal year 2017. I will begin on Slide 5 which leads to some of our operating highlights for the first of quarter. The first quarter was an excellent one for ATA as we exhibit our previously announced guidance range for quarterly revenue and a continued pushing forward on new business development efforts that we believe will have a lasting impact throughout fiscal year 2017. In yesterday’s press release we announced that ATA was recently selected by the China National Tourism administration to be the service provider for the national tour guide [Technical Difficulty] exam, which we expect to deliver in November 2016. In June the company was also chosen by four well known Chinese universities in closing Northwest University and Zhongnan University of Economics and Law to deliver exams and or to develop certain exam content for now. During the first quarter 2017, ATA successfully delivered a new exam Tito, the qualification exam for housing and urban rural construction field professionals of Sichuan Province and the Ningxia Autonomous region. We worked closely when capital sponsors to convert this exam from its original computer-based formats to ATA’s technology based platforms and look forward to continuing this relationship in the quarters to come. Overall, ATA delivered approximately 2.6 million billable exams during first quarter 2017, compared to 2.6 million billable exams in the first quarter of 2016. Exam volume for the period were relatively flat despite of the loss of the security appreciation of China exam for calendar year 2016 through 2017, which was mostly offset by volumes from new exams such as the Fund Practitioners Certification Exam. We have been working closely with the Asset Management Association of China we call it AMAC, which will presents China’s mutual fund industry. Over the past few quarters, to ensure the smooth administration and delivery of the Fund Certification Exam. It has been a productive relationship for both parties thus far and we look forward to growing this partnership with AMAC in the years to come. Moving on to Slide 6, which lists of financial highlights for effective foreign currency. As reported, net revenue RMB96.8 million for the period. We beat our guidance range of RMB87 million to RMB92 million, and compared to net revenues of RMB97.5 million in the prior year period. Gross margin for first quarter 2017 was 49.6%, compared to 55.5% in the prior year period. The decrease was primarily due to the change in revenue mix and increased expenses related to additional operations staffing. We reported net income of RMB4.1 million in the first quarter 2017, which compared to RMB6.1 million in the prior year period. Our bottom-line were impacted by increased losses incurred by the company’s joint venture and associated companies focused on the education and recruitment markets. Following our profit for first quarter, the company is reiterating its previously announced net revenues and non-GAAP net income guidance range for fiscal year 2017, which I will discuss in further detail later on this call. On the next slide, we breakout revenues for first quarter 2017 by our businesses, which can be divided into two areas, testing services and online education services. Testing services accounted for about 92.5% of revenues in first quarter 2017. On Slide 8, we provide a breakdown of the company’s financial result for first quarter 2017. As this information have been fully detailed in our earnings release, I won’t repeat the numbers here, but I’m happy to take any questions on this information during Q&A. Moving to Slide 9, we provide a supplemental chart 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 2017 was RMB5.2 million, or US$0.8 million compared to RMB10 million in the prior year period. Diluted earnings per ADS during first quarter 2017 on a non-GAAP basis were RMB0.22, compared to RMB0.44 in the prior-year period. We continue to be supported by free cash flow and a solid balance sheet, which we have highlighted on Slide 10. As of June 30, 2016, we had about US$18 million in cash and cash equivalents. Some of you may have noted that the decrease in cash and cash equivalent from about RMB248 million as of March 31st, 2016 to RMB119.5 million as of June 30, 2016. This decrease was primarily due to the increase in long-term investment related to ATA’s recent strategy investment in a number our education companies, which Kevin will expand upon in a moment and RMB30 million cash reserve set aside as a domestic [indiscernible] in China. That allows the company to obtain and obviously small for general working capital purposes in its international business. This cash reserve is for the current securing and obviously credit line with U.S. dollar for meeting. After June 30, 2016, we have withdrawn US$0.5 million from the total credit rolls. As shown on Slide 11, we expect second quarter 2017, net revenues will be in the range of RMB58 million to RMB68 million. As previously announced, we expect fiscal year 2017 on revenues to be between RMB429 million and RMB440 million. And non-GAAP net income guidance to be between RMB27 million and RMB37 million, which takes into account the operating results of a joint venture and our associated companies focused on the education and recruitment market, all of which are at an early stage of business development. The company is exploring growth opportunities in the K-12, education assessment and recruitment sector during fiscal year 2017 and plans to invest RMB20 million and RMB30 million in such sectors, which is not included in any other fiscal year 2017 guidance. Please keep in mind that this guidance is based on our own internal projections and that we will continue to evaluate our projections on a 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 2017 and beyond.

Thank you Jiang. The company’s primary growth drivers in the coming quarters will be [indiscernible] development and more entice new business and relationships with a focus on improving our core testing services business in fiscal year 2017. On Slide 13 of our presentation, is a list of some of our overall growth strategies. We have made some strong progress on this fronts, being first quarter 2017 with a successful conversion and the delivery of the qualification exam for housing and urban and rural construction fill the professions for Sichuan and the Ningxia province as well as the other more recent new clients wings that Shelly touched on. We continue to have a positive outlook of fiscal year 2017, particularly given the strong first quarter 2017 results, ATA was able to achieve. One was a [indiscernible] ACS exam in calendar year 2016 to 2017to the helps and the impact on our business during the period and we continue to have impact on the remaining quarters of this fiscal year. We are confident that our new business efforts will offset the majority, if not all of any negative impact. We believe that by leveraging our increased brand recognition following ATA Online’s [New Third Board] (Ph) listing reputable organizations will increase recognize ATA as a number one provider of advance testing technologies in China, which we are [indiscernible] to increased our continues new business pipeline. Over the course of the past few months, ATA Inc. and ATA Online have made strategy investments in a number of [indiscernible] educating companies. We believe, we will help accelerating growth of our core testing service business. We recently announced ATA strategic investments in online English language education and company in China. This investment allows that to continue exploring growth opportunities in China’s online education market. As our company take advantage of [indiscernible] expertise in content accretion and adopts learning technology focusing on online English language education. In addition to [indiscernible], ATA increased its investments in [indiscernible] that provide of ACS exam related technologies and services in China in handed [indiscernible] products. We believe these additional investments will be advantages in ATA’s efforts to brief into the international’s target market. We also allows that ATA strategy investments applied skill education and technology of corporation limited a channel based education technology company focused on academic solutions and [indiscernible] for higher education communities. With this investment ATA expect to work closely with applied skill management team to further develop this platform and business relationships and to benefit from [indiscernible] expertise in education technologies, data analysis, data mining, and information sourcing and the matching. Continuing its expansion into the K-12 and other online education, ATA also made a strategic investments in Empower Education Online, LLC. that operates its self-developmental leading with [indiscernible] platform in China. We expect this investments will provide ATA with increased access to various types of students and enhance the [indiscernible] exposure to this audience to take assessment exams administrated by ATA which will prove measurable to ATA’s core testing services business over a long-term. Our subsidiary ATA Online made strategy investment into education companies. The first is Medicine Education Technology Limited, China based online education, technology company focused on training in the exam preparation for the sectors of magazine, fancy, and healthcare. Most of the recently we announced that ATA online have made a straight investment in Beijing, Fuhua, Kuitun Education Technology Corporation Limited, which expects to calibrate with the Open University of China on equal and non-degree education programs. ATA continues to explore growth opportunities in the K-12 education assessment and the concrete of the improvement sectors by leveraging the core campaigners core competence in advanced [indiscernible] technology and testing technologies. With our key investors, apprised for our efforts here. We continue to work on the provisionally announced private placements for our subsidiary ATA online and we will keep the investment that is priced for any developments in this area as we move forward.

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

Thanks again to all of you for joining us. If anyone has questions for us please feel free to reach out directly to us on our investor relations firm Equity Group. We look forward to speaking with you all again during our second quarter 2017 fiscal financial results call. As always, we welcome anyway to our office in Beijing. Thank you.

Thank you. Ladies and gentlemen that concludes your conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.