ATA Creativity Global (AACG) Q3 2017 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the ATA Inc. Fiscal 2017 Third Quarter Financial Results Conference Call hosted by Katherine Yao of the Equity Group. My name is Sheila and I’m your operator for today’s call. During the presentation, your lines will remain on listen-only. [Operator Instructions] I would like to advice all parties this conference is being recorded. I’d now like to hand over to Katherine. Please go ahead.

Thanks, Sheila, and good morning, everyone. Thank you for joining us. Copies of the press release announcing ATA’s fiscal 2017 third quarter results are available at IR section of the 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 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 were proven to be correct. Information about the risks associated with investing in ATA is included in its filings within the Securities and Exchange Commission, which we encourage you to review before making any investment decision. The company does not assume any obligations 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 the Slide #2 of the conference call presentation for further information. All U.S. dollar amounts in this conference call relating to the financial results for the company’s most recent quarter ended December 31, 2016, are converted from RMB using an exchange rate of 6.9430 RMB to US$1, the noon buying rate as of December 31, 2016. 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 Page 3. The management team members presenting this conference call are the company’s Chairman and Chief Executive Officer, Mr. Kevin Ma; the company’s interim CFO, Shelly Jiang; and the company’s Vice President, Mr. [indiscernible]. Mr. [indiscernible] joined ATA in August 2016 and he’s in-charge of portfolio management. Prior to his position at ATA, Mr. [indiscernible] served as Manager of the Management Consultancy Department in Deloitte Consulting and was the founder partner of ECO Capital [ph], a China based private equity firm which focuses on education area. Now I would like to take a moment to outline the format for today’s call. The company’s Interim CFO, Ms. Shelly Jiang will provide an overall of operational and financial highlights for the third quarter 2017, beginning with Slide 4. The company’s Chairman and CEO, MR. Kevin Ma will then discuss ATA’s outlook and growth strategy for fiscal 2017, before opening the floor for questions. With that, I will turn the call over to ATA’s Interim CFO, Ms. Shelly Jiang. Please go ahead, Shelly.

Thank you Sheila, and welcome everyone. Today, I will provide an overview of our operational and financial highlights and then briefly provide an update on our outlook for fiscal year 2017. I will begin on Slide 5, which lists some of our operating highlights for the third quarter. In the third quarter 2017, ATA delivered approximately 7 million billable exams, compared to 5.1 million in the same period of fiscal year 2016. This increase was driven by both public and private sector exams, as well as revenue contributions from the National Tax Adviser Occupational Qualification Exam or the CTA exam, which was previously held in the fiscal 2016 fourth quarter. On October 15 and October 16, 2016, we successfully delivered the National Unified Certified Public Accountant or CPA exam to about 2.2 million tests. This marks the fifth consecutive year that ATA has provided our services for the CPA exam and is a prime example of our leading capability in simultaneous massive scale computer-based testing delivery across China. On November 5, 2016, we also successfully delivered the National Tour Guide Qualification Examination for the first time across 32 provinces, municipalities and autonomous regions in China on behalf of the China National Tourism Administration. For the Fund Practitioner Certification Exam, we doubled growth in revenue during the quarter compared to the previous year. Moving to Slide 6, which lists our financial highlights for the third quarter 2017, ATA reported net revenues of RMB273.5 million for the period, a 23.5% increase from RMB221.4 million in the prior year period. This was driven by increased exam volumes from both new and existing exams, such as, the Fund Practitioner Certification Exam, the CPA exam, the National Tour Guide Qualification Exam, and Qualification Exam for Housing and Urban-Rural Construction Field Professionals, and revenue contributions from the CTA exam held in third quarter 2017, which I just mentioned was held in fourth quarter 2016 in the prior fiscal year. Gross margin for third quarter 2017 was 50.8%, compared to 49.5% in the prior year period. The increase was primarily due to the change in revenue mix. The company also reported a 52.8% increase in net income attributable to ATA Inc. of RMB75.4 million, which compares to RMB49.4 million in the prior year period. Following a strong fiscal third quarter 2017, the company is reiterating its previously adjusted net revenues and non-GAAP net income attributable to ATA Inc. 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 third quarter 2017 by our businesses, which can be divided into two areas: testing services and online education services. Testing services accounted for about 94% of revenues in third quarter 2017. We have seen strong growth in our testing services for both traditional sector and HR Select and the TOEIC. On Slides 8 and 9, we provide a breakdown of the company’s financial results for third quarter 2017 and for the first nine months of 2017. As this information has 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 10, we provide a supplemental chart of quarterly numbers adjusted for share based compensation expenses and foreign currency exchange gains or losses. Excluding this item, adjusted net income attributable to ATA Inc. for third quarter 2017 was RMB76.5 million or US$11million compared to RMB51.4 million in the prior year period. Diluted earnings per ADS attributable to ATA Inc. during third quarter 2017 on a non-GAAP basis were RMB3.34 compared to RMB2.24 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 11. As of December 31, 2016, ATA cash and cash equivalents were about US$35.7 million, working capital was US$29.8 million, shareholder’s equity was US$63.7 million compared to US$38.4 million, US$38.1 and US$61.1 million at March 31, 2016. As shown on Slide 12, we expect fourth quarter 2017 net revenues will be in the range of RMB26 million to RMB31million. As previously announced, we expect fiscal year 2017 net revenues to be between RMB455 million and RMB475 million and non-GAAP net income attributable to ATA Inc.’s guidance to be between RMB nil and RMB10 million. The company is exploring growth opportunities in the K-12 education assessment and recruitment sectors during fiscal year 2017. In January 2017, the company successfully delivered the first formal services to the Tianjin Nankai Education Bureau. Kevin will provide more details in this regarding just a moment. Please keep in mind that this guidance is just on our own internal projections and we will continue to evaluate our projections on volume basis. With that, I’d 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, Shelly, and welcome, everyone. ATA achieved record results during the third quarter as we continued to maintain strong operations and the push for the new business development efforts that we believe we will result in ongoing [indiscernible] to fiscal year 2017. Expected a solid growth from government institutions, which Shelly mentioned, we also continued to see steady growth from our corporate clients. As our cooperation with large enterprise has grown as these clients increasingly rely on our quality services and the excellent reputation to data support their recruitment, internal recruiting and selection process. During third quarter 2017, we saw double-digit increase in revenue from the private sector, we continue to provide testing service to globally recognized companies, institutions and organizations, such as Huawei, China PEC, China Mobile and a number of commercial banks, including Bank of China, Industrial and Commercial Bank of China, Agricultural Bank of China, China Construction Bank and so on. We continue to actively pursue potential new business leads, including organizations that are prime candidates for converting paper-based exam to computer-based exams, so those are ongoing efforts. We have expanded our business by streaming cooperation with existing clients, while also welcoming new clients through our marketing initiatives and referrals. We are confident in the growth potential of our traditional testing service business as we see continued demand for our service across various industries. While we work to further expand testing service into other professions, ATA also continues to explore growth opportunities in education, such as K-12 and higher education and corporate recruitment sectors by leveraging our core competence in advanced psychometric knowledge and testing technologies. In the first week of January 2017, ATA was authorized by the Tianjin Nankai Education Bureau to execute its first formal education assessment for Grade 7 and Grade 10 students in the Nankai District of Tianjin, which carried about 7,000 students. This marks our first step in K-12 education assessment in public schools in China and our team continues to communicate with all levels of education services and institutions in different regions. In past years, ATA Inc. and its wholly-owned subsidiary ATA Online has made several strategic investments in a number of innovative education companies. Those investments have targeted different areas, including online English language education. The International studies market, service of academic solution and resources for higher education community. Online virtual custom platform provider and provider of data analytics and the HR recruitment process by SAAS. All of these investments are in line with our growth catalyst in the education and recruitment sectors. We continue to have a positive outlook on fiscal year 2017. We continue to grow our testing service business while further developing new business sectors, such as online education and the K-12 education assessment. We are dedicated to providing high-quality service to clients, while remaining observant of market trends, which is key to staying on top of opportunities related to our core business. With that, operator, let’s open it for questions.

Thank you. [Operator Instructions] And we do have a question from the line of Peter Halesworth of Heng Ren. Please go ahead, Peter.

Thank you and greetings management. Thank you for your results and shows some promise for the future. I just wanted to ask regarding Kevin’s comments regarding the mix of customers with an increasing number of what he said were larger enterprises, or corporates from the private sector bringing double-digit growth. Could you put an exact number on that? And then secondly, related to that, could you also give us some sense of what I would assume would be better profitability from these types of customers either on a per client basis, is there something that’s – now it gets to an ARPU, or is there a gross margin that would show that the private sector mix is more profitable than either the state sector or the exams for the big association, some color on that would be helpful? That’s my first question. Thank you.

Okay, thank you, Peter. Regarding the first question, we have the double-digit growth in the private sector. And the private sector’s total revenue is around 20% of the total revenues in Q3. And the revenue from the new customers, we need to now have the exam, the exact figures. But for the top five new customers, which generated revenues in Q3 is around RMB10 million. So I hope that will help you to understand. Regarding the second question, the gross margin generated from the private sector is a little bit higher than the government sector, but similar. That means their gross margin is around 50% not only in the Q3, but also for the whole year.

Okay. So just – so what is the private sector mix this increase in revenue, is it around the 50% gross margin? Is that correct?

Yes, yes, exactly.

Okay. And then my second question is just related to the capital allocation and the stock. So although we’ve seen a bump up in revenues in the – this quarter, which is promising, we’ve just seen basically stagnation in revenue growth and margins over the past five years and significant rise in the cost of revenues by about 30% in the past five years, and the returns ROE – return on investment at around a very average 6%. I was wondering if there was any – because of the strong cash flow generation, has there been any thought given to instituting a regular dividend? This might help investors be more patient and stay invested in the stock if they have this incentive for a regular return. We’ve seen other U.S. listed Chinese companies do this and it has stabilized their stock price and your stock price is down about 45% of its high in 2015. So I’m wondering if there’s any consideration being given to a regular dividend?

Thank you, Peter. The company is always considering to share the benefits with our shareholders, and we also have done the dividends in past years. So if we have the dividend plan, we will disclose it to the markets.

This should be under active consideration, because again, the stock has not performed well. And I think, investors would be more inclined to remain invested if they could see a fairly predictable and regular return from the stock. And I think, the company can easily provide that with its free cash flow generation. I think the last move in the stock was actually to that high point in 2015 was helped by the issuance of a dividend, which we’ve always seen won in the past seven years?

Yes, Peter. We definitely consider the dividend and we will discuss on the long-term.

Thank you. I’ll go back in the queue.

Thank you, Peter.

Thank you. And at this time, we have no more questions in the queue. [Operator Instructions] Okay, thank you. And the question comes from the line of Peter Halesworth again of Heng Ren. Please go ahead, Peter.

Sure. Well, I have the team on the line, just two quick questions. One is, what is the status of being listing of the ATA Online? And you if could give us an update on that please?

Regarding the private placement, we mentioned before, we haven’t finalized that up to now, and because we’re considering other options for better valuations. And since our business progresses well, and we believe we’re continuing to grow our business, the company’s valuation will increase, which also contribute to the interest of the shareholders eventually. So we are selecting our investors and from our valuation.

Okay. And then, is there any plans for a road show in the U.S.? We haven’t – I haven’t been informed of any road show recently. When was the last road show to the U.S. and when is the next one planned?

Yes. We do have the plan, and it will be in the March, or the early April.

Okay. And then lastly, and this is a question for more for Kevin, Shelly. Kevin, can you explain why Shelly is still the Interim CFO? Is that something by her own choice, or it just seems rather odd from a investor standpoint that someone to have an interim title for almost two years. And I’m wondering what is the situation if you could clear that up for us? Thank you.

[Interpreted] Peter, thanks for your suggestion. We’re still discussing this internally. Thank you for your suggestion.

No, it’s not a suggestion, Katherine, it’s a question if we can get an explanation of why there’s been an interim status for two years. Is there something to do with some needed type of registration, or some regulatory issue, or we just – that’s very rare you see an interim status on a – someone who is a one of the top executives for almost two years since May 2015, I believe?

Please allow me to translate, Kevin.

Thank you.

[Foreign Language]

[Foreign Language]

Definitely none of your concerns were a problem for Shelly to become the formal CFO. However, we do believe that this still a internal discussion for the company to please allow us to discuss and give us sometime to make this final decision.

Okay. So the decision is with Shelly, it’s not with the Board, or the Chairman, I just want to clarify that?

Could you please repeat, Peter, I don’t understand?

Yes, is the decision with Shelly, or is the decision with the Board?

Yes, Peter, the decision will be made by the Board.

Okay. And when will they make this decision, it’s been almost two years?

[Interpreted] Well, Kevin says like, the company and the Board hasn’t brought this up as a problem, as you mentioned. But now we’ll suggest that we’ll definitely look into this and have the internal discussion with the Board as well.

All right. It’s not that I think it’s a problem Katherine, but it’s just – it’s a signal that is in decision on the part of the company and it’s not a good signal to be sending to the market, or investors for someone to be an interim member of the executive team for over two years of a public company. It’s – it just needs to be clear?

Definitely, I agree with you, Peter, and I’ll pass on this to Kevin.

Okay. Thank you. I have no further questions. Have a great day, everyone. Thank you for your time.

Thank you.

Thank you. And I’d like to hand back to management for 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 the Equity Group will look forward to speaking with you, or again during our fiscal 2017 fourth quarter and year-end financial results call. As always, we welcome any visitors 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.