ATA Creativity Global
Q3 2014 Earnings Call Transcript

Published: 25 Feb 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the ATA, Inc. F3Q 2014 and Nine-Months Financial Results Conference Call. My name is Michelle and I’ll be the operator for today. (Operator instructions.) As a reminder, this conference is being recorded. It’s my pleasure now to turn the call over to your host for today, Ms. Carolyne Sohn of The Equity Group. Please proceed.

[Carolyne Sohn:]

Thank you, Michelle, and good morning everyone. Thank you for joining us. Copies of the press release announcing ATA’s F3Q 2014 results are available on the IR section of the company’s website at www.ata.net.cn. As a part of this conference call the company has been having a copy of the slide presentation on the company’s website. You’re 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 the 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 these 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 US dollar amounts in this conference call related to financial results for the company’s most recent quarter and nine months ended December 31, 2013, are converted from RMB using an exchange rate of RMB 6.0537 to $1.00 US. 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 CEO, Mr. Cheng-Yaw Sun will provide an overview of operational highlights for F3Q 2014 beginning with Slide 4, and Mr. Benson Tsang will follow with an overview of financial highlights for the period. The company’s Chairman, Mr. Kevin Ma, will then discuss ATA’s outlook and growth strategy for the remainder of F2014 before opening the floor for questions. With that I’ll turn the call over to ATA’s CEO, Mr. Cheng-Yaw Sun. Please go ahead, Mr. Sun.

[Cheng-Yaw Sun:]

Thank you, Carolyne, and good morning. I would like to begin on Slide 5 which lists some of our operating highlights for F3Q 2014. During the period we did report 4.2 million billable exams which is about the same number of billable exams ATA established in the prior-year period. Among these exams was the National Unified Certified Public Accountants Exam or CPA Exams which we successfully administered with ATA’s computer-based platform for the second consecutive year. Over 1.5 million exams were delivered throughout China. [Of these], 1.4 million exams were in (inaudible). We continued our effort to grow our base of corporate clients in HR Select and increased our reported growth 70% in volume during F3Q 2014 to 790,000 exams, most of which were for key clients such as Agricultural Bank of China, China Construction Bank, and Bank of China. We also signed new HR Select clients such as Shanghai Rural Commercial Bank and JiangSu Rural Credit Union. With regards to TOEIC we recently announced the termination of ATA’s exclusive distributor contracts with ETS for these exams effective the end of this month. However, we continue to be in active discussions with ETS to explore the possibility of TOEIC and other potential business opportunities. Using our new mobile testing system, or MTS, we successfully administered the Cambridge Junior English Exams in Mexico, Spain, and Argentina in November. We made significant progress in the integration of Xing Wei’s staff and services into ATA, furthering their position late in our year. And I’m pleased to say that it was a smooth integration. On the right-hand side of the presentation is the map of our established nationwide network of over 3,000 test centers which enable ATA to deliver larger-scale exams simultaneously and cost-effectively for our clients. (Inaudible), we are the only provider of this kind of larger-scale testing solution in China, and this on such a strong base. I’m now working closely with members of senior management team, focusing our ATA growth strategies for the next three years. Now I would like to turn the floor over to Benson for the review of our financials.

[Benson Tsang:]

Thank you, Cheng-Yaw. As shown on Slide 7 we achieved year-over-year improvement in gross margin primarily due to increased revenue contributions from our HR Select business as well as a decrease in average monitoring costs from the prior-year quarter. During F3Q 2014, revenues from the private sector business increased about 31% to RMB 58 million primarily as a result of significant growth in HR Select exam volumes which had a positive impact on gross margin. Due to the termination of the exclusive TOEIC distributor contract with ETS, revenue contributions from TOEIC decreased about 25% during the period; and we expect this will have an impact on our TOEIC revenues in F4Q 2014 as well. While we are very pleased to have achieved healthy growth in our private sector business during F3Q 2014 we are revising our net revenue and non-GAAP net income guidance for F2014 due to delays in contract negotiations, changes in timing of client services’ needs, and the termination of our exclusive TOEIC distributor contract with ETC. Kevin will expand upon our updated guidance later on during the call. On the next slide we break out revenues for F3Q 2014 by our businesses, which can be broken down broadly into two areas

[Kevin Ma:]

Thank you, Benson. We were pleased with the measurable growth in our HR Select business during F3Q 2014 as we reported the successful delivery of a record number of CPA exams last October. Our F3Q 2014 was however impacted by the royalty fee write-off resulting from the termination of our exclusive distribution contract with ETS for TOEIC as well as increased operating expense related to the integration of Xing Wei. As Cheng-Yaw mentioned earlier, we are presently engaged in active discussions with ETS to explore the possibility of TOEIC remaining or of ETS exam title offerings as well as other potential business opportunities. Slide 15 shows our annual guidance for F2014. As Benson mentioned earlier, we are revising our F2014 net revenue and non-GAAP net income. This is largely due to delays in contract negotiations, changes in timing of client services’ needs and the termination of the exclusive TOEIC distribution contracts. We now expect net revenues to be between RMB 370 million and RMB 380 million; and our GAAP net income guidance to be between RMB 37 million and RMB 42 million. [Slide 16] lists our set of growth initiatives. We are pleased with the smooth transition of Xing Wei service offerings and personnel following the acquisition and expect to introduce additional online and mobile training platforms where it has a positive impact on our efforts to grow both new and existing client relationships in the future – especially for the HR Select. ATA will [advance focus on diversifying] the company’s revenue mix between the public and the private sectors, and we continue working towards this goal. Many exams in China continue to be administered via the traditional paper and pencil format. We believe there continue to be many opportunities for ATA to transition larger-scale exams to our significantly more cost-efficient and secure, technology-driven formats. Choosing to administer the highly-regarded CPA Exam was a major milestone for ATA in F2013 and we continue to work to secure more contracts like it. Following a series of trial exams we were most pleased with the most (inaudible) successful administration of Cambridge English Junior Exam in Mexico, Spain, and Argentina. We have received positive feedback from Cambridge English on ATA’s technology and we are optimistic that our efforts will lead to a long-term relationship with this recognized and respected organization. We believe the MTS provides ATA with a significant opportunity to expand its presence in the global testing marketplace. Lastly, we remain cognizant of our financial position and we continue working to generate cash flow to fund our future growth. With that, Operator, let’s open it up for any questions.

[Operator:]

Ladies and gentlemen, you have now reached your question-and-answer session. (Operator instructions.) There are no questions waiting in the queue. We have no questions waiting.

[Cheng-Yaw Son:]

Thanks again to all of you for joining us. We look forward to speaking with you again during the F4Q 2014 Financial Results Conference Call. As always, we welcome any visitors to our office in Beijing. Thank you.

[Operator:]

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