ATA Inc. (NASDAQ:ATAI)
F2Q2014 Earnings Conference Call
November 8; 2013; 08:00 a.m. ET
Kevin Ma - Chairman
Benson Tsang - Chief Financial Officer
Carolyne Yu - Investor Relations, The Equity Group
Ella Ji - Oppenheimer & Co.
Greetings. Welcome to ATA’s, fiscal 2014, second quarter and six months financial results conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions).
It is my pleasure to introduce your host, Ms. Carolyne Yu of The Equity Group. Thank you. Ms. Yu. You may begin.
Thank you Crystal and good morning everyone. Thank you for joining us. Copies of the press release announcing ATA's fiscal 2014 second quarter results are available at the IR section of the company's website at www.ata.net.cn.
As part of this conference call, the company has an accompanying 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 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 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 and six months ended September 30, 2013, are converted from RMB using an exchange rate of RMB6.1179 to $1. 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 are 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 three.
The company's CFO, Mr. Benson Tsang will provide an overview of operational and financial highlights for the second quarter 2014 beginning with slide four. The company's Chairman, Mr. Kevin Ma will then discuss ATA’s outlook and growth strategy for the remainder of fiscal year 2014 before opening the floor up for questions.
With that, I'll turn the call over to ATA's CFO, Mr. Benson Tsang. Please go ahead, Benson.
Thank you Carolyne and good morning everyone. I would like to begin by providing an overview of our financial and operating highlights for second quarter 2014.
Slide five shows some operating highlights for second quarter 2014. During the period we delivered 1.7 million billable exams, up 21% from the 1.4 million exams ATA delivered in the prior year period.
We saw growth in volumes for the China Futures Association Exam and security guard exam, which were delivered in Shanghai and a few other provinces. However this was offset somewhat by challenges related to decreasing volumes of the Securities Association of China Exam.
We have discussed these challenges in prior quarters, but in spite of these headwinds we continue to move forward with innovative products and services that we feel can drive our business in the long term.
One example is our mobile testing system or MTS project. We successfully administered the Cambridge Junior English Exam in Hong Kong in July and August. We have also conducted successful trials of this exam in Beijing, Shanghai, Mexico and Spain.
Our cooperation with Cambridge thus far has been very positive and rewarding and we look forward to moving forward with this process over the next several months and eventually growing our business in this area.
We were pleased to have recently announced the closing of our acquisition of XingWei Institute Hong Kong Limited, a private education technology company that provides training solutions and online mobile training platforms for corporations in China. We believe that combining XingWei’s service offering with those of ATA will strengthen our value proposition to customers, especially those in the private sector.
On the right hand side of the presentation is a map of our extensive nationwide network of over 2,900 test centers, which enables ATA to deliver large-scale exams simultaneously and cost effectively for our clients. We believe we are the only provider of this kind of large scale testing solution in China.
Now I would like to discuss our financial highlights for the quarter on slide six. We achieved year-over-year improvement in gross margin, primarily due to lower CPA exam-related expenses, which were typically higher in prior year quarters to ensure the smooth delivery of the first computer based China CPA exam.
As a result of year-over-year growth in TOEIC and HR Select exams volumes, revenues from this business grew 11% from the prior year period to RMB14.5 million during the second quarter 2014, which had a positive impact on overall gross margin.
We were pleased to have exceeded consensus estimates on both the top and bottom lines for the quarter, which you can see on the next slide. Exam volumes and revenues for this exam were in line with our expectation for the period. We continue to be on track with our budget; as such the company is reiterating its net revenue and non-GAAP net income guidance for fiscal year 2014, which Kevin will expand upon later in the call.
On the next slide, we breakout revenues for the second quarter 2014 by our businesses, which can be broken down broadly into two areas; testing services and test preparation and training solutions. At 90.9%, our core segment of testing services was a significant percentage of our total revenue in the 2014-second quarter.
On the next slide we have provided a break down of the company’s financial results for the quarter. Gross profit increased about 2% to RMB22 million from RMB21.6 million in the prior year period. Gross margin for the second quarter 2014 improved to 48.7% from 46.1% in the prior year period. As I mentioned before, the increase in gross margin was primarily due to lower cost associated with the CPA exam and the increased revenue contributions from the private sector business.
Net loss improved to RMB4.3 million from a net loss of RMB9.1 million in the prior year. Diluted losses per ADS were RMB0.19 in second quarter 2014 compared to RMB0.42 in the prior year period.
You can see the full first half results on slide 10. Gross margin for first half 2014 was 51.1% compared to 50.6% in the prior year period. We reported net income of RMB5.1 million for the period and diluted loss per ADS of RMB0.22, compared to net loss of RMB3.8 million in the prior year period.
On slide 11 we provide a supplemental chart of quarterly numbers adjusted for share based compensation expense and foreign currency exchange gains and losses; I would like to highlight that.
Excluding these items, adjusted net loss for second quarter 2014 was RMB2.7 million, compared to RMB6.6 million in the prior year period. Diluted losses per ADS during the second quarter 2014 on a non-GAAP basis was RMB0.12 compared to RMB0.30 in the prior year period. Adjusted net income for first half 2014 increased 170% to RMB8.3 million from RMB3 million in the prior year period and diluted earnings per ADS on the non-GAAP basis was RMB0.36.
We continue to be supported by free cash flow and sold partnerships, which we have highlighted on slide 12. As of September 30, 2013 we had above $46.5 million in cash. We have no long-term debts or short-term borrowings and continue to follow the strict cost structure that has served us well over the past several years.
Finally, I would like to provide some projections for third quarter 2014. Based on existing exam schedules, we expect third quarter net revenues will be in the range of RMB180 million to RMB200 million. Please keep in mind that this guidance is based on our own internal growth 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 Mr. Kevin Ma, to provide some more detail on our outlook for third quarter 2014 and fiscal year 2014.
Thank you Benson. We were pleased with the continued growth in TOEIC and HR Select in the second quarter 2014, as well as the increased exam volumes and the revenue contributions from the security guard exams.
As Benson mentioned earlier, our fiscals two quarter is our busiest time of the year. Last month we successfully delivered (ph) 2013 CPA exam, which is only the second time this exam has been delivered via a technology-based platform. ATA is very pleased to have been chosen as a complete service provider of this exam for the second year in a row and we delivered a record 1.52 million exams in late October, an approximately 13% increase over the prior year exam.
We’re also anticipating increase in volumes for the China Banking Association exam and many projects related to the campus recruitment during the third quarter 2014. China’s increasingly competitive job and landscape reports, ATA is in a unique portion to help employers hire their most suitable job candidates and to help the job candidates to find a long term sustainable employment. With the recent Xing Wei acquisition we believe combining ATA’s trusted (inaudible) with Xing Wei training platform will be a key growth driver for potential business, especially in the product sector.
Side 15 shows our annual guidance for fiscal year 2014, where we are entering the fiscal year 2014 guidance provided in May and expect the net revenues to be between RMB403 million and RMB423 million and the non-GAAP net income to be between RMB37 million and RMB47 million.
Before I move on to our growth strategies, I will like to say a few words regarding the newest member of our senior management team, ATA’s new CEO Mr. Cheng-Yaw Sun. Our team at ATA feels very fortunate to be working with someone of Cheng-Yaw’s cadre and we were extremely pleased that he agreed to join our company.
We believe that his big ground ideas and vision scenario is what we are trying to accomplish at ATA. And Chen Yaw has been working with our team in earnest to familiarize himself with our company. I personally look forward to cover (ph) ATA with Cheng-Yaw in the future and I’m excited about what we can achieve as a group.
Now moving on to slide 16, where we list our growth initiatives. We continue working on making a smooth transition following ATA acquisition of Xing Wei and accept that Xing Wei’s online and mobile training platforms will have a positive impact on growing our new and existing client relationship in the future, especially when combined with TOEIC and HR Select efforts for the private sector.
Diversifying the company’s revenue mix between the public and the private sectors continues to be a primary focus for our team and we believe that Xing Wei’s acquisition will help us make greater strides toward this goal as a majority of the exams continue to be hand test, but still there are many opportunities for ATA to transition exams to our more cost efficient and security driven format.
Being chosen to administer the highly regarded CPA exam was a major milestone for ATA in the fiscal year 2013 and that we continue working to secure more contracts like it.
We are very pleased with the progress we made with MTS and our relations with Cambridge English during the second quarter 2014. We successfully have been administering the Cambridge English Junior Exam in Hong Kong in July and August and have conductive trials in Beijing, Shanghai, Mexico and Spain. We expect to continue working with Cambridge English and officially roll out the new technology based English Junior Exam in those cities by end of 2013.
The MTS technology has opened the doors for ATA outside of China and we are working harder to prove the technologies, the courage and the reliability over the next few months. So to round it all, we are mindful of our financial position and continue to focus on generating excess cash flow to fund our future growth.
With that operator, let’s open it up for any questions.
(Operator Instructions). Our first question comes from the line of Ms. Ella Ji. Please proceed ma’am.
Ella Ji - Oppenheimer & Co.
Thank you for taking my questions and congratulations on a strong quarter. My first question is with regard to your Xing Wei acquisition. I’m wondering if management can talk about, with this acquisition if there is going to be any changes in the business direction in ATA and also with the acquisition, how do you think that Xing Wei will help with your existing business here. Thank you.
Thank you for the question Ella. Regarding the acquisition, ATA acquired Xing Wei with strong belief in Xing Wei’s current presence in the pipe etcetera is an asset. We believe by acquiring Xing Wei we can combine its current business into ATA and we can benefit both companies and at the current plan, we believe we can actually make use of the content and the platform from both companies and we can serve our private corporation clients better. So in the near future we anticipate our private sector business will benefit from it.
In the longer term as we just finished the acquisition with Xing Wei, currently ATA, our Chairman Mr. Xiaofeng Ma and the senior management team together with Mr. Sun, we are exploring and discussing the new direction moving forward and we will be ready to share with everybody in Q3.
Ella Ji - Oppenheimer & Co.
Good. I’m looking forward to that. Also Benson I wonder if you can talk about if you’re going to acquire any major integration costs in the rest of the year. I did notice that you mentioned the full year met revenue in the income guidance, but just wondering if we should anticipate any material costs coming from this integration.
For this acquisition, the consideration for the acquisition was approximately $3.2 million U.S. and in terms of other related acquisition costs, it’s very limited. It’s only in the range of $100,000 and as far as the integration, we do not anticipate the company will incur additional expenses or additional significant expenses in the integration process.
Ella Ji - Oppenheimer & Co.
Good. And then talking about Cambridge, your new program, it’s great to see that you have achieved some initial success with your MTS this term. I wonder if you can also talk about when do you anticipate Cambridge, the young to start contributing material revenues for the company and can you provide us if there is any seasonality in this test and also your anticipated amount in levels. Thank you.
Sure Ella. Mr. Ma just now mentioned about the status. We finished trial tests for Cambridge in Hong Kong, Spain and Mexico mainly and according to the feedback on Cambridge and their local partners, they are very happy with the result, both the technology and the way we monitor the test remotely from Shanghai.
The feedback we got from Cambridge, they fully intend to rollout official tests starting calendar year Q4, which Mr. Ma mentioned we anticipate by the end of 2013 we will conclude a conversion contract of Cambridge and we’ll start rolling out in those three cities and country I just mentioned, which is Hong Kong, Spain and Mexico. We will also start some trial tests for Argentina in November and there will be other countries we will roll out the trial test for Cambridge in accordance with Cambridge schedule.
In terms of the seasonality, we do not anticipate there will be significant seasonality impact on this particular test and we understand for Cambridge, this English program is offered to students throughout the year and the students, once they finish the course they will take the test immediately. So we do not anticipate seasonality to impact this particular test.
Ella Ji - Oppenheimer & Co.
Yes, and also Benson can you talk about your anticipated margin (inaudible) project there?
Sure. This particular product or this MTS project, the main cost to this project is the R&D cost, which you have already incurred. So going forward we anticipate this particular MTS project, that the margin will be north of 85%.
Ella Ji - Oppenheimer & Co.
Great. And then switching gears to TOEIC and HR Select, I noticed the growth rate for this quarter sort of slowed from our last quarter. I did know that this quarter is slow even for you. So can you talk about your anticipated growth rate for the rest of the year?
Sure. We anticipate on a full year basis. Our private sector which include TOEIC and HR Select, we anticipate we’ll achieve a 25% growth. In Q2 we believe it’s a timing issue, because of some application time. Managed students are taking times off and also even people in the private sector or in the job markets. So Q1 we achieved over 30% growth and Q2 we achieved about 11%. So overall in the first half we achieved 25% and for Q3 and Q4 we anticipate we can also maintain a growth of 25%.
Ella Ji - Oppenheimer & Co.
Great. And last question from me, so you still have more than 46 million of cash on your balance sheet. Can you talk about your use of cash? You made some acquisitions, but other than this will you consider like a dividend. Any thoughts would be helpful?
Sure. At the current moment we do not have any dividend plans. In fact ATA believe we are in a year where we’ll consider seriously how to expand the business. Particularly now we have a new project MPS and we see if its a novelty proven and its effective by Cambridge, we see there is a lot of potential we can write on this technology and go overseas.
And also with this technology we also believe we have good opportunities within China. We can make use of this technology and grow business in the private sector. So until we work with our new CEO and also Kevin to work out the new direction, we will retain the cash and through some thought a new plan may come out, which we believe we’ll have ready and share with you in Q3.
Ella Ji - Oppenheimer & Co.
Great. That’s all my questions. I will get back to the queue. Thank you.
Thanks again to all of you for joining us. We are looking forward to speaking with you again during our third quarter 2014 financial results call in February. As always your welcome, any visitors to our office in Beijing. Thank you.
Ladies and gentlemen, that ends our presentation for today. You may now disconnect. Have a great day.
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