ATA Creativity Global (ATA Inc.) — FY2014 Form 20-F Summary
Business context and reporting period
ATA Inc. provides computer-based testing, test preparation and training, employee assessment, test content, and related education services primarily in China. The filing is an annual report for the fiscal year ended March 31, 2014, prepared under U.S. GAAP. The company’s ADSs trade on Nasdaq under “ATAI,” with each ADS representing two common shares.
- Testing services accounted for 93.3% of FY2014 revenue.
- The company delivered 9.7 million tests, including 9.4 million billable tests, versus 8.7 million billable tests in FY2013.
- The authorized test-center network totaled 3,048 locations as of March 31, 2014.
- ATA consolidated ATA Online, a PRC variable interest entity, through contractual arrangements rather than equity ownership.
Financial performance and key metrics
| RMB millions, except percentages | FY2013 | FY2014 | Change |
|---|---|---|---|
| Net revenue | 366.7 | 384.7 | +4.9% |
| Testing services revenue | 335.8 | 358.8 | +6.9% |
| Test preparation and training revenue | 11.3 | 5.9 | -47.6% |
| Other revenue | 19.5 | 19.9 | +1.7% |
| Gross profit | 177.8 | 196.2 | +10.3% |
| Gross margin | 48.5% | 51.0% | +2.5 percentage points |
| Operating income | 27.0 | 41.4 | +53.2% |
| Operating margin | 7.3% | 10.8% | +3.5 percentage points |
| Net income | 23.2 | 27.3 | +17.5% |
| Net margin | 6.3% | 7.1% | +0.8 percentage points |
| Net cash from operating activities | 67.8 | 37.3 | -44.9% |
FY2014 revenue was RMB384.7 million, equivalent to US$61.9 million using the filing’s translation rate. Gross profit was RMB196.2 million and net income was RMB27.3 million, or US$4.4 million. Basic and diluted earnings were RMB0.59 per common share and RMB1.18 per ADS.
- Cash and cash equivalents increased to RMB311.9 million, or US$50.2 million, from RMB290.0 million at March 31, 2013. Restricted cash was RMB2.7 million.
- Total current assets were RMB398.1 million and total current liabilities were RMB77.1 million, implying substantial reported current liquidity.
- Accounts receivable, net, increased to RMB68.4 million from RMB51.1 million.
- Total liabilities declined to RMB79.3 million from RMB82.3 million. The company reported no outstanding debt, debt securities, contingent liabilities, mortgages, or liens.
- Shareholders’ equity increased to RMB411.9 million from RMB375.5 million.
- Capital expenditures were RMB4.2 million. Investing cash outflows of RMB14.0 million primarily reflected the Xing Wei acquisition.
- Operating lease obligations totaled RMB67.9 million, including RMB13.1 million due within one year.
Material changes versus the prior comparable period
- Testing revenue increased due to growth in TOEIC and HR Select, higher CICPA and China Banking Association exam volumes, and increased National Security Guard Exam revenue.
- Revenue from the Securities Association of China and China Futures Association declined as certification demand weakened; the Financial Planning Standards Board began conducting the AFP examination internally; and the Asset Management Association of China delayed its annual fund exam.
- Test preparation and training revenue fell sharply because SAC moved its online training program toward internal operation. ATA stated that it did not expect further SAC test-preparation revenue.
- Gross margin improved primarily because of lower average test-monitoring costs and RMB3.4 million of revenue recognition related to Microsoft’s use of ATA’s Dynamic Simulation Technology.
- Research and development expense rose 26.7% to RMB27.7 million as the company expanded development of its Mobile Testing Service platform. Sales and marketing expense declined 4.3% following sales headcount reductions, branch restructuring, and the cessation of TOEIC promotional activity.
- Operating expenses included a RMB12.0 million impairment of intangible assets, principally the TOEIC license, following termination of ATA’s exclusive TOEIC distributorship agreement with ETS.
- Income tax expense increased to RMB19.9 million from RMB7.0 million, mainly because ATA Testing distributed RMB113.0 million and incurred RMB11.3 million of PRC withholding tax.
- Net operating cash flow fell to RMB37.3 million from RMB67.8 million, partly because of higher cash payments for payroll and operating costs and an increase in accounts receivable.
- ATA acquired Xing Wei in October 2013 for RMB19.6 million in cash. Xing Wei contributed RMB0.3 million of revenue and a RMB1.7 million net loss after acquisition; the transaction added RMB7.6 million of goodwill.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide quantitative revenue or earnings guidance. Management stated that current cash and expected operating cash flows should be sufficient for working capital and capital expenditures for the next 12 months and the foreseeable future, while noting that acquisitions, changed business conditions, or other developments could require additional financing.
- Management expects testing services to remain the largest revenue source and intends to expand MTS, HR Select, Cambridge-related services, and corporate training through Xing Wei.
- ATA plans to gradually exit traditional career-oriented education delivered through IT and vocational schools and shift toward soft-skills and career-oriented training for corporate employees.
- ATA’s exclusive TOEIC distributorship ended February 28, 2014. A non-exclusive agreement signed June 23, 2014 covers selected institutional clients through December 31, 2016, but management expected to lose a majority of TOEIC-related revenue in FY2015.
- ACT notified ATA that an administration addendum would terminate effective August 31, 2014; the parties were discussing a relationship focused on workforce solutions and marketing services.
- Revenue is seasonal: quarters ending June 30 and December 31 are typically stronger, while quarters ending September 30 and March 31 are typically weaker. FY2014 quarterly revenue ranged from RMB45.1 million in the September quarter to RMB188.9 million in the December quarter.
- Revenue concentration is significant. CBA, SAC, and CICPA represented 17.6%, 16.7%, and 16.0% of FY2014 revenue, respectively; the five largest testing clients represented 61.0%. Government-controlled entities generated 65.1% of FY2014 revenue.
- Key risks include dependence on major test sponsors and government budgets, client payment delays, competition, technology failures or data-security breaches, loss of licensing or distribution relationships, PRC regulatory changes, foreign-exchange restrictions, and limited enforceability of the VIE structure.
- The company relies on contractual arrangements with ATA Online, which holds the ICP license and certain operating assets. If the arrangements are invalidated or unenforceable, ATA may lose control of ATA Online and reported assets, revenue, income, and cash flows could be materially lower.
- ATA’s management and KPMG concluded that internal control over financial reporting was effective as of March 31, 2014, and KPMG issued unqualified audit opinions.
- A special cash dividend of US$0.205 per common share, or US$0.41 per ADS, was declared on May 30, 2014, with an expected aggregate payment of approximately US$10 million around July 31, 2014.
Most important facts for an investor to verify
- Whether TOEIC revenue declines and the ACT termination materially affect FY2015 revenue and margins.
- Retention, pricing, payment status, and renewal terms for the CBA, SAC, CICPA, and other concentrated government-related customers.
- Whether the Xing Wei acquisition produces the expected revenue growth and synergies without additional impairment.
- Conversion of reported cash into usable offshore liquidity, including PRC dividend, tax, foreign-exchange, and statutory-reserve restrictions.
- The enforceability and continuing regulatory compliance of the ATA Online VIE agreements.
- Whether the FY2014 decline in operating cash flow and increase in receivables represent temporary timing effects or a persistent working-capital issue.
- The effect of the RMB113.0 million dividend, related RMB11.3 million withholding tax, and the subsequent US$10 million special dividend on parent-company liquidity.
- Future tax rates, including the expiration or renewal of preferential HNTE treatment and potential withholding taxes on PRC subsidiary distributions.