Business Context and Reporting Period
ATA Inc. (now ATA Creativity Global) filed its annual report on Form 20-F for the fiscal year ended March 31, 2015. The filing is prepared under U.S. GAAP and covers annual results rather than 2014 Q4 specifically. ATA provides computer-based testing, test preparation and training, career-oriented education, and related technology services primarily in China. Its ADSs trade on Nasdaq under ATAI, with each ADS representing two common shares.
Financial Performance and Position
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net revenues | RMB350.2 million | RMB384.7 million | Down 9.0% |
| Testing services revenue | RMB319.1 million | RMB358.8 million | Down 11.1% |
| Gross profit | RMB177.6 million | RMB196.2 million | Down 9.5% |
| Gross margin | 50.7% | 51.0% | Down 0.3 percentage points |
| Income from operations | RMB31.8 million | RMB42.5 million | Down 25.2% |
| Operating margin | 9.1% | 11.1% | Down 2.0 percentage points |
| Net income | RMB23.1 million | RMB27.3 million | Down 15.5% |
| Basic and diluted EPS | RMB0.49 | RMB0.59 | Down 16.9% |
| Operating cash flow | RMB45.9 million | RMB37.3 million | Up 22.8% |
At March 31, 2015, cash and cash equivalents were RMB240.3 million, compared with RMB311.9 million a year earlier. Accounts receivable, net, declined to RMB48.2 million from RMB68.4 million. Total assets were RMB455.2 million and total liabilities were RMB77.9 million. The company reported no outstanding debt, debt securities, contingent liabilities, mortgages or liens.
Net cash used in investing activities was RMB52.8 million, primarily reflecting capital expenditures and equity investments. Net cash used in financing activities was RMB63.7 million, principally due to the RMB58.3 million special cash dividend, equivalent to approximately US$9.5 million. Capital expenditures were RMB14.8 million. The company stated that cash and expected operating cash flow should meet anticipated working capital and capital expenditure needs for the next 12 months and foreseeable future.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of lower testing volumes, reduced TOEIC-related activity following the end of the exclusive ETS distribution arrangement, and lower revenue from certain government and industry exams.
- Billable tests delivered decreased to 8.77 million from 9.41 million.
- Testing services remained the core business, representing 91.1% of revenue, compared with 93.3% in FY2014. Test preparation and training revenue declined modestly to RMB5.7 million, while other revenue increased 27.7% to RMB25.4 million, partly due to rental income.
- Research and development expense increased 33.1% to RMB36.8 million, mainly due to consumer-market initiatives. General and administrative expense declined 9.6% to RMB64.8 million.
- FY2014 included a RMB12.0 million impairment charge related to the terminated exclusive TOEIC license; the FY2015 impairment charge was RMB0.3 million.
- Income tax expense declined to RMB9.6 million from RMB19.9 million, primarily because FY2014 included RMB11.3 million of withholding tax on a special dividend from ATA Testing.
- Cash declined despite positive operating cash flow because of the special dividend, share repurchases, increased investment spending and equity investments.
- ATA Online invested in online professional training provider Zhishang, K-12 education provider Master Mind, and SAT learning platform Satech. The company recognized RMB2.2 million of losses from equity-method investments.
- After year-end, in May 2015, ATA restructured its testing services business into ATA Online, terminated the prior VIE contractual arrangements, and made ATA Online a wholly owned subsidiary. ATA planned to seek a listing of ATA Online on China’s New Third Board, subject to regulatory approvals.
Outlook, Commentary, Risks and Unusual Items
Management did not provide specific revenue or earnings guidance. It expects testing services to remain the largest revenue source and believes demand may benefit from professional certification, computer-based testing adoption, and technology-enabled education. The company also intends to expand mobile testing, online education, corporate training and other newer offerings, but stated that these markets are relatively new and unpredictable.
- Customer concentration: SAC, CICPA and CBA accounted for 19.1%, 18.5% and 18.3% of FY2015 revenue, respectively. Government-controlled entities generated 70.3% of revenue, creating exposure to budgets, policies and payment timing.
- Contract and sponsor risk: Revenue depends on maintaining relationships with major test sponsors. The exclusive TOEIC arrangement ended in February 2014, and the ACT administration agreement was terminated effective August 31, 2014.
- Seasonality: Testing revenue is generally higher in the quarters ending June 30 and December 31 and lower in the quarters ending September 30 and March 31. Test timing can materially affect quarterly comparisons.
- Regulatory and China risks: Foreign-exchange restrictions, education and Internet-content rules, tax treatment, SAFE registration requirements, and possible changes in PRC policy may limit operations, fund transfers or dividend distributions.
- Liquidity and fund-transfer constraints: PRC subsidiaries had RMB26.4 million in statutory reserves restricted from distribution. Dividends from PRC subsidiaries may also be subject to 10% withholding tax.
- Technology and security: Breaches, technical failures, cheating, data loss or problems at independent authorized test centers could damage the company’s reputation and lead to claims or regulatory penalties.
- VIE and restructuring risk: Prior-year financial statements consolidated ATA Online as a VIE. Although the VIE arrangements were terminated after year-end and ATA Online became wholly owned, the proposed New Third Board listing remained subject to approvals and could dilute economic interests or increase complexity.
- Tax and investment contingencies: Several PRC subsidiaries’ preferential 15% HNTE tax treatment required renewal or confirmation. The company also had RMB58.3 million of PRC tax-loss carryforwards, with portions expiring between 2015 and 2020.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of March 31, 2015. Management reported effective disclosure controls and internal controls.
Important Facts for Investors to Verify
- Confirm that the requested 2014 Q4 analysis should instead use the fiscal year ended March 31, 2015, because the provided filing is an annual Form 20-F.
- Reconcile the decline in testing-services revenue with exam volumes, TOEIC contract restrictions, ACT termination and changes in major-client revenue.
- Assess the sustainability of the 50.7% gross margin and the 9.1% operating margin after the revenue decline and increased research and development spending.
- Verify cash availability at the parent and subsidiary levels, including PRC reserve restrictions, foreign-exchange controls and the effect of the special dividend.
- Monitor renewal of preferential HNTE tax treatment and potential withholding taxes on future distributions.
- Review the May 2015 ATA Online restructuring, termination of the VIE arrangements and status, terms and dilution implications of the proposed New Third Board listing.
- Evaluate customer concentration, receivable collection—particularly the SAC balance representing 44.9% of net accounts receivable—and dependence on government-controlled customers.
- Review the carrying values and performance of the Zhishang, Master Mind and Satech investments, including contractual provisions that could change ATA’s ownership interests.