Q2 2020 Arco Platform Ltd Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcome to the platform second quarter 2020 earnings call.
Time, all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during the session you'll need to press star one on your telephone.
<unk> program May be recorded I would now like to introduce your host for today's program Berchtold, a true because I our director. Please go ahead.
Thank you I'm pleased to welcome you to Arkansas support its probably 20 conference call with me on the call today, we have our could feel how did you saw a couple of country.
Yeah.
The truth.
During today's presentation or exactly will make forward looking.
When looking statements Jodi relate to future events <unk> future financial operating performance evil known and unknown.
Certainly and other factors that may cause actual results to differ materially from those compensated by these forward looking statement.
Statements made his presentation include but are not limited to make statements related to all the pieces and financial performance expectations in guidance for future periods.
Expectations regarding outstripping called to each other and they're really the benefit.
Issues regarding the Mark.
These risks, including those set forth. The press release issued earlier today, it's always those more fully described never filings with the Securities Exchange Commission.
Looking to determine if that decision based on the information available to us it's up to date here.
You should not rely on them as predictions of future, saying, Hey, we disclaim any obligation to update any forward looking statements, except as required by law.
They shouldnt management be reference normally afforded finish measures on this call.
No I got from financial measures and send it to be considered in isolation sports as a substitute for results prepared in accordance with.
We have provided a reconciliation of these known for its financial results. The most directly comparable I apologize furniture measured in overcapacity.
I'll now turn the call over to how did you saw a couple of Kucinich articles field.
Thanks for Battle and thanks, everyone for joining our COO second quarter, two told him 20 conference call.
Got you any families are all healthy insights.
I would like to talk is called <unk>. Thank you the efforts of our team who have been dedicated an enormous amount of energy to serve our partner schools and real true or mission of being the basketball one stop shop Faulkner talk like.
During today's call you like to discuss plus topics.
First.
Recap on our quality recognition around.
Brazil over 15 years education experience and big you're behind our industry leading growth rates.
Second an update about our new go to market strategy.
We have been achieving significant results with it.
Third our financial results, which have been once again in line with all expectations.
For an update regarding the integration of 42.
We completed the corporate reorganization and now start amortizing the goodwill for clinical benefits.
Lastly, I like to talk about PQI, which is a very successful outcome from our strategy to that in early stage.
Companies.
We'll continue to invest in such companies has ended and he continues to be any fortune peeler or growth strategy and we're excited about.
Moving to lighten number four and to go over the first topic on todays agenda.
Like you discuss why we are confident that well continue to lead the beat in Brazil.
In this industry the ability to attract new partner schools is directly related to reputation Brent equity and consistency ops <unk> clinical results over the years.
This is not always a result, so cooked in a customer oriented culture, but also.
Our quality leadership track record and brand reputation.
And by the academic results generated by our proprietary methodology, which had been evolving over the years as a result batsmen quality and content.
Our breakthrough technology, driven portfolio of services and innovative Uni, which has allowed us to be a healthy competition in terms of developing its fully integrated educational platform and anticipate industry needs such as the adoption of supplemental solutions by school.
He was possible because of all our let's focus on creating value generating returns focused on the long term.
In an extremely powerful distribution network composed by over 5000 schools and 1.3 needed students.
The combination ops people with trust work the long lasting relationships with our clients creates a phenomenal that you weren't lost to continue to offer new products and services smaller schools.
Mm three pillars are not stuff with overnight become from over 50 years of excuse me education. So your focus on quality and disease.
In Brazil effort, it's shown in slide number five.
Another your school GP dollar solutions are listed them on the bad the country and like last years, we'd have to sports Bachmann schools ranks the top 10, Brazil nationally.
This is a remarkable result and shows the strength of more product across the country to position Arclight schools, that's top schools country like not only easier seats.
We also have the highest marketshare on top 10 schools at the end <unk> exam.
Its presence in 24 states out of the 27.
Well over our students achieve on average scores 15 personal how you're going to competition.
It's bureaucratic results are possible, because we haven't customer centric approach.
Sure our students will receive the most up to date and engaging content our experience in house editorial team updates and proven solution every single year and throughout the school year, because we've had segregated teams for Brent you took the teams is equal to quickly customer feedback.
Back and make sure implement those change while maintaining the Brent identity.
And it's bad each brand also has its own technology team focus and bringing new features that enhance because they make performance of our partners.
As a consequence transport students' lives.
Our technologies only meaningful because it's about who we integrated with our content and improve every year well back and data generated by the users.
Our in house team is well training process.
Pardon team you were able to develop into several new features such as integration with third party platforms podcasting like you environment.
Further expand our online assessment slot for.
As we just nation quality brand equity can be deepens, our crude fuel to succeed and it takes time to deal with no shortcuts.
Our success as shown by increasing market share and industry, leading patron rates came from more consistent and intense but people content and technology over the last years pretty knocking that's true competitive position as our value proposition becomes stronger 12 schools.
Now I'd like to do like number eight to talk about our new go to market strategy.
As we nation. Indeed Freedoms conference call you start internal project to redesign or go to market strategy as a way to boost the group of patients by beat Moglia, our remote Saudi process, and bringing our digital marketing through a new level.
Like implemented to change Bulls and forgive between our sales force we were able to.
Significantly we believe he leads generation with more than twice acquisition costs.
We designed to go to market strategy in order to come to can we read both negotiation so use 40 process.
More customized Walgreens reality.
Improved the lead quality have currently 400 leads nor solutions on a trial version.
Hi level customer satisfaction.
We are confident that these changes will be valued lots not only doing just fine wildly remote seems model you did also <unk> upcoming years, we'd be acceleration off the digital transformation each school.
With that I'll turn to called about who will discuss the funding issues lead W.
Thank you I'd.
We can now guarantees like number nine.
Where we are pleased to discuss our second quarter performance.
Before we dig into the numbers. Please note that except for revenue gross margin selling expenses DNA in cash flow for operations all financial measures I discuss your ordinarily pantheris and growth rates for compare to the prior year compare.
Beard, unless otherwise stated.
We also know that year over year comparisons are affected by acquisition that were not included in our 2019 financials.
Now I will go over financial highlights.
Then give more details about our margins and free cash flow and finally provide guidance for me CB recognition for the third water.
Tom to any and EBITDA margin for the 2020 P. school year.
Floors reviewing our numbers.
Net revenue for the second quarter, 2020, well 234.9 million reside.
Which represented 23% update 2028.
The revenue recognition Mayberry waters with no in fact, the do it away CB and.
And this happens due to product mix.
Mistakes and our customers decision when she will be content.
As mentioned in our financial statement.
Given the quinine schools change the skadden awfully cold in the leader.
Then eventually we do recognize revenues related to digital joining HCV during the fourth quarter. This year.
Net revenue for divorce, how 2021.
496.4 million we ice.
Versus 254.6 million re guide this debuted last year.
Yes marketing was 81.6%.
For the second quarter versus 81.2% for the same period.
2019.
And it's in line with our Startco trend.
He did worse than last or our gross margin was 77.8% down 349 bips year over year.
Like the different revenue recognition seasonality, among our brands as compared to previous year.
Selling expenses for the second quarter of 2020 was 88.1 billion resides.
124% compared to 39.3 million realized for the second quarter of 2019.
The higher year over year selling expenses, we like I wouldn't that now we're saying.
Including hunters and farmers.
The massport to walk through continued support to our partner schools and expand our matter work of clients.
The sequential quarter over quarter, increasing selling expenses easy gauge our investment the new go to marketing strategy in order to boost the 2021, well put things you given the new opportunities that are rising from their environment.
Keep in mind that you'd be in our very high.
I said that you've got they show.
Those are investments with very high returns to our common.
Jimmy expenses.
60.1 billion resides.
Compared to 44.9 need and realized for the second quarter of 2019.
In both numbers include non recurring expenses.
Adjusting for share based compensation in 2019, and she doesn't do many and M&A in order one don't expenses and she doesn't do any she and they would have been studying age we didn't we I the second quarter she deleverage Wendy.
Why was the worst water off this year.
Adjusted EBITDA was.
100.6 million rewinds toward the second quarter 2020.
64% year over year.
We are on track to achieve adjusted EBITDA margin of 35.5% to 37.5%.
In 2020.
In terms of cash position, we ended the second quarter with 892 million real cash and equivalents.
And and approximately 300 million Riyad bank.
Bank loan.
Were very comfortable liquidity situation, even considering the future M&A payables.
Moving now to the guidance.
Our guidance for the adjusted EBITDA margin for your 2020 is between 35.5% to 37.5%.
And before turning the call back to why do you for any closing remarks I'd like to provide an update what did you lose integration process.
Which is on page 10.
With all the spores weve been lied incorporate reorganization and based incorporation of wouldn't cheap.
Meaning we have a tax benefit of the stability of the goodwill and fair value adjustment of 529 million react.
Yeah fair value adjustment should be the deck.
Over the next five to 20 years.
According to the use of life of the and he did quite often and the goodwill should be deductible for at least five years under the Brazilian pack long.
Depending on the utilization core established by the company you gave me should we use off the benefit.
We also completed 90%.
Off the back office activities migration to Arcos shared services center.
Despite the challenges posed by the Cobiz 19, social distancing measures.
Very proud of our team even that even doing that and president hi was able to successfully complete did staff update integration process.
And with that I would like to turn the call back to body for any closing remarks.
Thank you Bobby I like to conclude this call by sharing about.
Well, 100% digital learning system with artificial intelligence to bed.
And adaptive learning platform to drive a completely personalized learning experience to students.
The first Baskin <unk> in 2016 and have knowledge you 53% of each for the company.
Since its inception.
Has been a head up it's fine.
It's like playbook platform allows for constant customization and more integration between stake holders and optimization of the teachers daily activities bites easy on average 50 hours per month healthier Todd.
During these in breast in time.
Sure impressive results and is well positioned to host exciting growth.
The acceleration in technology adoption by schools.
The last of the Geeky is one more reason why we got position on edge education technology, and why we continue to lead the industry transformation in Brazil.
Define nature and academic outcomes, we deliver are possible because you'd have to make investments with the long term return perspective.
With that we conclude our presentation. Thank you for your time and we can now open for questions.
Thank you Sir.
As a reminder to ask a question you would need to press star one on your telephone to withdraw your question press the pound key.
Please standby, while we compile the too many roster.
I show off first question comes from the line of Petro Mariani from Bank of America. Please go ahead.
Hi, guys you didn't need thanks for taking my question and congrats for the for the results yet.
So I have two questions first.
Media connectivity.
The company just feel highly kept the like it's funny fall one next year.
Given the macroeconomic eightx right now.
Are you seeing a higher number off and they do any teams.
What should we expect from M&A activity going forward.
And secondly, I was wondering if you could see add which he called me combined the competitive landscape doing different then.
If there was any change in Dubai make.
Bolstered grow organically war for the best staggered somebody to make US well you got my questions like it.
Thank you Pedro for your question.
So the pipeline is very active we're looking at M&A as always in a very disciplined way.
And the pipelines movie, we're very encouraged with the potential positive outcomes, while we're looking into three segments course supplemental intact.
Are we still believe that would have a large room to diversify our portfolio of supplemental the tech features.
With the progress of supplemental that we can offer.
Both in terms of pricing and marketing position.
Did that additional supposed to people that work really Greece or possibilities in terms of.
Distributing new products.
Fundamental ones into our base.
Basically help when she was moving well and we feel very comfortable to pursue new M&A opportunities are in a into future.
In terms of competition are you having in the market for a while it's a competitive in fragment the market.
It's played on a quality bases on a regional basis I think we right. We're still continues to gain market share from our competitors.
Because of the reason that we mentioned the beginning of the call Oh Youre a peer play we are 100% focus on piece itself. A learning systems are also we both quality and we believe that we will be able to keep pursuing M&A.
Opportunities as well is gaining market share from our customers and regarding M&A.
I think we'll have been developing relationships with potential targets.
For Wildlife now building a reputation.
And I think we are in a very privileged position to continue to consolidate the sector organically.
The potential sellers, indeed industries in the industry they attribute a in all or most relevant the legacy and the growth.
Their business like I think we're very well position to continuing eight.
It's probably they shut off the sector.
This is great. Thank you very much.
Thank you.
Next question comes from Utah told me talk from Goldman Sachs. Please go ahead.
Hello, Good afternoon, everyone. So on outside the two quick questions. If you could give us some more color on that's cool that led yard number up schools in Dallas and name Top then ranching triple from three to four and also a related question. That's also a follow up on Petros question, Yes.
If you could either some more color on how the competitive landscape has been evolving in terms of academic quality can go on namely if you have seen other players, including investments or try to achieve a better lab North Dakota quality Index M resort.
Maybe to fuel on those metrics.
Thank you.
Hi, Detour ER. Thank you. Thank you for a for your question so.
I'm going to start for for the second floor.
So regarding the competitive landscape or in terms all organic growth.
What so we haven't seen any changes in the competitive landscape.
Our significant changes so even though.
We are you orderly and a full cycle because the you know the majority of the new calling directly can you didnt later.
So, but even though that.
We haven't seen significant changes the competitive landscape and been school. They do you feel because a lot on quality and.
And and that's the main driver Dread pool for Dissinger.
HM side, we are keeping the lubricants.
The high quality to resolve died and that's that these our history and the way that we have the number in the last Oh 50 years.
And I'll just checking had record has definitely helping us to keep our organic growth healthy.
Daniel really want to cheer from all the competitors.
And keep the the prices.
Oh power products and solutions.
No we haven't seen changes and it gives give you more color about the sales cycle itself.
As you all said no.
We have actually the TV viewing for the following year, it's composed by existing.
Glenn schools. So we would you be school drugs and also by adding new schools Jordan at work.
And and builds to walk they happen at different stages here are the new category.
Oh, it's cool who starts already the year or two which allows us.
At this point, having very good visibility about the review process and and it had been doing.
We will be well so at this time, we had to say a person page of our contract that we have next year life easier. So it's in line with the previews and historical numbers, we chose a very healthy.
<unk>.
And then inside the new ones because it's too early to feel cycle. That's the payments or data. We gave like lets you wouldn't be had the second quarter results body, which are <unk> like you.
We have expected.
Great. Thank you very much credit itself.
Thank you next question comes from the line up.
From BTG Pactual. Please go ahead.
I.
Thanks, Good evening, Eddie V's Modesto, you're going to go on.
Two questions here from my side, the first one regarding to plug and play on T.H.T.V. I think that you guys just nation that maybe part of the <unk>.
I've been 20 could be based spending to be recognized in the fourth quarter of busier.
Maybe if you will see nice can you quantify.
De Sac due to do.
I mean do you think about these could be a meaningful or not.
The second question regarding geeky.
Just still hear more thoughts on the Swabi all for the company I mean do you guys expect sure they're signing the call option to kind of on the person Interestingly the company Wendy's bench before you should could provide.
Big numbers on the company as well that's it thank you for Nick.
Uh huh.
Hi.
So I think you did you for for the question, so well so I'm talking about doing.
Uh huh.
In the presentation considering the.
Circumstances emboldened by Dick will you.
We have we probably will have some from a revenue or before or.
Related to be $2 Lindsay.
Ah that's mainly due to a shoe the there the close of these cool and then PD patient vacation. So they school year to year should be longer than expected and should be on November.
And that's why we expect to government you ended seem to be also recognized in the fourth quarter. So overall, we have an oh. They can do recompletion had people's form a beach Golden age.
And and so it's hard to say no.
A precise about how how much of the <unk> will be recognized the fourth quarter.
Because it depends on when the club and get them start. So we are we are monitoring this progress, but its you do not so significant and so you have to me because you'll be back at some point in third quarter, Oh, and then we can you give 'em, finishing school year.
Before for video so it's early to tell us, but as you side, probably we will have some revenues before <unk>.
<unk>.
Regarding heightened.
Right.
No, but I have nothing but.
Oh, so regarding the out we plan to exercise the option. So the idea is you have what happened to be called <unk> Jude on 22.
Ah. So we are very very excited about Bob that's a portrayed.
Yeah.
Creating something pretty unique and and they've been show. It begins its huge so are we are happy with the different nurse and all the clean there and the idea is to keep helping <unk> Jude <unk> goals.
And and when they contracted do you will probably we will definitely exercises.
Okay. Thank you very much.
Thank you.
Our next question comes from them.
Most gandini from Morgan Stanley. Please go ahead.
Hi, good afternoon, everyone. So I have a question on the evolution of these new digital go to market, how the evolution of Gooley and if you have be able to crack keeps you farmers in home to spread the deep deep and resolve our actually improving and also we find me can you. Please give some.
Color on the next year D.C.V., Israel I believe we already rail advanced in the process right.
Sure I can start here so regarding the they'll go to market strategy or we will develop a process internally and we train a bowl of farmers and hunters.
Certainly.
So that they could be prepare.
To come to a sale process, 100% online I think the results are already starting to fill up since the number of fleet that we have been generating a has significantly increased quarter last month, and we are a converting contracts with the sales 100%.
Oh line.
We have also I choose very qualify it needs because of the different kind of these plants that we are hosting a keynote speakers so things with a indeed vance and therefore the generation of leads have been very successful.
Regarding your second question. So most of the sales of a new schools flexing schools that take place in the second semester. This is true for the previous years and this is also to afford dizziness and.
The way you build our hmm is really by a renewed renewing existing contracts upselling at two different grades in products in Texas in schools and this starts from hearing the here, but the second part a trucking schools the platform that takes place mostly on the second semester.
So as we mentioned in the same odd to Q call a lesson here. It was too early at that time as well to predict how are the sales cycle will take place. What we can tell is definitely business school year will be longer we can expect to add a news.
Schools and students in the whole second semester and eventually in generally are February.
Yes, we had this kukulka.
[noise] if he just one follow up so the renewal process is more on the first half and has this been lines your expectation or a little bit above below I remember that the tour and increased the little bit into basketball part is mainly because of the.
The integration of positive or has the tour in Oh Red has started to come down or are not really.
So talking about doing renewal rate.
They were new words is pretty much in line. This year on what we have seen last year. So the numbers look good in some talking about who is achievable I think it's too early to see are they in fact, but what we have done there is really to have a chest pool.
Not only the go to market strategy had been set incentives off the farmers.
But also the digital platform.
Because during the course BG, we could put in place a significant new features a for the cheaper platform. So.
We can't expect.
The following years to have an approval in the renewal rate, but again, a we'll see as the cycle a closure if we could have this lifting renewal rate for the team from the first year.
Alright, Thank you very much.
Thank you.
Our next question comes from.
Yes.
Okay.
Hi.
Good afternoon, everyone. Thanks for taking my question are there to the person another one on the go to market what does exactly a lower customer acquisition cost. I mean are you guys. It's related to logistics are the lead acquisition. It's cheaper. So what can we understand about this is lower tax and my second is it's hard to one Uh huh.
You could give some color on the nonrecurring expenses and the Govies related extraordinary expenses that affected your is though would be interesting thing.
Hi, this is.
The third here are you couldn't understand the first part of the question could you please with it.
Yes sure sorry.
On the go to market strategy I'm, just wants to understand what does the lower tax mean, so is it related to the logistics the the farmers into hunters needs to visit the physician cost of the lead cheaper so what exactly the that does that mean.
Nope.
Okay. Okay got it felt like Uh huh.
Oh. Please go ahead of it.
Okay. So regarding thing you go to market strategy.
Why one of the success a successful strategy batteries adopted into lounge.
A feature called you some school.
And the fact that.
We've made it available trees today.
From school.
Actually goes along to our matter work.
Which enables us to generate just going.
We too are now Ah Ah floral felt while she was the strategy.
And also as I mentioned, the previous conference call in Barnwell, some part of felt before.
She really what your prospect schools.
So all those things they have been generating very qualified leads to always says five life.
And as a consequence, we are not expanding and she visits pools and travel expenses.
Personal Armenians anytime and all those savings.
I have been leading to a more efficient and.
Not quite easily.
So that's that's the main concept behind it that says that he fat.
One other thing that we've incorporated in our since process.
Even though could be it in declines even would stop in the future.
Because definitely it's UNFI is the capability that we are we expect to use or in the future more hybrid operation enforcing meeting.
How do you still need.
[laughter] did you guys get the second question.
Yeah pretty set again.
Yes.
The first of all can you give us some color on the nonrecurring and liquid related extra Nick that they factor a bit.
Hi, sorry, I got it yet.
No I I figured that impact your line is getting a little bit therapy, you asked about the nonrecurring.
<unk> expenses right.
Yeah.
Okay.
Yeah, it's all part of the nonrecurring expenses or did it to a coupon too. So all those are for three of the two or do.
Yeah. That's for sure there was due to service the schools are doing different dynamic and some one off.
No recurring expenses too I mean perfect.
<unk>.
As well so.
Before you have to schools in.
Financial statement, so I'm going to have a severance you've got the breaking down a one for these are two to cope with my team and then the remaining portion of the nonrecurring expenses are related to approach like server farms normal course of the business or both of them are your view limits you too and then they were started.
Did you Cruger FERC I mean, not part of the ongoing.
I'm going business, Okay, but your financial statements. When you have a loose you're going to see that we're breaking down including what is cobiz Nike related and what is most related to those one off a its strategic project.
Yeah. Thanks, Thanks, guys, thanks for the pretty yet.
Yes. Thanks.
Thank you.
I sure last question comes from the line.
Thank you Tom Please go ahead.
Hi, Thank you. Thank you protection our crashes they had two if I could go up like that they commercial team I feel good providing some data on the commercial.
Now I'll fight every home it cools my back either.
Possibly coming up them actually I think.
And I'm actual clients that could be our first question.
The second question like they do yourself.
He did they give both wasn't provide that currently allows for line.
Just aren't yet.
Quantum class.
And if you define who come to change that coach them Delphi.
The quarter horse is like a from <unk>.
Hi, Susan Oh, I think that octopus okay.
Well have to go ahead.
Okay can borrow [laughter].
Okay, I think I can report Bharti women can you say Matt.
I will say that are actually going as we know.
The peak of the conversion rate.
Ill could happen in doing that maximize so it's hard to see now.
Equal worse, or we will be especially because we are dealing with a a new jersey and then get situation.
He pulled and by the grain Brian.
Hard to predict good conversion rate.
And but we expect you have more visibility about them.
You can check water.
Yes, you got to go ahead.
Sure. So regarding the products is on a like a quarter question.
We have both a type of glasses.
Feel like classic.
A poor schools to keep their education process. So would have liked glasses for all the subject and all the great.
And some schools are using that product as a they teach their students and we also have a record to classes a huge library with more than 3000 video classes, the corridor and business I use as a reinforcement and the process.
As for instance, equipped with a classroom methodology or or or some because that cannot give a specific less something specific day. So the schools yields as they want so we'll have both sides. The three acorda classes in the life glasses.
Perfect. Thank you.
<unk>.
Thank you.
Thank you ladies and gentlemen, this concludes today's conference call and acuity session.
For participating.
You may now disconnect.
Okay.
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