Q3 2020 Arco Platform Ltd Earnings Call

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Good afternoon, everyone. Thank you for standing by and welcome to Arco platform third quarter 2020 earnings calls.

Does the rent is being recorded and all participants will be net leased and all the mode. During the Companys presentation.

After our remarks and there'll be a question and answer session at that time for instructions will be given.

Sure Dan the participant and Dusty since during this call. Please press the star Zero true reached the operator.

This event is also being broadcast live via webcast and May be if that's true are of course website at Investor Day, Arco platform Dot Com, where the presentation is also available.

Now I will turn the conference over its true kind of how do you look I hate of our IR director how do you <unk> you may begin your presentation.

Thank you I'm pleased to welcome you to our Acos third quarter 2020 conference call with me on the call today, we have Arco CEO, Eddie just a couple of Internet and Arco Seattle, They do get.

During todays presentation, our executives to make forward looking statements.

Forward looking statements generally relate to future events or future financial or operating performance and involve known and unknown risks uncertainties and other factors that may cause our actual results to differ materially from those contemplated by these forward looking statements.

Forward looking statements. In this presentation include but are not limited to the statements related to our business and financial performance expectations and guidance for future periods, our expectations regarding strategic brought the did you should use and the related benefits and expectations regarding the market.

These risks include the dose that sport and the documents that we issued our day to day as well as those more fully described in our filings with the Securities and Exchange Commission the.

Forward looking statements and his presentation I base and the information available to us as off the date hereof, you should not rely on band of predictions of future events and the disclaim any obligation to update any forward looking statements, except as required by law.

In addition management May reference non my friends financial measures on this call the nominee F. Reiss financial measures and not intended to be considering isolation or as the stoops you'd you'd from results prepared in accordance with <unk> for US. We have provided a reconciliation of these non <unk> from financial measures to the most directly comparable I Afrezzas financial measure.

In our press release.

No the except from revenue growth margin selling expense Ginny and cash flow from operations or other financial measures, we discuss here and non <unk> from and the growth rates are compared to the prior year comparable period, unless otherwise stated. We also note that year over year comparisons are affected by a position.

That were not included in our 2019 financials, let me now turn the call over to bet the GAAP Arco Seattle.

Think through kind of you know and thanks, everyone for joining our growth third quarter installs and 20 conference call we.

We hope that you and your relatives are all healthy and say.

During today's call, we would like to discuss sports topics, that's showing in slide four.

First our financial results for the quarter, and 48 stores and 20 school year the.

The resilience of our business model and the board and support solution to partner schools, all all of those to the liver exposed and saying Gee school years TV in line with the contracted volume.

Net revenues and adjusted EBITDA presented triple digit growth and we are confirming the margin guidance for the installed and Twentys fiscal year of 35.5.

37.5.

Second our guidance for 2021 ACB bookings we.

We expect Saudi the growth of 20% to 25% with a broader range, reflecting a delay of commercial cycle the books of Cobiz.

Third and the updates of our operational results, we believe the accelerated evolution or product service and go to market practices and implemented during the first nine months of the southern and 24.

Further differentiated the quality of port solutions, our brand reputation and distribution capability.

As a result, we are experiencing record levels of Jersey engagement client satisfaction retention and the lead generation.

The easy evolutions will bear fruits for years to come and we believe that arc always emerging from the spend dynamic as the stronger company with the even brighter growth prospects.

Finally, we continue to approach her business with the the one mindset.

The thing is more market share and the large and fragmented the addressable markets.

We are excited at the opportunities ahead for organic growth and M&A execution.

Moving to slide number five.

We delivered 961.7 million highs of forward 2020 TV.

Representing a GAAP of 4% to the contract the CV.

Does the mold GAAP is mainly related to the temporary dropouts of pre k. kindergarten and that's the prep courses, we expect the students to be Reenrolled Es and school learning resumed.

As a side note.

The point 9 million highs of this doesn't 20 TV has been recognized in the fourth quarter. The delay follows requests of partner schools to receive the quarterly conference later in the year due to go beat related the leasing their pedagogical calendars.

We would like to highlight that the delivered 80 the represents the totality of for revenue and.

As our business is fully subscription based.

Therefore, our HCV is an excellent proxy to our expected revenues.

With small possible adjustments to reflect actual enrollment in partner schools.

Turning now to slide number six to discuss our third quarter financial performance.

We are pleased to announce strong financial results amid a challenging global scenario.

Net revenue for the third quarter of 2020 was 208.7 million Heights.

Which represented a 196% growth year on year.

Our net revenue in the first nine months of spas and 20 was 705.2 million Heights.

Hundred and 17% of both the first nine months of styles and 19.

Gross margin was 78.7% for the third quarter versus 79.9% for the same peered instead of the 19 and.

The first nine months of the year, our gross margin was 78% down three percentage points year on year due to the small differences and the cost structure for the Tivo acquired and the final coworkers 2019.

Adjusted EBITDA was 57.6 million high.

For the third quarter 2020 from negative 7.3 million in the third quarter of 2019, mainly due to the reduction of selling expenses in June the expenses as a percentage of revenues.

Adjusted EBITDA margin for the first nine months of standard and 20 was 36.2% compared to 31.7% for the same period of stuff from the 19.

We are on track to the liver and adjusted EBITDA margin of 35.5% to 37.5% for the 2000 insight into fiscal year.

Finally, adjusted net income was 38.8 million nice for the third quarter of 2017 from.

Zero point $8 million in third quarter 2019.

Moving now to slide number seven when arc was guidance for 2002 into and HCV.

2000, and things he has been a challenging year for schools, where the suspension of the person activities for more than six months and the so the need for that to a completely new reality.

Despite the stuff scenario, we expect to deliver in each of the growth of 20% to 25% for the 2021 school year.

In regular years, you would typically have close to full visibility of for next year you see the by the end of November.

This year as we experienced a longer sales cycle. Following the school year the lease the two co bid we have partial visibility.

For this reason, we bought to share of broader guidance range.

On slide number eight we present the moving parts accounted for in this range.

The lower limit of course, Theres conservative assumptions and no expected troubled recovery.

While the upper limit so theres order growth coming from additional renewals and new squinty, mainly in our supplemental solutions and partial recovery of the student dropouts seen during 2020.

We have opted for a conservative assumption and drop off the recovery heading back only part of it.

Given that at this point it is too unclear whether schools will be able to fully resumed impersonal glasses and the beginning of stalls and 21.

However, it is important to mention that as the situation normalizes, we expect the full recovery and did the dropout in the coming cycles.

We will come from the 2002 and you want HCV in the fourth quarter earnings release, together with 2021 fiscal year adjusted EBITDA margin guidance.

As a reminder, we expect the CCV to be fully delivered and recognized as revenue between October 2020 and September 2021.

With that I will now turn the call today.

Please go ahead.

Thank you Pedro and good evening, everyone. Thank you for your time and I also hope that you and your relatives are all safe and healthy.

Let's now turn to slide nine.

Year has been a period of intense change for Arco.

We believe that we are even more prepared now to win this game as of the structural changes in the sector favored the adoption of technology by students teachers and parents, while reinforcing our leading factors of having the high quality and CLI and central reputation and distinguish distribution capabilities.

Moving to slide 10, while protecting our team we acted fast to offer the comprehensive support to our partner schools and generate growth opportunities for our company.

Beginning in March and continued to this day, we have designed it and launched several innovations in the way, we sort of our clients and convert prospects.

We believe changes CHS, 100% of our content available in the video tools for live classes embedded in our platforms fully remodeled EBITDA goshko consultancy and for US the investments in diesel market and the large scale training of our sales force for remote negotiations have further differentiate it.

The article.

On slide 11, we offer a glimpse into the full day still experienced that our partner schools and prospects have enjoyed during this period of.

Almost 16000 video classes delivered 340, Webinars with global keynote speakers a portfolio of all line assessment tools with over 250000 additional activities and more than 9100 remote the goshko meetings with the schools for teacher training.

And management support.

As we roll out these innovations to meet the remarkable and new levels of tech adoption by schools, we have experienced outstanding operational results as shown in slide 12.

Engagement of teachers and students with our solutions has increased threefold.

Customer satisfaction has reached record levels, and we expect to deliver very high retention rates and healthy price increases.

To deliver such strong operational performance and the challenge here is the source of price for us.

Our business Trust and reputation are Paramount to long term success and these results will drive referrals and growth for years to come.

Our revamped go to market strategy also contributes to and even brighter scenario ahead of us.

As shown on slide 13.

Combined net adopting fully digital strategies for generating leads offering a freemium solution to over 400 prospects schools and using the hybrid online offline negotiation process have delivered record pipe line of qualified leads 2.5 times greater.

And the 2019 figures.

These go to market changes are a year just state and the belief that in the long run the will contribute to a higher sales force productivity and and additional growth.

Additionally leads generated but not convert to the is your will be cultivated for closing over the following cycles.

The conversion of these leads into new schooling take has accelerated after schools start to reopen in mid September EPS, showing the slides 14.

And that signing in new schools relies on the complex technical and trust these decision process.

Prospect schools have postponed the your decision to adopt new but the Garnica solutions, while they were focused on the assessing and dealing with the implications of cobiz.

Additionally, we believe that the last mile of negotiations, we will continue to been of feet from in person meetings.

Therefore schools, starting to reopen and our sales team resuming traveling drove higher conversion of leads into ground trex and strong year on year results for the later months of 2020.

We expect that it will continue to be the case for the remaining months of the current sales cycle.

Let me now I'll turn the call the back to build the true who will share our thoughts on the best the heads for Arco bids from please go ahead.

Thank you.

I will now switch to the slide 15.

We're excited with the opportunities ahead of us as we are only scratching the surface of the huge and fragmented market with the underserved the clients that share of pressing need for high quality solutions.

We will continue to approach this opportunities from three angles.

Growing organically through our superior solutions and distribution capabilities.

Pursuing disciplined M&A for scale and scope and why easily making bets and adjacent markets that might create the additional growth engines and the long run without distracting us from more obvious and immediate prices.

As seen on the slide 16, we currently have only 4% share in the 25 billion and market.

Our five core brands together represent the only 12% of the market share on of 6.5 billion highs market.

We believe there is space of acquire additional core brands that offer attractive growth potential.

The opportunities and Supplementals are even greater as we have just begun our journey.

Our supplemental brands have around 1% market share.

Oh, and the 18.7 billion highs market.

On the verticals, we already operate we see space to complement our portfolio with new brands that have complement the repositioning.

Additionally, we have the potential to serve new and large verticals such as codes, the robotics and through three three and how's development or acquisitions.

On the slide 17, we present the factors that make us confident on our organic growth prospects.

First our competitive at the vintages.

The reputation of our brands, while the support solutions and distribution capabilities. The winning factors that have propelled dark once of the day.

Has been further strengthened and by the pandemic and we continue to drive our growth by disrupting textbooks.

And gaining share for other learning systems.

Second supplemental benefits from structural trends that we continue and driving our organic growth for years to come in.

The indicators parents and students the men that 21st century skills take a leading role alongside traditional cognitive development.

And the migration from out of school swings cool lowers the cost of litigation and delivers convenience to the parents and students.

Finally, we benefit from having three power for growth sources within our base of partner schools.

360000 students for Upselling, almost all of our student base for cross selling and space. The increased price is following evolution of the first solutions that improve their value proposition to partners.

Moving now to our M&A perspectives on the slide 18.

We believe the disciplined and accretive M&A will continue to be an important source of growth for Arco.

There are three components to the visibility.

First we play in a highly fragmented market where scale matters.

Our over 400 companies and core supplement and net tech and Brazil the.

The agenda and elect the resources to scale and thrive.

Second arc was well positioned to be the prime buyer for the best assets.

Founders and owners prefer to partner with us, we make decisions and execute extremely fast given the benefits of being a focused pure play company.

And we offer unrivaled growth potential for founders, who wish to grow their companies within our ecosystem.

Third we have been consistently executing our M&A strategy for a long time.

Operating relationships with several owners and folders, resulting active talks with 15 potential targets.

We are actively pursuing opportunities to increase our scale by adding new brands and core to strengthen our portfolio and the enter new verticals and the supplemental market.

I will now turn the call back 24 of the final part of our presentation.

Thank you Bill.

As we approach the end of our call I would like to share the good news regarding sales achievable and it's called and determination.

And was achievable two pieces of the good news first we are closing to concluding our back office integration that has been executed within the expected timeframe and cost.

Second it is gratifying to see significant improvement in customer satisfaction and rotation just one the year after the acquisition by reinforcing the jewels front line team invigorating, the Companys leadership team and culture and by improving its products and services our team has delivered.

Of 15% increase in client NPS and five percentage points improvement in retention rates.

As for the cheapest stars to Shine brighter, we expect to capture growth synergies over the coming cycles.

Finally on his call the NTD genes shall we expect the Brazilian and tight trust the authority to present its final approval Tomorrow December Onest and the closing to happen on December 2nd.

Looking forward to E I joined the articles portfolio of great companies.

He is the clear winner within the exciting social emotional learning vertical and its stellar of 15 share our sales long term focus and quality clients and growth.

With that we conclude our presentation.

I'd like to thank our of clients for the trust in our board.

Good thank our investors for all of the support.

And our team for the relentless pursuit of excellence and value to our partner schools.

We are here for the long run thanks.

Thank you for the time operator, we can now open for questions.

Thank you.

The floor is now open for questions. If you have a question. Please press the star one on your Touchtone phone at the start anytime if at any point or question and answer you may of both yourself from the queue by pressing the star Chu.

Questions will be taken and the harder day RC we.

We do ask that when you pull her question that you pick up your handset to provide optimum from quality.

Please hold while the poll for questions.

Our first question comes from Vitter from Goldman Sachs.

With the opening all hope the all this level of if you and your families. So we have two questions on outside the us.

First line, it's on competition, if you could give us some more color on how you are seeing competition moving during the sign of stretch the south cycle and especially on the how complex or have been able to visualize their sales approach as you and the status and the R side and on the lighter you have seen any extra.

Yes, Mark of actually is ex the slides and.

And our second question with the regarding the interest on the offerings, we have no interest contests.

And we'll all right guys see increased demand R&D, Greece, or so you should accelerate teenage production type of offer.

Great.

The cultural factor related physical books is huge much barrier at this point. Thank you.

Thank you for your questions the third federal here floors.

First on the competition.

It is important to note that you've had the competing.

And the fragmented markets, we need to be the same bleeds for a long time, we've been gaining share from existing learning systems and the be disruptive.

The books from a combination of the factors in distribution and brand reputation and the quality of from solutions you see that historically and you also see that this year.

Record levels of retention and the very healthy price increases.

We don't see significant changes this year and competition.

Regarding your second question on that the adoption, yes leads day.

We will now even more via the key parts of our solutions from schools and that is the present that both the record level of user engagement that we've experienced this year, but I'll say the pollution upward from the offerings, where we had significant but some operations in the rollouts of features and solutions.

The partner schools, we expect the in the coming years that we consider to be the case, we grew the levels of user engagement and.

Actually the reason to evolution of our technology offerings of partner schools.

Thank you very much.

Our next question comes from finishes the beta of you'd be EPS.

Hi, guys and good afternoon, everyone Hope everyone is this is all.

The question of on our side here and the price will be on par if you could give us a little bit of color on how much.

The complementary solutions to the representative of the.

But you've been one.

Guidance the provided.

And the second of just one from December one from a little bit more detail you set the the conclusion of the new schools accelerated way and this is the school Yelp and kind of just help with considering how does that mean part of the go to market when you're using more digital a lot more digital part of of visits.

What does and it's only in fact materialize when the of the visit is made are just so that we can and understand the how how to sort of the sense corridor.

Thanks.

Hello.

Hi, the features the.

You for your questions first one regarding supplemental.

First it's important to know that of each supplemental greens and have a longer cycle, even the core historically schools and make the decision and supplemental after the decide nucor and even this year. The decision is delayed we began to have some months ahead of plus sales tool has been declared Jim Hall supplements and going up and up and the degree.

Like the guidance of.

Our range for the guidance says.

Thank you and we believe this is going to be of took where you're for supplement the and reported see slower growth in our supplement the words, we see a very strong year for quarter. However, it's important to note and we're very confident on the long term trends for supplement the ads. The schools are moving forwards any for century skills and strength in there.

The education and second and see a movie from out of school Sweeney school, adding more convenience and a lower cost of parents and students.

Second regarding our digital marketing.

First we believe that our future will be a hybrid model, where we continue to invest in the generation of the leads to digital marketing where use keynote speakers at large all.

Full line events to accelerate the funnel will continue offering free and solutions. However, we still believe that the last mile of negotiations.

We'll be taking share by equal or some meetings, where our consultants help of the school. So understand the with the use of the solution and generate the trust and partnerships that are important for success buying.

Finally to your question.

Yeah the.

The book our HCV when the contract is signed so when we have enough from can meet someone from the school and the school cannot.

Let's go without significant penalties.

Okay very good day thanks.

Our next question comes from that and ranges from this could be the <unk>.

Hello, everyone and thank you. Thanks for the call I have two questions here as well and we just launched the one if I can go back to the edge of the supplement the requires and you can just utilization and and idea about from each wants from each products.

Yes from the backlog that would be one of the Glock.

The high feedback.

The negative impact from will be 19, and gets makes me and may needs and the international schools you can describe the little bit more of volumes would be great and then and the second question.

There is a difference in EBITDA pharmacist share products for example, the more winning products from the bad and like the socks off of that performing quite eager and across across the board. Thank you very much.

Hi, Greg Thank you for your questions.

First on supplement the weird keep similar dynamics for our supplemental solutions longer sales cycle.

Overall, the slower growth for the year Bloods would strong friends for the kind of cycles that make us believe the ones you to be strong engines of growth for our cool seconds on non core working similar.

The viewers for our solutions and defend the deal for price points high customer satisfaction.

Very high levels of customer retention.

Healthy price increases and the strong pickup and rebound in knees greenpeak after sales team to the terms of the viewed as the schools and reopened.

Okay, perfect and the very clear thank you.

We have a question from the webcast of this came from BTG.

Good evening, everyone does the guidance for 2021 HCV growth all radical see the call. They did it change yes. Thank you.

Thank you pretty question and you expect excluding the JV to become part of Barkell boots, which is going to have been the first day as of December we are including equally to the James Your line in our guidance.

Excuse me of would have another question.

From the webcast, it's from and todays Davis. It says good afternoon. Thank you for taking my question. Your M&A growth strategy, how do you envision the future acquisitions affecting our HCV and gross profit.

Yes.

Thank you for the question.

First of important to note that we believe the main and Jennifer growth will continue to the organic growth second and the navy called seem to have and important partner growth as it has had in our past performance.

We'll pursue.

Positions in core with either on the other brands behalf of Treximet growth potential or by gains can you and our current brands second Rupert swimming and supplemental solutions either by reinforcing the portfolio, where we already played out or adding new verticals to arqule third.

Continue to acquire the.

Great and.

And tax that offer how you call high quality solutions and talented teams to help us increase of value propositions to clients.

We will pursue boots acquisitions with the discipline and we will only do so we believe the our creative and sort of company into our shareholders.

And as a reminder, if you would like to both of the question. Please press star one please.

Please hold while and bar for both of question.

We have a question from Alex sex.

From.

I'm sorry, the have a question from the last cash comes from Alex and good afternoon can you talk about the growth rate of the items for.

Our 2021 estimate and what it means for our organic growth into thousands like the one.

Thank you Alex for your question overall from seasonally the DJ the following the same but the other supplemental solutions with the longer sales cycle.

Overall slower growth for the year.

That's.

The corrective long term trends for growth and for planning music, new skills to schools and students, we and others globally.

Going to the shape of the whole because the believe it's not material for our growth.

That concludes our goals video conference for today. Thank you very much for participation and have a nice day.

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