Q2 2021 Arco Platform Ltd Earnings Call
Good afternoon, everyone. Thank you for instinct and by and welcome to Ark, a plateau Farms' second quarter 2021 earnings call.
This is being recorded and all participants will be in a listen only mode. During the company's presentation.
After our remarks, there will be a question and answer session and a tiny part of instructions will be given.
Should any participant to need assistance during this call push prices start to heal a little tweak Bill Prater.
This event is also being broadcast live via webcast and may be accessed through our website at Investor <unk> article palette of farm Duck call, where the presentation is also available.
Now I'll turn the conference over to cutting OCA Hadar Arco IR director Cortina you may begin your presentation.
Thank you I'm glad to welcome you to Arco's second quarter 2021 conference call with me on the call today, we have Arco's CEO, Eddie just a couple of continental in Arkansas for a well that put them. During today's presentation. Our executives will make forward looking statements forward looking statements generally relate to future events or future finance.
Our 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.
Statements. In this presentation include but are not limited to statements related to our business and financial performance, our expectations and guidance for future periods, our expectations regarding strategic product initiatives and their related benefits and our expectations regarding the market.
These risks include those set forth in the documents that we issued earlier today as well as those more fully described in our filings with the Securities and Exchange Commission.
The forward looking statements in this presentation are based on the information available to US as of the day hereof, you should not rely on them as predictions of future events and we disclaim any obligation to update any forward looking statements, except as required by law.
In addition management may reference non <unk> financial measures on this call. The non <unk> financial measures are not intended to be considering isolation or as a substitute for results prepared in accordance with all you are correct. We have provided a reconciliation of these non <unk> financial measures to the most directly comparable I FRS fine.
And she'll measure in our press release.
Please note that except from revenue gross margin selling expenses G&A and cash flow from operations. All other financial measures. We discuss here are non hire for us 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 <unk>.
Acquisition that were not included in order to tell them in 'twenty financials, Let me now turn the call over to Eddie Arco's CEO.
Thank you Karina and thanks, everyone for joining today's conference call we.
We hope that you and your families are all healthy and safe.
You'd like to present four topics today as shown in slide three.
First on the results, we had a 21.9% revenue recognition in the quarter, leading to a net revenue of 588 million Reais for the first six months of 2021 or a 18% increase versus the same period of 2020.
Adjusted EBITDA this quarter was impacted by lower revenue recognition product development and sales force increase as we prepare for a post pandemic recovery, leading twin accumulated adjusted EBITDA margin for the first six months of the ear of 32, 4%.
Despite an even softer third quarter had following historical seasonality trends as Altera will show in a few minutes. We are confident that the fourth quarter, we lead us to meet our adjusted EBITDA margin guidance of 35, 5%.
37, 5% range.
The free cash flow improved this quarter as we collected the receivables generated by the extension of the payment terms to assist our partner schools, taking us back to our strong cash generation profile.
Second the commercial cycle for 2022 School Europe continues to show encouraging results as pandemic related restrictions are progressively lift.
At this point, we see organic growth space for core solutions in line with brief endemic levels, while supplemental solutions accelerates versus 'twenty 'twenty, but indicated two step recovery to pre pandemic growth rate levels.
We are achieving great results from our cross sell initiatives, which will now be powered by the creation of a centralized supplemental business unit called Arco plus.
Third as we continue to search for innovative ways of better service, our clients and consolidate our leadership position in the industry. We launched this year SaaS adapt Chris.
<unk> and data oriented version of sauce, our most premium core solution, allowing us to better serve the premium back.
Segment.
Okay.
Some of that was developed on top off in due course LMS solution. We acquired in July that will integrate our architect portfolio and has great data analytics capabilities.
And finally, we concluded our first step towards the disclosure improvement and commitment to increase our impact with the release of our first ESG report.
I will now turn the call to a battle to discuss the results for the quarter.
Please go ahead.
Thank you Eddie and good evening, everyone. Thank you for your time I also hope that you are all safe and healthy moving to slide five net revenues for the second quarter. After both of them 21 were 256 million reais, representing a 9% year over year growth and 21.
One 9% of revenue recognition below the historical average for the quarter impacted by the second wave of COVID-19. As a result net revenue was 46 months of 2021 totaled 588 million reais, 18% above the same period for last year.
Lower revenues added to higher costs related to product development and higher selling expenses, Amy a stronger sales cycle led to an adjusted EBITDA for the quarter of $72.3 million Reais, 20% below the second part of last year with a 28, 2% EBITDA margin.
Adjusted EBITDA for the first six months of the year totaled 190.6 million Reais resulted in a 32.4% accumulated margie finally, adjusted net income was $36.4 million for the quarter with a 14, 2% net margin and $97.5 million for the first six months.
With 16, 6% margin.
On slide six we present, the breakdown for our receivables, which reduced 19% from the first quarter level as we collected the receivables from our partner schools to whom we provided support through a more flexible payment terms that added to the lower effective tax rate, resulting from the corporate restructuring led trucks Cigna.
The improvement in the free cash flow this quarter.
Slide seven we present, an update on our ongoing corporate restructuring, which will further contribute to our cash generation in the future.
We concluded the incorporation of SaaS subsidiaries on July 1st leading to annual savings amounting to 30 Minnery ice.
Next steps include incorporation of Navajo valid this year and it's called him off the main to Plano and he stood us in 2022.
As we incorporate businesses acquired in the past, we will be able to capture additional tax benefits and further reduce our effective tax rate.
To conclude the session moving to slide eight we'd like to take the opportunity to make a quick recap on the seasonality of our business and how we expect this year to behave when compared to historical trends.
Adjusted EBITDA and the cash flow from operating activities have different behaviors are lumpy year as you can see in the to India to chart. The Blue line for Bolt chart represent the historical trend why would the Red line represents the expected behavior for 2021.
When analyzing adjusted EBITDA best performing quarter for revenue recognition is Q4, and all solutions have their first content delivery to schools on the other hand, the worst performing quarter is Q3 as most of the content has been delivered improved this quarters. This year, we expect a more accentuated seasonality, but still following historical trends.
When analyzing cash flow from operating activities at the majority of schools pay for our solutions in up to eight installments starting around February Q2, he's usually the strongest cash generator, while Q4 is the weakest.
This year as we extended payment terms to assist our partners Kohl's cash collection behavior will be a little different for all historical trends move.
Moving to slide 10, we are very excited about the return of in person classes in mold states in Brazil as it increases the effectiveness of our commercial activities at this point, 56% of the population received at least the first dose of the COVID-19 vaccine and 24% are fully vaccinated with vaccination of teenagers.
Starting this month in some states.
The reopening of schools and vaccination of the population has a direct impact in the commercial cycle as principals become more optimistic and open to meet our team and discuss positive changes to their schools.
As represent inflight 11, despite any still early stage the commercial cycle for the 2022 school year is presenting a much faster organic growth pace versus last year, indicating that the worst is definitely behind us.
For our car solutions year to date organic growth base is in line with pre pandemic levels, indicating a strong lead conversion on top of a suppressed demand.
The Tivo is the leading performer for the core segment. Two times ahead of the commercial cycle for 2020 school year proving the effectiveness of our acquired and improve strategy.
And for our supplemental solutions year to date organic growth base shows strong Reg recovery versus last year, but indicates a two step recovery to pre pandemic growth rate levels. We had one of the best year support renewals last year and at this point renewal rates for car solutions are in line with historical levels while.
Implemented solutions are presenting a stronger renewal performance.
Moving to slide 12.
Cross sell has further accelerated and now represents 85% of the intake for supplemental solutions year to date.
Born to mention that the economics for cross sell or better as we see a faster lead conversion signing of larger contracts and usually with longer terms and the relationship with the partners KOL becomes a stronger increase in the retention rates.
The possibilities to capture cross sell opportunities are numerous and here are some recent examples in the first one named cross sell E. Take we signed with a large coal that did not use any oracle product before adding both site and navi our maker solution in the second example, named renewal core plus cross sells that.
Mental we extended the contract term with posit Tivo partners called two five years and added Plano.
And the third example, named up Sally supplemental plus cross sell core we extended the contract or with an international school partner school, while adding audio branches of the same chain and including sauce, leading to a five times ACB increase.
Finally in the fourth example, named renewable supplemental plus cross sell we extended the contract term with on its call. It into the JC partners co. Two four years and added Si P S and Plano, leading to a 10 times a C V inquiries.
Moving to slide 30, we are now powering the cross sell initiatives with the creation of alcohol plus a business unit that will centralize our supplemental solutions. There's a structure, we all hours to extract synergies by centralizing activities that will lead to cost savings, reducing time spent with rapidity demands and challenges you see me.
Waiting cooperation between solutions, providing access to tools and our resources from one to one Andrew and leveraging on oracles employer branding while of course, maintaining strong brands that are godsquad approach with clear identities fast response to customer needs and focus on quality and innovation.
I'll now turn the call back to widen RT. Please go ahead.
Thank you with that.
Innovation has always been part of our DNA, especially when it translates into delivering a better product or service to our clients on.
On slide 15, we present SaaS adapt a version of SaaS. Our most premium brand that offers more customization possibilities generates more data on students' engagement and pedagogical gaps and allows for higher connectivity among all content available in the platform.
It's a solution that fits well with the demands of school segments that want to customize their content, which in turn will provide valuable feedback that will guide us to further improve our solutions side.
Some of that was created using studios and in due course features which are now part of Arco Tech alongside calling moved him into our App communication solution and that looping saw our ERP solution as presented on slide 16.
Arco Tac was recently created with the Goff centralizing the technology backbone of our solutions gathering the best features from all platforms acquired along the years that can be the common to all into one single strong backbone.
It will allow for us cost savings and better user experience as we will be able to implement improvements and add new features much faster decides strengthening our employer branding to attract talents on the technology segment.
At Duke who acquired in July is a great complement to architect portfolio as it is a powerful LMS that provides a personalized learning experience and help schools to acquire more students based on data intelligence.
On our final slide on page 18, we bring a summary of our E. S. G report released last week, our first step towards mapping our strengths and gaps. So we can further expand our impact on Brazilian education.
The materiality analysis presented last quarter guided us to focus on three main topics, which are fully aligned with our strategy in.
Impact on allocation.
<unk> on people and strong and sustainable structure.
The report brings relevant information on each of these topics and challenges us to continue pursuing better practice going forward.
Yeah.
Arco is undergoing relevant changes M&A was key to support our mission to scale quality education across Brazil, and now is the time for us to organize our structure and third you extract the benefits of having repeatable brands quality solution and a highly talented team the cream.
Nation of architect and Arco plus allow us to centralize a structure that will generate even more value when combined.
And there is more to come as we deep dive into our processes generating savings that will translate into free capital to invest in what really creates value serving well our clients and unlocking value to grow.
Thank you for your time, operator, we can now open for questions.
Thank you the floor is now open for questions. If you'll have a question. Please press star one on your textile fallen.
These are any time.
To your point truck question same search you may remove yourself from the queue by pressing star two.
Questions, you'll be taking in the or did the RMC.
We do ask that when you pose a question that you pick up your headset provided an optimal sound quality.
Please hold while we poll for questions.
Our first question comes from Vitor Tomita.
Goldman Sachs.
Hello, Good evening, all and thanks for taking our classrooms to your questions on our side. The first one is on our whole blood.
You could give us some more details on the type of activity that will be centralized, particularly we will have a single commercial team for all brands now and so you can see English to Brent or fashion in using big thinking far higher and lower end supplemental brands.
And the SEC on classroom with E on Oracle attach.
Especially how each will interact with the various car brands are there Dan.
How separate SEC and Autological back and currently between <unk> corporate brand.
And if there could be significant cost savings arising from unifying the technology the technology basketball across car brands. Thank you.
Yeah.
Hi, Ritu. Thanks for the questions. They looked out of here one article plus I would say that Theres no change in mindset here I think that's something that Oh, we always mapped that was going to happen. We're just waiting for the right timing to do a search into.
Integration. So the idea here is really to join our airports in a more efficient way across those brands. Okay. So in terms of what are you going to be centralized and integrated we are here internally, you're saying that everything that is behind the curtain right. So everything that would not prevent.
The decline from perceiving the unique identity of the brain okay. So.
Everything related to operations and back office.
Our services will at worst be integrated.
With regards to the sales team day Dear here is to keep them independent right. So as we disclosed in the presentation. We already have a team dedicated to the cross sell so these team dedicated to cross sell is already selling all brands, but we're gonna keep independent sales team for each of the brands as well.
So this is what.
We will drive clients and customers to perceive the uniqueness of each of the brand, but behind the curtains, we will integrate.
There are several areas okay.
As to Arco Tac I would say that similarly to our Coke plus here, there's no change in mindset as well right. So it's really about finding the right timing.
To do it as you know we made several acquisitions over the last.
Two three years and the key priority.
Experts was really to improve the content to improve the product to improve the customer service.
And to improve the go to market strategy and to use the local technology expert right. So that was the strategy for those acquisitions that we made now we think it's the it's the time to drive the integration of the technology platforms. So what we're going to do is create a one single taken.
Allergy backbone right are backing those platform and the front end is going to be independent right. So we're gonna have a local team at each of the brands are driving the uniqueness of the front end to students and to school, but we're gonna have this centralized backbone.
Driven by article tick right. So the idea here is to drive more efficiency.
Drive more agility, right and to allocate the beds resources fault go to all the brain right social debt stadia here.
Thank you.
Our next question comes from Pedro <unk> with Bank of America.
Hi, guys.
Thanks for the opportunity here.
Two questions. So the first if.
If you could just provide any.
Commercial cycle for next year, how you see you know it takes it makes for a domestic producers' lives or does it.
While up losing base like a nuclear.
Those are through the conversion.
So there are new systems.
That would be super hubs to be cheap there, especially in the second.
Can you just talk about that you would be better suited for neutral right now I just wanted to understand what is the strategy here right.
With all of these schools you won't get that.
If there is any difference and it turns out it gets worse.
Fiduciary.
Okay.
Thank you.
Hi, Pedro this is Eddie Thank you for your question.
Regarding the commercial cycle I'd say that the early signs are very strong. We used you are in the beginning of the cycle. Most of the contracts are signed in the second semester of the year between September and November.
But I think the main difference here is that we are now able to visit schools are our team is traveling extensively.
We're able to receive schools you know headquarters. So we are hosting events are very frequently and this last step off the sales cycle to close the deal is very important. So we see that in core we are multiple times ahead of a 'twenty 'twenty.
And in that drilled space in line of 2019 in the supplemental in 2019, we were growing 60%. So I would say that in 'twenty 'twenty. It's multiple times ahead of us.
Sorry in 2020, one as multiple times ahead of 2020, but I would say that the recovery.
To the levels of 2019, it's going to be in a two step our way.
So we're very optimistic at this point still early.
But.
The traction of the sales force and the sales team is very strong, but we are very excited for the months ahead.
Regarding startup that Ah I would say that the idea here is most to address those schools that used textbooks and want to have a white label product and the ability to flex belies your content and also to.
Have the possibility that they are teachers are produced content and upload in their platform.
I would say that.
These are.
And most of the times of premium schools.
That they have their own content produce it in house and regarding the pricing. It's the same pricing that we use as ses and because it's already a premium solution.
Super helpful. Thanks, so much.
Sure.
Our next question comes from Vinicius <unk> with UBS.
Hello, guys. Good afternoon, Thanks for taking my question.
It seems you'd like to discuss here. Please.
Thanks for the meters on the ATV South Super helpful. You mentioned the core legacy sales are in line with 2019, we just wanted to clarify if don't sales already include positive performance during 2019 or not.
And the second question is you guys reiterated your margin guidance and you alluded to the <unk> results, but just wanted to understand how dependent is the guidance on you achieving your internal goldcorp. The ATB that you start to start could you recognized during the fourth Q and should result in operating leverage.
How do you need to Oh title here. So thanks for the question as to the first one are you including for the Tivo Oh in 2019, Okay. So thing Brian.
Okay.
The second one with regards to the margin yes, we are.
For me or reiterating the range between 35, five and 37 five.
And finally of course, we had assumed that we will we reach our internal goals for for for next year right. So I mean traditionally we do right. So you're assuming and based on the early signs for us that he said 40 commercial cycle they seem achievable right. So we.
Broad the expected use on myeloma for where margins are this year. So the seasonality will reflect the historical train Oh right. So we should expect a.
A week adjusted EBITDA margin in Q3, and a strong adjusted EBITDA margin in Q4, so there should be no surprises there.
Picks up that quickly.
Oh, thank you.
Our next question comes from <unk>, Li She Banco BTG Pactual.
Good evening, he looked at her and carrying that Ah I have two brief questions here on my side. The first one I just wondering if you guys could give us more color on the two step recovery in the supplemental ACD.
I mean does it mean that it will take two years to fully recover should we expect these supplemental HCV.
Back to 2019 levels like in the 2023 cycle.
That's the first question and the second question I just wanted to know if you guys could give us a breakdown on the nonrecurring expenses.
That you guys published here today.
<unk>.
Hi, Oh title here so to your first point on the supplemental growth as already mentioned 2019 is both a business unit that was growing close to 60% right. So.
By saying that we expect this to be a two step recovery is not that we don't think that 60% growth is no longer achievable right is just because we think that to reach those both level you would need to have a full one year of a normal commercial activity, which did not happen right. So the truth is that Oh, I would say it.
Our team.
Was able to more intensively interact with schools from the month of May beginning of June right.
And the level of stress at the school was much higher in the first semester of the year right. So our point here is that we think we would need a full year of a normalized promotional activity to be able to reach those growth rate. Okay. So we think that struck.
<unk>.
A business unit is capable of having this growth and by seeing two stage, we think that possibly could happen in 2023, let's see.
As to the nonrecurring expenses.
Could you just repeat the question you wanted to understand what is included in non recurring right.
Yes, there is a line.
Called the nonrecurring expenses, but we don't have further details. So I just wonder if you could break it down for us.
Sure.
Yeah, absolutely. So inside will recur you basically have costs related to the Sox.
Implementation or accreditation to the company, Okay, and you have older expenses related to our emanate deals and due diligence process that we're undergoing okay.
Yes. Thank you very clear thank you guys.
Question comes from.
Yes.
Hi, Thank you Hey, what do you mean.
Okay.
I wanted to ask you were getting about the commercialization right I know that each of Italy, but I won't do to try to get some color or maybe some new terrain snow and ice.
You have to understand how can be eagle Ford's ability may be impacting the mix for next year and then if you. If you have noticed any different trends in size psi versus the new brands.
Oh sure English International schools, the ultra will make a profit, especially the new ones.
Yeah that would be my first question. Please.
Yeah.
Yeah Howdy here. Thank you for your question so.
We have seen a when you look at the core are strong performers for all the brands.
You highlight that.
<unk>, which is a premium brand is performing quite well, so far but I think that the good surprise here is really pulls achievable, where we have a two times higher.
Student intake this year when you compare that to last year and I think the reason for that is it's not.
The price positioning is it's mainly the changes and the evolution that we made.
In the product and in the technology.
I'd say that it's it's a it has been a good year for our replacing schools that used textbooks because they lack the technology necessary to pursue the activities in the post COVID-19 scenario.
But I also would say that especially for the less.
<unk> lives in smaller learning systems that lack the scale to invest it has also been a trend that these schools look for more robust solution like ours. So I would say that technology is playing in.
A very important role in shifting our schools from textbooks and small learning systems to our solutions.
Thanks.
Remember I remember when you bought side that you had a bump in one geo or something like that can lead to lease with an insurance not related with the changing hands from them from the brand. So it sounds like these times youre going to be able to avoid that that that would be really good news should we expect the same for the most culturally the ones that are out there.
Antitrust approval.
So I would say that we will not be able to execute.
A full cycle regarding both our retention.
And our school and commercial cycle, both for retail and commercial cycle because the the deal is expected to be approved on the fourth quarter. So.
So far.
Because of the antitrust.
<unk> figures that we have shows that the numbers are in line with previous years.
But definitely I think we won't have enough time to conclude a full cycle.
In COC in them both school because the antitrust will be approved on the last quarter of the year.
Makes sense. Thank you very much.
Thank you Javier.
Yes.
Hey, guys. It's it'll settle here we have a question from my read out from our side from the webcast. So can you provide more color only solve a prospect how does it shouldn't growth looked like and.
What are the opportunities identified for the D to C product. So it muddied up thanks very much for for the question. So we are super excited.
With me Sowell I think strategically this was the movement that Oh, we have been talking about Oh for awhile.
Wanted to have the possibility to serve.
Students enrolled in public schools right. So we wanted to impact those students, but it was very challenging to find the right to find the right a product.
Product right and to find equilibrium between what would be affordable four doses students and the acquisition cost.
Dougherty students six adults are traditionally digital product so misawa, he's a great fit a two digit strategy and we are two for me.
This is more and more as we know better yes. It your point on B to C U E.
Is actually very interesting because this is a.
Possibility right. So we think that the products offered by the Salto and the profile of two or three that are they offer them is highly capable of adding incremental value to the schools that we serve already are you already starting to test the appetite.
<unk> this product already in this semester right in the second semester of 2021 through.
Through our Freeman.
Feature.
And let's see I mean, we are testing our appetite right now and the idea is possibly next year, our up sell this product to a paid burden.
Okay.
Yeah.
At this time I have no more questions in the queue.
That concludes our second quarter 2021 earnings call.
So very much for your participation and have a nice day.
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