Q3 2021 Arco Platform Ltd Earnings Call
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Good afternoon, everyone. Thank you for standing by and welcome to Oracles platform third quarter 'twenty 'twenty. One earnings call. This event is being recorded an 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. At this time clothing strict shows that it will be given should any purchase that need assistance. During this call. Please press star zero to reach the operator.
This event is also being broadcast live via webcast and may be accessed through our website at investor Doc Arca platform Dot Com <unk>, where the presentation is also available now I will turn the call for a server Jakarta, Yanacocha Heder Arcos IR director Arena.
You may begin your presentation.
I'm pleased to welcome you to Arco's third quarter 2021 conference call with me on the call today, we have Arco's CEO, Adam just a couple of things matter and Arco's CFO of better data during today's presentation, our executives will make forward looking statements.
Forward looking statements generally relate to future events or future financial or operating performance and ease of 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 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 is.
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.
Forward looking statements in this presentation are based on the information available to us as of the date 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 the you're correct. We have provided a reconciliation of these non <unk> financial measures to the most directly comparable I FRS fine.
Shall 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 <unk> and 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 would not include the dinner to tell them in 'twenty financials, Let me now turn the call over to Eddie Arco's CEO.
Thank you Gardena and thanks to everyone for joining today's conference call.
We hope that you and your families are all healthy and safe.
You'd like to present three topics today as shown in slide three.
First on the results, we had a 16% revenue recognition in the quarter, leading to a net revenue of $1 billion and 57 million Reais for the 2021 cycle.
Excluding new business, which our business is not accounted for in the nine months of 2020, our G&A expenses started to reflect efficiency measures, which will lead to improved profitability and earnings quality, while selling expenses increased align with the successful.
<unk> 2022 commercial cycle.
We highlight Andy will detail further had the positive performance of our allowance for doubtful accounts, which dropped 61, 8% year over year and has returned to historical levels with a sequential increase in our coverage index.
The adjusted EBITDA margin for the quarter was eight 6% the lowest margin of the cycle as expected due to historic seasonality.
Additionally, it reflects product development investments in sales and marketing as well as the new business, which carry lower margins as they are still in early stages of maturation.
Margin for the nine months of 'twenty, one was 26, 8%.
Excluding the acquisitions concluded in 2021, the nine months 21 margin was 27, 3%.
Second.
We reiterate our 2021 adjusted EBITDA margin, which will be between 35, five and 36%.
We will present the drivers that will take us to this result further ahead, but I wanted to emphasize that this will configure an important achievement and indicates our commitment to the guidance, we disclosed to our shareholders. Despite the lower than expected revenue generation. This year, which was not anticipated by us by the time of the guidance.
Now cement.
Okay.
Finally, we are announcing today our guidance for next year.
We're very proud to say that we have a very strong commercial cycle. Despite the fact that our commercial activities started later than usual this year be cut up because of the second wave of Covid in Brazil.
We expect revenues to grow between 27, and 29% organically in the 'twenty to 'twenty two cycle.
38% to 42% with recent M&A.
We are also moving the announcement of our adjusted EBITDA margin guidance for the upcoming fiscal year to the third quarter as we have revisited our budgeting process.
We are moving our EBITDA margin guidance range to 36, 5% to 38, 5% for 2022 from 35, 5% to 37, 5% for the last three years as Oracle continues to reinforce its bladder form profile and benefits from a more efficient.
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I will now turn the call towards data to discuss the results for the quarter or federal. Please go ahead.
Thank you Eddie and good evening, everyone. Thank you for your time I also hope that you and your relatives are all safe and healthy move.
Moving to slide five net revenues for the third quarter of 2021 were $183 3 million Reais, a 12% reduction year over year, leading to a 16% revenue recognition below the historical average for the quarter impacted by the Covid related dropouts in the year.
Net revenues for the nine months of 2021 totaled 771.2 million Reais, 9% above the same period last year.
With the results of the third quarter, we conclude the 2021 cycle with 1.057 billion in revenues, 9% below the ACD booking provided at the beginning of the year as the schools encouraging dropouts as a result of the pandemic as we've shown this light we historically incurred a very small variation between ACB and collected rare.
<unk> in the cycles, what makes it clear that 2020, and 2021 were directly impacted by the pandemic outbreak. We've done expect revenues to be below a TV in 2022 as the schools were in general Conservative with the size of the contract and we are not assuming any positive again.
The Asian in our AZZ guidance for next year.
On slides six and seven we present the year over year dynamics of originate and selling expenses.
Starting with slide six on G&A the growth in both third quarter and nine month G&A figures reflect expenses related to new businesses acquired in the last 12 months and therefore not incorporated in the same period last year. It also reflects nonrecurring 30 party services related to new businesses acquired mainly COC Endo, both school and finally.
The fair value update and get to the stock option plan, which is 100% of connected with the acquisition price of the company as explained in the financial statements.
When we look at G&A ultimate considering the same companies that were consolidated last year and excluding the RSV plan, we see a 19% drop in the third quarter year over year and 10% down in the nine months. This is the first signal of the efficiency measures, we are putting in place to drive higher profitability of our operation.
On slide seven we discuss the performance of our selling expenses, the higher Q3, and nine months selling expenses reflect first expenses related to new businesses. Similarly to the trends witnessed indeed, G&A and second the resumption of traveling and events key factors of our commercial strategy we wanted.
To highlight the very positive performance of our allowance for doubtful accounts, which reflects the quality of our receivables and the success of our cash collection performance, which we detail in the next slide.
As we have been discussing with the market articles was extremely diligent with the quality of its receivables.
To not flexible lies on pricing conditions or aggressive commercial terms to retain our clients. Instead reflects belies some payment terms with a slightly longer installments as a consequence, our allowance for doubtful accounts has now returned to pre pandemic levels with delinquency dropping and our coverage index expanding sequentially, we continue to see.
A very healthy operating cash flow conversion, which is a characteristic of our business model.
Moving to slide nine to revenue contraction naturally impacted our EBITDA and net earnings. The Q3 is usually a weak quarter in terms of EBITDA and net profit contribution to the year and in 2021 it wasn't that different.
Third quarter 2019, we generated negative adjusted EBITDA, while in the third quarter 2020, our EBITDA was positively impacted by lower than usual selling expenses as a result of the social distancing measures in Brazil. We also remind that our revenue recognition last year in the same quarter was higher than the revenue recognition into.
Third quarter this year as a consequence, our adjusted EBITDA reached $15 8 million rise in this quarter or $206 4 million in the ninth month for naturally the margin of 26, 8% or 29, 2% if excluding the recently acquired businesses do.
<unk> operating profit compression combined with higher depreciation and amortization led to two onex compared to a net profit of $85 5 million reais in the nine months of 2021.
Moving to slide 11, we wanted to once again reiterate our EBITDA margin guidance for 2021, we expect the margin to be at the bottom of the range between 35, 5% and 36% on top of historically strong Q4 contributing to the annual EBITDA.
We will collect the benefits from the several efficiency initiatives being put in place mainly coal supply chain and G&A, which bill will discuss in more detail on our upcoming Oracle day on December six as those initiatives are part of a more comprehensive plan.
Now I'll turn the call back 'twenty I. Please go ahead.
Thank you Alberto.
Moving to slide 13, we were very excited about the year to date results of our commercial cycle for the 'twenty to 'twenty two.
School ear.
At this point, we are providing an HCV bookings guidance for 2022 off 1.4 dollars 75 billion to 151, 5 billion reais, which translates into organic growth of 27% to 29% or a total growth including recent M&A.
38% to 42%.
On slide 14, we share some qualitative and quantitative aspects of this expected HCV growth.
New student intake and upsell for both core and supplemental solutions were extremely positive at.
At the midpoint of the guidance range, we have our co core ex post tivo brands with organic growth of approximately 37% while positive brands accelerated to approximately 17%.
Supplemental solutions recover significantly versus 'twenty, 'twenty with approximately 35% organic growth.
Cross sell initiatives, we're quite relevant for the ear contributing to 31% in the number of our core schools using at least one supplemental solution.
Contracts originated by our cross sell initiative represents 70% of the supplemental contracts closed year to date for the 2022 cycles.
Retention rates were consistent with historical trends, while average price increases also presented a very healthy performance even in such challenging macro scenario.
Finally, we are confident that this positive outcome was possible because we're always committed to our client satisfaction.
Which translates into our NPS that has increased 18% in the last two years with highlight two pozzi, chief who brands strong sequential improvement.
Moving to slide 15, as I mentioned before we are moving the announcement of the adjusted EBITDA margin guidance to the third quarter.
We expanded the range for 2022 fiscal year 236, five to 38, 5%, reflecting arcos integration initiatives and corporate restructuring in place as we pave the way to become a portfolio hub of education solutions and a more profitable efficient company in the years to come.
Important to mention that this guidance includes all recently acquired business to date when excluding operations still in the early cycle of maturation, such as any Silva at dooku into pass, which actually carry negative margins, but have higher growth our adjusted EBITDA margin for 'twenty.
And two would be 180 bps higher.
In Slide 17, let me use this opportunity to quickly comment on the $150 million investment from drag on the year end General Atlantic announced that two weeks ago.
The investment was made through the acquisition of convertible senior notes that will mature in seven years and bear interest rates at 8% per year fixed in Brazilian reais.
Investment reinforces arcos cash position. So we can continue to fund our growth strategy in the education segment, while bringing onboard two highly renowned growth oriented investment funds that will advisors in past continue impacting the lives of students all over Brazil.
I'd also like to invite you all for our first Arco D, which will be hosted on a virtual format on December six at 12 P M Eastern time.
We are excited to have her leaders sharing your views on their business.
And great opportunities that we have in the years to come.
To end this call I'd like to thank for all the effort and talent of our team.
Our people were responsible for achieving great results in a very adverse periods of our company and we were very excited with the 2022 year and the years to come.
You very much operator, now we can open up for questions.
Yeah.
Thank you the floor is now open for questions. If you'll have a question. Please press star one on your touched on fan out. These are anytime if at any point or question is answered you may remove yourself from the queue by pressing star two questions will be taken there are there. They are received we do ask about it when you pose your.
Question that you pick up your handset to provide optimal sound quality. Please hold our first question comes from Vinicius forget is the Ito.
Thanks for taking my question.
First question regards to HCV guidance for 2022.
Look at your breakdown guests about the car will be achievable and supplemental are rebalancing already quite well, but both achieved what should be the laggard.
And they still need to do to accelerate your growth targets, a specific brand and why should we expect it.
Just wondering if you could give us some more detail on the nonrecurring third party expenses that we saw this quarter would be great. Thanks.
Sure Hi, Vineet.
Thanks for the two questions. So starting with the second one or the third party services is mainly driven by the payment of the fee related to the acquisition of <unk> and <unk>. Okay. So it won't be financial statement, we are breaking down a decent amount, but roughly 90%.
Specifically services.
To the banking fees and legal fees related to the acquisition.
On the first one yes.
Yeah, I mean to your point for the Tivo.
Could be close to double what I'm actually we see the 17% growth.
Quite strong figure if you remind by the time, we acquired this company for the people we're growing around 5%.
Then last year. So 2020 was the first year after the integration right.
Colby claim and pretty much we couldnt collect the benefits from all the efforts you have put in place the company in both on the product technology.
And the.
We report however, this year, we think we are collecting.
This benefit so 17% growth versus around five 6%, which I mean, what the company was growing two years ago. We think it is.
I heard the number and as already said at the beginning of the call right. I mean, this sales cycle pretty much started by end of May beginning of June.
The true.
Because of this second wave of Covid, we think that in a normal year, probably growth would have been higher.
And I think that when we look at the qualitative aspect.
The growth for the Tivo.
See improvement.
Your line so not only in the number of new students coming to the base, but also only retention NPS, which was.
Among the most important metrics right. So I mean, we are happy with the result within that of course is the sales cycle has started earlier or in line with the usual.
Timeline, probably be it will be even stronger, but I mean comparable compared to where it started but it's a required the company.
It's a big success.
Okay, perfect very clear.
Thanks for that.
Thank you.
Our next question comes from <unk> <unk> BTG Pactual. Please proceed.
Good evening, everyone two questions on our side.
We still think correlated okay.
First one is about the share based comp.
Compensation comprehension compensation plan I'm sorry.
I understand I wanted to understand better.
Year over year increase considering the recent stock portfolio performance.
And the second one is about our financial expenses.
I believe that both of them could do.
Kind of correlated will be with the stock option plan.
But I just wanted to get a little bit more color on these two questions.
Thank you.
Sure sure. Thanks for the question.
Yeah, I mean, we either presentation on the footnote, we explain the dynamic but pretty much by the time, we acquired <unk>.
We also agreed to acquire.
The management related stock option.
Right. So this was part of the equity price and part of the disclosed agreed price of this acquisition. Okay. So every time, we recalculate the value attribute it to the stock option, we have updates Volker haase payments.
The house payment to shareholders like the <unk> that we have on the liability and also updates <unk>.
So these increases are 100% related to the earn out of <unk>.
Frank.
Payment. Okay. So this has nothing to do with our coach or is your plan as I said I mean.
The stock price is down so I mean, it wouldn't make sense.
This is a 100% connected with earn out of geeky reached is composed also by the purchase of the stock option plan. Okay. So and he could have a very good commercial performance.
This year. So these reflect on this line and also the account statement.
Shareholders.
Perfect.
Thank you.
Thank you.
Our next question comes from Venetian Debatable UBS.
Good afternoon, everyone. Thanks for taking our questions two on D. C V guidance, if I if I may so first.
Is the guidance, including.
The return of students that dropped out during 2021 of our debt would be an upside to consider them and number two I'm a little more on the qualitative side you guys can share with us anything about the commercial landscape. I mean is there any one that was more aggressive in terms of prices or more aggressive.
Marketing expenses or something like that that should.
Would indicate a change in the industry are should we assume that the landscape continues the same as it was pre COVID-19.
Thanks.
Sure no.
Thanks for the question.
On the first one.
We are not incorporating any assumption of positive organic variation. Okay. So we're pretty much assuming the number of students as per the contract.
<unk>.
So any positive organic variation would be an upside to our numbers.
It's worth mentioning that.
Even though we started the process by the end of May the renewal of the contract earlier in the year reached pretty much when the second wave of Covid hitting Brazil. So I mean, when we look at the contract signed a for example by the end of the first quarter. They were quite conservative right and we know that because we know.
How many subscriptions we provided to both same schools by the end of this year right and we know the dos subscription even higher than the size of the contract signed with those pools in the beginning of the year. So I mean being being straightforward here I mean, the ACP could have applied or the revenue rate for next year could have upside.
Depending on these positive organic operation that we could end up seeing which we think that theres a hyper ultimately this will happen.
To your second point on competition I mean, we cannot comment on the competitive growth, but in general we think the combination of our growth retention and price increase showed that we were among the winners for sure.
An example, I mean it takes us.
The world's most premium brand.
The most of and bringing to market and as a consequence.
Expensive legacy systems.
And Brazil, which means that any competitor that approaches.
We will probably bring a more competitive pricing condition.
And it's probably easier nevertheless.
In 2021, our retention rate in line with all time high levels around 97, 5% 98%.
But we think its appropriate yes, there is competition in the market, but I mean quality reputation, but I'm going to support end up being key reasons why it holds up to stay with us so yeah.
Thanks, Thanks for the answers.
Yeah.
Sure. So we have a question from Covid you Richie good afternoon, just like to get an update on introductions coal.
The arbitration process and the commercial cycle sure. Thank you Rajeev. Good question. So yes, actually we have news regarding the arbitration process today.
Today, a couple of hours ago, we received the decision from the arbitration occurred.
Which will disclose tomorrow before the market opens in our financial statements the FCC.
Has decided that Mr releases is not entitled to receive any shares of <unk>.
And that's the amount to be paid by our sharp beak calculated based on 10 times the realized EBITDA for 2019 and 2024 years.
<unk> net of net debt as.
As determined in the investment agreement business, 100% consistent with the calculation methodology that we used to estimate the provision amount in our balance sheet as reported.
With.
Got to be a commercial cycle internationally school I mean, the figures are quite encouraging.
Or is that and as we show on the presentation of supplemental showing a 35% organic growth year over year. This is a major recovery from from last year.
And interact with <unk> given its size of course.
Among the high growth.
Product within the plan. So so yes in terms of scope is performing quite well.
And supplemental as a whole we think that has delivered a very good result, despite again, the fact that the sales cycle started later.
In the year.
Discretionary profile of this product so it was.
It was a very good result for international school in supplemental.
And as I said I mean, the arbitration, we have a positive ruling.
From the Kurt.
Okay.
Our next question comes from Javier Martinez.
Morgan Stanley. Please proceed.
Hi.
So thank you very much and my question was answered but the.
Let me, let me get a little bit more detail on international nurse call and also the what are you where do you typically shouldnt you have you had already can you remind us then.
The expectation is that that should cover 100% of the.
Of the completion of the arbitration correct.
And we had we took title here. Thanks for the question, yes. So to date on our balance sheet, we have roughly 370 million reais provision in the liabilities.
This decision from the arbitration Kurt the format that we used to calculate this amount is in accordance with the interpretation from the arbitration court as being the most adequate way to calculate this remaining amount okay. So based on this.
Decision, apparently I mean, the number is the most equity youre right.
Fantastic.
Okay. Thank you very much.
Thank you.
Thank you once again, if you have a question. Please press star one and two.
To remove your question. Please press star two.
Thank you at this time, we have no further questions in the queue that concludes Arco's third quarter 2000, <unk> earnings call. Thank you very much for your participation.
Okay.
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