Q4 2021 Arco Platform Ltd Earnings Call
Good afternoon, everyone. Thank you for standing by and welcome to Oracle platform for Florida, and the full year 2021 earnings call.
The event is being recorded and all participants will be in Melisa I'll lean mode. During the company's presentation. After Oracle remarks, there will be a question and answer session at that time further instructions will be given should any participant need assistance. During this call. Please press <unk>.
<unk> zero cherished operator.
This event is also being broadcast live via webcast and may be accessed through our website at http. As coke.
Slash slash investor adopt Arco platform that conflict, where the presentation is also available now I'll turn the conference over to cutting OCA Hayden IR.
Our director Petty Ma'am you may begin your presentation.
Thank you I'm pleased to welcome you to Arco's fourth quarter and full year 2021 conference call with me on the call today, we have Arco's CEO I did just a couple of Internet and uncle Scheffel of that preferred during today's presentation. Our executives will make forward looking statements forward looking statements generally relate to future events or future financial.
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.
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 our 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 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 considered in isolation or as a substitute for results prepared in accordance with <unk> for us.
Have provided a reconciliation of these non air for his financial measures to the most directly comparable <unk> financial 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 discussed here are normal year for us and growth rates are compared to the pre.
At year comparable period, unless otherwise stated we also note that year over year comparisons are affected by acquisitions that were not included in our 2020 financials. Let me now turn the call over to Eddie Arco's CEO .
Thank you and thanks, everyone for joining today's conference call.
We hope that you and your families are all healthy and safe.
We'd like to present three topics today.
First on the results.
We had a very strong topline growth in the fourth quarter of 55% year over year to 468 million Reais.
As a result of the extremely successful 2022 commercial cycle, leading to net revenues of $1 2 billion Reais in 2021.
Adjusted EBITDA margin was 48, 7% in the fourth quarter of 'twenty one.
Despite the challenges 2021 margin excluding the M&A concluded in 2021 was 36% for the ear within the guidance range of 35, five and 37, 5%.
This is a very important achievement considering the impacts from the COVID-19 pandemic in our revenue recognition during the year.
Second we concluded the 2022 commercial cycle and at schools return to in person classes and restrictions related to the COVID-19 pandemic are gradually lifted we are resuming our growth trajectory.
2022, HEV was 156 billion reais, representing a strong 46% growth year over year.
And that 32% organic growth year over ear.
Just numbers comps above the guidance initially provided to the market back in November .
This strong HCV is a combination of healthy retention rates and price increase added to a solid organic growth for both our core and supplemental solutions powered by the successful cross sell initiatives.
We expect to continue to do so as our key differentiating factors gained further relevance and we want to consolidate our leadership position and strengthen our value proposition.
Finally, we can conclude this presentation detailing our three priorities for 2022.
Strong growth efficiency and cash generation and ESG.
I will now turn the call to our bedroom to discuss the results for the quarter well that'll. Please go ahead.
Thank you Eddie and good evening, everyone. Thank you for your time and I also hope that you underwrote too are all safe and healthy moving now to slide number five.
Net revenues for the fourth quarter of 2021 were 468 million Reais.
5% increase year over year, and representing a 29, 5% revenue recognition of the 2022, HCV, which we'll detail a few slides ahead.
Net revenues for 2021 reached 1.232 billion reais at 23% growth versus 2020, or 18% organic growth when excluding the M&a's announced last year.
Organic growth of our cost of sales in 2021 was in line with organic topline growth.
Selling expenses outpaced top line with a 30% year for your organic growth.
Line with our strategy to invest in go to market and customer support to boost future growth.
G&A expenses had an important dilution there'll be organically only 10% year over year.
As a result, adjusted EBITDA was $224 4 million reais in the fourth quarter, 78% above the fourth quarter in 2020 and.
$430 9 million Reais in 2021, 13% higher than 2020.
When excluding the M&a's concluded in 2021, adjusted EBITDA was 12% higher year over year with a margin of 36% within the guidance range, we provided for the year.
On slide six we present, the adjusted net income, which contracted 32% year over year in 2021 due to the lowered revenue recognition observed in the nine months and a high financial expenses. We also wanted to highlight that we are reducing the number of adjustments to our adjusted net income metric.
As part of our commitment to evolve and improve corporate governance and disclosure.
We eliminated three adjustments that we believe did not prevent investors to assess our cost operational results.
Interests on acquisition of investments linked to a fixed rate foreign exchange on cash and cash equivalents and share of loss of equity accounted investees.
Moving to slide eight we are excited with the results of our 2022 commercial cycle with schools resuming in person classes any students returning to the classroom, we reaccelerate growth our ACD bookings reach it wouldnt be the 560 million reais above the previously guided range represents.
A strong 46% year over year growth or 32% organic growth when excluding assets acquired from <unk> last year.
Core segment grew 32% organically year over year 20 C V of 1.109 billion Reais and over $1 6 million students.
Our supplemental content solutions comprised in 2021 of International School and P. S. In English as a second language is clothing to these Asia and Plano is social most of the learning and Navi is team grew by 35% organically 20 C V of 275 million Reais and over.
660000 students at important acceleration of largely attributed to our successful cross selling initiatives, which were key to the 80% increase in the number of our core schools using at least one supplemental solution.
Finally, we are breaking down other supplemental solutions comprised of our tech and services brands WP sought is calling moving into studios.
Studios and in due course as.
As well as our B to C solution Massawa.
And our education as a benefit solution it will pass which grew 38% organically year over year.
On slide nine we did tell you the build up of our 2022 ACB bookings our growth has always relied on our ability to retain our clients improve our value proposition driving price increases.
Our solutions within our partner schools and attract new partner schools.
It was not different.
Even in such a challenging year, we were able to deliver a retention rate stable when compared to the previous cycles at 93%, including both core and supplemental while adjusting prices on average by 6%.
During the call back to Eddie I'd eat. Please go ahead.
Thank you with that one.
On slide 11, we present, our four main priorities for 2022.
First priority is about using the power of our platform to continue to boost growth.
We reinforced on slide 13, the relevance of delivering a superior value proposition to our customers in 2021, we increased our net promoter score among core partner schools to 84, as we continued to improve the solutions into support our partner schools.
We also saw an important improvement in the academic results of our students. We students admitted in first place in public universities through the in an accent.
Growing 27% year over ear.
<unk> admitted in the top 10 growing 17% and total students admitted growing 27%.
Moving to slide 14, as Arco consolidates, its leading position cross sell becomes a central piece in our growth strategy.
We had important learnings and major achievements in our first year of cross selling initiatives.
First we saw a substantially higher lead conversion when the new solutions is introduced by an article farmer with a preexisting relationship. It was almost seven times the conversion rate without cross sell.
Second we had lower churn among core partner schools. Once the adopted other solutions from article it was hats off the churn of the schools without other solutions.
And third it is very clear to us that schools have space to adopt more than one supplemental solution and we continue to see an increase of keys of schools with two or three super mental solutions.
School base.
On slide 15, we present, an analysis of the potential increase in our HCV inside our school base with our existing students through cross sell initiatives.
When we considered the migration of students in our base that use only one supplemental solution or that use only a core solution.
Or that use our core and only one supplemental solution.
To the performance of our core solution plus two supplemental solutions, we see the potential to add 1.8 billion reais in HCV or more than double our current HCV.
Other words, we have a large potential to increase the ARPA or average revenue per user of our student base by cross selling additional solutions to that specific student.
Our second priority is about integrating all of our structure to unlock efficiencies and benefits of scale.
On slide 17, we present, our efficiency roadmap would have concluded the corporate reorganization in 2021 with the creation of the core reps plus.
Plus our Quebec and services business unit, we are now working on supply chain and technology initiatives.
Moving to slide 18, the supply chain integration is already on track in presenting positive results in 2020 . One we have integrated our printing efforts decreased the number of logistics suppliers and built a unique supplier chain culture, leading.
Two a 10% reduction in the operations cost per student and almost doubled the days payable outstanding.
For 2022 with Blaine on unifying our supply teams. According to business verticals create a performance team and create the planning service and production functional verticals.
On slide 19, we present, our technology integration plan, which will be made gradually over the next two to three years and should reduce complexity increase agility and improve out right user experience.
On the education technology front, we plan on reducing to one assessment form one boarding sign on in five content structures.
On the optimization front, we should you forward to eight systems from the existing 'twenty three.
Our third priority is about improving cash generation to strengthen our balance sheet and allow for future investments.
On slide 21, we present the main pillars that will lead us to a healthy cash generation in 2020 two.
We will focus on improving our cash cycle with the return of days receivable and inventories to historic levels and further improvement on payable days.
We will continue to incorporate the recently acquired business leading to lower effective tax rate.
And we will optimize our capex, which we expect to be 10% to 12% of revenues in 2022.
Finally, our fourth priority is about continued to expand disclosure on ESG initiatives and increase our impact.
We are releasing today, our 2021 ESG report, where we detail our 2025 goals lifting dollar projects to achieve these goals and update the main metrics in our three material pillars.
For 2022, our focus on measuring the evolution in learning at our partner schools and increasing the number of students learning 21st century skills.
Reduce turnover increase the employees M P S and strengthening our diversity programs.
And mapping our paper lifecycle and starting to measure our carbon emissions.
We know we have an important and critical role in our society and we are committed to continue impacting lives through education of high quality.
And to end this call I'd like to thank articles team for their resiliency effort Talon.
And an exceptional delivers in such a challenging year we have.
We are extremely excited with the outlook ahead of us.
Thank you very much for your trust in time, operator, we can now open for questions.
Thank you the floor is now open for questions. If you have a question. Please press star one on your Touchtone phone at this or any time is at any point. Your question is I'm sorry, you may remove yourself from the queue by pressing star two.
This will be taken in the order. They are received we do ask that when you pose your questions that you pickup your handset to provide sound quality.
Please hold while we poll for questions.
Our first question comes from Jeff Spaghetti, though.
B B.
Good evening, everyone and thanks for taking my question. My first question is regarding the ACB is shown on slide nine that the churn rate stood at 7%. This year could you. Please provide how this rate performance storage really just to understand.
It has been like and at least at this number is in accordance to last year's.
Yes, how could you increase the everything shows rates.
Going forward and the second question is regarding ECP brake one of your competitors mentioned that it's fair to assume ACP break very close to zero.
Is it fair to assume that for arc with you. Thanks.
Happy to.
Thank you.
All good questions.
Oh sure, yes, 7% pretty much in line with the.
The historical figures that we have posted or that other brands have posted over time.
And to your point on how we can improve.
Right, Okay, and it's pretty much one improving the brand to post all of these things from the more mature ones. So for example, we acquired through the Tivo.
Three years ago.
We think the rate of 86%.
This year from Tivo reduce your rate might be for right. So.
A little bit of time right.
Definitely improved the retention rate of the brands that we acquired and don't forget that guidance sure.
Implemented brand as well, which.
We thank you Sir.
Hey, so improving pretty much it's going to happen.
The mix of those maturing.
That's broad based technology in the.
Go to market strategy.
Two two.
Hum.
Okay.
So I mean this change.
It's pretty much based on the actual number of students currently using our solution and <unk> seen the platforms. So.
One five.
No longer are projections, okay. So busy.
But until now almost the mobile AP on the number of students in school.
Are using the political G.
So this is what gives us confidence that we will not see a breakage of ACD.
At this point.
Okay.
Okay.
Perfect very clear thank you.
Thank you.
Our next question comes from Vitor Tomita Goldman Sachs.
Good evening, all and thanks for taking our questions two questions from our side. The first one is on tickets.
So given that acquisitions have added quite a few new price points and that they're relatively high inflation levels.
Have you seen Brazil could you give us some more color on the dynamics of average tickets grow far car solutions in these years ACB bookings and on how you expect tickets to evolve going forward. This is our first question and our second question would be on the supplemental Tech solutions.
<unk> traditionally Oracle had mostly included technological our software features in the car solution behind us, but I understand that's newer software solutions like <unk> and some of the acquisitions have been sold separately as supplemental offerings from a strategic sense.
How do you see this going forward do you expect most new technological solutions, you acquire or develop to be included we seen car solution bundles just supports tickets and retention or is the plan to grow these solutions as a separate revenue line via cross selling and make them more.
Relevant to your longer term as revenue sources by themselves. Thank you.
Well, thank you Vincent.
Thanks for the question. So the first one will be tried some prudent.
As we show on the presentation.
The average ticket.
6% Okay.
For core and supplemental for the core brands, even though we do not disclose the broken pre separately look at bulk good level okay.
Still below that 10% inflation for 2021, and I'll keep it pretty much.
They needed to be.
It won't.
Building up our <unk> for the next year.
Very early.
Okay. So when we go back to the first months of last year, the run rate of inflation looks far away from 10%. So that's a lag effect.
You brought up the NCD protocols.
Especially in a year.
Inflation there was a lot.
Okay.
The first one.
This equity one.
Mix effect, okay here.
As you well pointed.
Pointed nowadays you have a very nice place.
With respect to a price point and yes.
Some well performance our brands.
Folio.
Also other ones.
Lower average stupid does not mean that the outgrew okay. The one with the highest every stupid actually we saw.
A very homogeneous performance across.
The portfolio, Okay, but there is a mix.
Back to you as well and finally, when you look at all of the cost inflation, okay. So articles plus inflation.
Both of them 21, do you think the profile.
Our calls given all those supply chain effort that will conclude.
Our compensation awards far away from 10% as well, okay. So didn't hold pricing.
On your second point about the new tax.
Futures.
I think those two strategies, Dave do not too late.
Okay.
Each of them in different ways Pfizer separately. Both sides featured we start to build up relationship with target schools. Okay.
As you know our port project that complex, rather like to respond to explain if you start to use some times and schools are freight from the exchange and so using that feature to one inside the school and from that point only expand its something that we have started to do okay. Since last year.
But it would not be bandwidth towards selling them together.
All of the supplemental okay. So basically we have a two fold strategy here.
Both work fine Okay.
Very clear thank you very much.
Thank you.
Our next question comes from Marcelo Santos of JP Morgan.
Hey, good evening Oh.
Thanks for taking my questions. The first question is about the competitive environment. If you could discuss a bit how is the competitive environment in core and supplemental markets and the second question is if you could discuss on the incremental if you hadn't supplement there I think you had $71 million re is an incremental <unk> from 2021.
For 2022.
How much is.
That roughly is sales to the current core clients and how much.
Sales to clients with our new clients.
Thank you.
Okay.
Thank you Marcella.
So talking about the competitive environment, what we've seen over the last years.
Pretty much similar to the environment that we've seen before.
We still have a very fragmented market with many players.
Some larger some smaller.
But one thing that I saw that we saw there was a little bit different in the last two years was especially.
The tax books with publishers.
<unk> that were <unk>.
Somehow reluctant to use our learning systems.
Were much more willing to consider our solutions because of their needs.
Technology and of course, because of the value proposition teachers' training and assessment flutter forums.
The brands that we add.
The school so we.
We saw.
Textbooks are losing share in the overall market.
Other thing of course since scaled.
More important.
The investment in content innovation and technology.
Men scale, what we what we've seen with the smaller players.
Had a harder time in order to invest in product evolution during the pandemic, but other than that.
I'd say that the competitive environment remains the same.
Sure.
Hello, everyone and thank you so on the supplemental incremental CEO . So.
Yeah.
Regarding more cross sell versus non cross sell right. So I mean, when you look at the penetration of supplemental products.
The core.
Students with went from 10% penetration in 2021 between 10% of our base of course.
Well what length of class solution.
2%.
122, however, the base of course students also grew substantially right. So I mean the.
Allstate's strategy proved to be quite effective and.
No.
Sure.
And I think that I think are more.
If you all recall the principle that the lead conversion.
We do cross sell is six times faster than when we do not cross sell for supplemental solutions.
And the second one is that when normalized been sharing and schools.
We had cross sell.
Perhaps the one where you do not have cross sell okay. So the truth is that in a bit more we do cross sell probably the lower our churn in the future, Okay and the third one.
Also quite important.
Helps the argument that amoeba is affordability.
We've shown that means the number of schools.
We.
Supplemental.
It's been just one year of cross sell so you get a warning.
Let's do it.
Thank you we can share that.
Or you're going to start to do reverse so pretty much youre going to start to do cross sell full supplemental to the court.
So today, we have pretty much three almost 400000 supplemental.
That did not.
Good core solution, yes, Okay, and post dosing 23, you're creating.
Incentives training.
Process This cross sell.
Right.
Just understand that last point because it is the first one is leasing versus six times faster churn, 50% lower than the last point is that you are going to stocking to reverse cross sell.
Does your desk.
Just to be sure I got everything.
Yes actually the third one was the number.
Uh huh.
Three supplemental solutions on top of the core product okay.
And the fourth one.
Cross sell so pretty much the core products to 400000 student debt today OLED yields once implemented and do not our core learning system yet.
Perfect very clear thank you very much.
Thank you.
Thank you Marcel.
Our next question comes from Vinicius <unk> UBS.
Hey, guys. Good afternoon, everyone. Thanks for taking our question.
Cocoa awesome on prove you have already addressed.
So first of all on the price increases.
Not sure I understood it correctly, but going forward, assuming we have a <unk>.
<unk> months of.
Double digit inflation, which we're likely to see here in Brazil.
Should we expect you guys to maintain.
It's spread over over inflation.
Price increases or under that circumstance is things that are different from from.
From some perspective and the second question going to the cross sell your analysis you guys provided by Christine.
And.
You addressed that in the previous questions, but you guys have a significant number of schools that have more than one supplemental solutions.
What do you see as the main hurdle for schools.
Once once you suspect traditional solutions, meaning that two or three years you guys provided in the slide.
Thanks.
Sure.
For the question. So on your first one no I mean.
Our goals for next year it is in flight.
Real price increase okay. So our goals will drive improved for 2023.
Our above 2% definitely okay, even though I mean, according to market patient that.
It looks like inflation next year going to be.
6%, who knows but I mean, our goals for next.
Next year are much closer to a.
High single digit then.
Okay.
Hum.
To your second point, I mean, I would say, yes to date do you have a relevant portion of schools using one court.
Uh Huh supplemental solutions.
The number of printers, okay. So it is irrelevant.
Remember, we also remind that cross sell.
Okay. So I think it was about facing I mean.
Pushback in school I think it's more about execution.
Improving construction strategy.
Interactive okay.
It's called <unk>.
Supplemental I mean, usually what we see is one by legal product, Okay, Claude one social motion or make a profit.
Sandra.
Youre seeing.
<unk>.
And I'm very lucky that you're gaining SKU.
Cool.
So at the end of the day and not only the acquisition cost of watching them to do that.
Slowly, but I mean, when you think about the lifetime value of this contract over time.
Higher so this allows us to.
<unk> worked with bundles and be competitive.
To penetrate those who are.
More supplemental products.
Yes, one thing that they experience.
Thank you.
Our next question comes from Javier Martinez Morgan Stanley .
Instead Javier you May go ahead.
Yeah.
Remember that you posed the question you May press Star one.
At this time, we have no further question in the queue.
That concludes Arco's fourth quarter and full year 2021 earnings call. Thank you very much for your participation and have a nice day you may now disconnect.
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