Arco Platform Ltd (ARCE) 2021 Q3 法說會逐字稿

Good afternoon, everyone. Thank you for standing by, and welcome to Arco's Platform Third Quarter 2021 Earnings Call. This event is being recorded. (Operator Instructions) This event is also being broadcast live by webcast and may be accessed through Arco's close website at investor.arcoplatform.com, where the presentation is also available.

Now I will turn the conference over to Carina Carreira, Arco's IR Director. Carina, you may begin your presentation.

Thank you. 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, Ari de Sa Cavalcante Neto; and Arco's CFO, Roberto Otero.

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 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, 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 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-IFRS financial measures on this call. The non-IFRS financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with IFRS. We have provided a reconciliation of these non-IFRS financial measures to the most directly comparable IFRS financial measure in our press release.

Please note that except from revenue, gross margin, selling expense, G&A and cash flow from operations, all other financial measures we discuss here are non-IFRS, 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 acquisitions that were not included in our 2020 financials.

Let me now turn the call over to Ari, Arco's CEO.

Thank you, Carina, 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 3 topic today, as shown on Slide 3.

First, on the results, we had a 16% revenue recognition in the quarter, leading to a net revenue of BRL 1.057 billion for the 2021 cycle. Excluding new business, which our business not accounted for in the 9 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 aligned with the successful 2022 commercial cycle.

We highlight and we'll detail further ahead 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 8.6%, the lowest margin of the cycle, as expected, due to historic seasonality. Additionally, it reflects product development and investments in sales and marketing as well as the new business, which carry lower margins as they are still in early stage of maturation. Margin for the 9 months of '21 was 26.8%. Excluding the acquisitions concluded in 2021, the 9 months '21 margin was 27.3%.

Second, we reiterate our 2021 adjusted EBITDA margin, which will be between 35.5% 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 announcement.

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 start later than usual this year because of the second wave of COVID in Brazil. We expect revenues to grow between 27% and 29% organically in the 2022 cycle or 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 3 years as Arco continues to reinforce its platform profile and benefits from a more efficient structure.

I will now turn the call to Otero to discuss the results for the quarter. Otero, please go ahead.

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

Moving to Slide 5. Net revenues for the third quarter of 2021 were BRL 183.3 million, a 12% reduction year-over-year and 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 9 months of 2021 totaled BRL 771.2 million, 9% above the same period last year. With the results of the third quarter, we concluded the 2021 cycle with $1.057 billion in revenues, 9% below the ACV booking provided in the beginning of the year, as is Cores incurred in dropouts as a result of the pandemic.

As we show on this slide, we historically incurred a very small variation between ACV and collected revenues in the cycles. What makes it clear that 2020 and 2021 were directly impacted by the pandemic outbreak. We don't expect revenues to be below ACV in 2022 as the schools were, in general, conservative with the size of the contracts, and we are not assuming any positive organic variation in our ACV guidance for next year.

On Slide 6 and 7, we present the year-over-year dynamics of our G&A and selling expenses. Starting with Slide 6. On G&A, the growth in both third quarter and 9-month G&A figures reflect the 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 third-party services related to new businesses acquired, mainly COC and Dom Bosco. And finally, the fair value update on Geekie's stock option plan, which is 100% connected with the acquisition price of the company, as explained in the financial statements.

When we look at G&A, only considering the same companies that were consolidated last year and excluding the RSU plan, we see a 19% drop in the third quarter year-over-year and 10% down in the 9 months. This is the first signal of the efficiency measures we are putting in place to drive higher profitability of our operations.

On Slide 7, we discuss the performance of our selling expenses. The higher Q3 and 9 months selling expenses reflect: first, expenses related to new businesses similarly to the trends witnessed in the 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, Arco was extremely diligent with the quality of its receivables. We opted to not flexibilize on pricing conditions or aggressive commercial terms to retain our clients. Instead, we flexibilize on payment terms with a slightly longer installments. As a consequence, our allowance for doubtful accounts have 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 9. The 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 was not different. In the third quarter of 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 in the third quarter this year. As a consequence, our adjusted EBITDA reached BRL 15.8 million in this quarter or BRL 206.4 million in the 9 months for an accumulated margin of 26.8% or 29.2% if excluding the recently acquired businesses. The operating profit compression combined with higher depreciation and amortization led to an accumulated net profit of BRL 85.5 million in the 9 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 on supply chain and G&A, which we will discuss in more detail on our upcoming Arco Day on December 6, as those initiatives are part of a more comprehensive plan.

I will now turn the call back to Ari. Ari, please go ahead.

Thank you, Otero. Moving to Slide 13. We are very excited about the year-to-date results of our commercial cycle for the 2022 school year. At this point, we are providing an ACV bookings guidance for 2022 of BRL 1.475 billion to BRL 1.515 billion, which translates into an organic growth of 27% to 29% or a total growth, including recent M&A, of 38% to 42%.

On Slide 14, we share some qualitative and quantitative aspects of this expected ACV growth. New student intake and upsell for both Core and Supplemental Solutions were extremely positive. At the midpoint of the guidance range, we have Arco Core ex-Positivo brands with organic growth of approximately 37%, while positive (sic) [Positivo] brands accelerated to approximately 17%. Supplemental Solutions recovered significantly versus 2020 with approximately 35% organic growth.

Cross-sell initiatives were quite relevant for the year, contributing to 31% in the number of our Core schools using at least 1 Supplemental Solution. Contracts originated by a cross-sell initiative represents 70% of the Supplemental contracts closed year-to-date for the 2022 cycle. 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 are always committed to our client satisfaction, which translates into our NPS that has increased 18% in the last 2 years with highlight to Positivo 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 to 36.5% to 38.5%, reflecting Arco's integration initiatives and corporate restructuring in place as we pave the way to become a portfolio hub of education solutions and a more profitable and 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 Me Salva!, Eduqo and Edupass, which actually carry negative margins but have higher growth, our adjusted EBITDA margin for 2022 would be 180 bps higher.

In Slide 17, let me use this opportunity to quickly comment on the $150 million investment from Dragoneer and General Atlantic announced 2 weeks ago. The investment was made through the acquisition of convertible senior notes that will mature in 7 years and bear interest rates at 8% per year fixed in Brazilian reais. The investment reinforces Arco's cash position so we can continue to fund our growth strategy in the Education segment, while bringing on board 2 highly renowned growth-oriented investment funds that will advise us in path to continue impacting the lives of students all over Brazil.

I also would like to invite you all for our first Arco Day, which will be hosted on a virtual format on December 6 at 12 p.m. Eastern Time. We are excited to have our leaders sharing their views on their business and great opportunities that we have in the years to come.

To end this call, I would like to thank for all the effort and talent of our team. Our people were responsible for achieving great results in a very adverse period of our company, and we are very excited with the 2022 year and the years to come.

Thank you very much. Operator, now we can open for questions.

(Operator Instructions) Our first question comes from Vinicius Figueiredo, Itaú.

The first question in regard to ACV guidance for 2022. Taking a look at your breakdown, we could see that the Core ex-Positivo and Supplemental are rebounding already quite well, but Positivo should be the laggard. What the company still needs to do to accelerate the growth for this specific brand? And when should we expect it? Obviously, if you could give us more detail on the nonrecurring third-party expenses that we saw this quarter, it would be great.

Sure. Vinicius, this is Otero here. Thanks for the 2 questions. So starting with the second one, the third-party services is mainly driven by the payment of the fee related to the acquisition of COC and Dom Bosco. Okay. So on the financial statement, we are breaking down this amount, but it's roughly 90% of the third-party services refer to the banking fee and the legal fees related to the acquisition.

On the first one, yes, I mean, to your point, Positivo could become the laggard. And actually, we see the 17% growth as a quite strong figure. If you could remind (sic) [recall], by the time we acquired this company, Positivo was growing around 5%. Then last year, so 2020 was the first year after the integration, right, but COVID came and pretty much we couldn't collect the benefits from all the efforts we have put in place the company, both on the product technology and the sales force.

However, I mean, this year, we think we are collecting this benefit. So 17% growth versus around 5%, 6%, which, I mean, is where the company was growing 2 years ago. We think it's a very good number. And as already said in the beginning of the call, right, I mean, this sales cycle pretty much started by end of May, beginning of June. That's the truth because of the second wave of COVID. We think that in a normal year, probably growth would have been higher.

And I think that when you look at the qualitative aspect of the growth from Positivo, we see improvement in several lines. So not only in the number of new students coming to the base but also on retention and NPS, which to us, I mean, among the most important metrics, right? So I mean we are happy with the results. We think that, of course, this sales cycle has started earlier or in line with the usual time line, probably the results will be even stronger. But I mean compared to where it started, by the time we acquired the company, I think it's a big success.

Our next question comes from Yan Cesquim, BTG Pactual.

Two questions on our side, which I think are correlated, okay? The first one is about the share-based compensation plan, I'm sorry. I understand -- I wanted to understand better the year-over-year increase considering this recent stock performance.

And the second one is about financial expenses. I believe that both of them could be kind of correlated with the stock option plan of Geekie, but I just wanted to get a little bit more color on these 2 questions. And that's it.

Sure, sure. Yes. Thanks for the question. Yes, I mean we -- in the presentation on the footnotes, we explained the dynamic pretty much by the time we acquired Geekie, we also agreed to acquire the management-rated stock option plan, right? So this was part of the agreed price and part of the disclosed that with price of this acquisition, okay?

So every time we recalculate the value attributed to the stock option, we have to update both the account payment -- the account payment to shareholders [like the third one] that we have on the liability and also update the RSU. So this increase is 100% related to the earnout of Geekie's outstanding premium payments, okay? So this has nothing to do with Arco RSU plan. As I said, I mean, the stock price is down. So I mean it wouldn't make sense. So this is 100% connected with the earnout of Geekie, which is composed also by the purchase of their stock option plan, okay? So -- and Geekie had a very good commercial performance this year. So this reflects on this line and also the account payment to selling shareholders.

Our next question comes from Vinicius Ribeiro, UBS.

Two on the ACV guidance, if I may. So first, is the guidance including the return of students that dropped out during 2021? Or that would be an upside to them? And number two, a little more on the collective 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 than the marketing expenses or something like that, that should -- would indicate a change in the industry? Or should we assume that the landscape continues the same as it was in the pre-COVID time?

Sure. No, thanks for the questions. So on the first one, in this ACV, we are not incorporating any assumption of positive organic variation, okay? So we are pretty much assuming the number of students as per the contracts that were signed, so any positive organic variation would be an upside to our numbers. We think it's worth mentioning that even though we started the intake process by the end of May, the renewal of the contract we started earlier in the year, which pretty much when the second wave of COVID was hitting Brazil.

So I mean when we look at the contract signed, 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 those same schools by the end of this year, right? And we know that those subscriptions were even higher than the size of the contract signed with those schools in the beginning of the year.

So I mean being straightforward here, I mean, the ACV could have upside or the revenue, right, for next year could have upside depending on these positive organic variation that we couldn't have seen, which we think that there's a high possibility to happen.

To your second point on competition, I mean, we cannot comment on the competitors' growth. But in general, we think the combination of our growth retention and price increase showed that we were among the winners for sure. I'll give you an example. I mean, if we take SAS, which is most premium brands, SAS is the most premium brand in the market. And as a consequence, it's one of the most expensive learning systems in Brazil, which means that any competitor that approaches a SAS school will probably bring a more competitive pricing condition, and this probably happened this year.

Nevertheless, SAS will cost in 2021, a retention rate in line with all-time high levels, around 97.5%, 98%. So we think it's a proof that yes, there is competition in the market. But I mean quality education, [parent/guardian] support and that being key reasons why schools opt to stay with us. So yes.

So we have a question from (inaudible). I'd just like to get an update on international school, (inaudible) process and the commercial cycle.

Sure. Thank you, (inaudible), for the question. So yes, actually, we have news regarding the arbitration process. Today, a couple of hours ago, we received the decision from the arbitration court, which we will disclose tomorrow before the market opens in our financial statement at the ICC. The court has decided that Mr. Ulisses is not entitled to receive any shares of Arco, and that the amount to be paid by Arco shall be calculated based on 10x the realized EBITDA for 2019 and 2020 school years, both net of net debt, as determined in investment agreement. This is 100% consistent with the calculation methodology that we used to estimate the provisioned amount in our balance sheet, as reported.

With regards to the commercial cycle of international school, I mean the figures are quite encouraging. I mean, as Ari said and as we show on the presentation, Supplemental is showing a 35% organic growth year-over-year. This is a major recovery from last year. And international school, given its size, of course, is among the high-growth products within Supplemental. So yes, international school is performing quite well. And Supplemental as a whole, we think that we delivered a very good result despite again the fact that the sales cycle started later in the year and the more discretionary profile of this product. So it was a very good result for international school and Supplemental as a whole. As I said, I mean, in the arbitration, we have a positive ruling from the court.

Our next question comes from Javier Martinez, Morgan Stanley.

In reality, my question was answered, but let me get a little bit more detail on international school. So what is the provision you have already? Can you remind us? And then the expectation is that, that should cover 100% of the conclusion of arbitration, correct?

Javier, it's Otero here. Thanks for the question. Yes. So today, in our balance sheet, we have roughly BRL 370 million provision in the liabilities. So as per this decision from the arbitration court, the formula 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 accurate one. You're right.

(Operator Instructions) At this time, we have no further questions in the queue. That concludes Arco's Third Quarter 2021 Earnings Call. Thank you very much for your participation.