Vasta Platform Ltd (VSTA) 2023 Q1 法說會逐字稿

Hello, and welcome to the Vasta Platform First Quarter 2023 Financial Results. (Operator Instructions) I would now like to turn the conference over to Marcelo Werneck, Vasta's IR. Please go ahead.

Good evening, everyone, and thank you for joining us in this conference call to discuss Vasta Platform first quarter of 2023 results. I am Marcelo Werneck, Vasta's IR. And with me on the call today, we have Guilherme Melega, Vasta's CEO; and Cesar Silva, Vasta's CFO.

Before we begin, I would like to read the forward-looking statements. 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, expectations for future periods, our expectations regarding our strategic product initiatives and their benefits, and our expectations regarding the market.

Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. These risks include those set forth in the press release that we are issuing 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 today. You should not rely on them as predictions of the 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. Let me now give the call over to Guilherme Melega to make his opening statements.

Thank you, Marcelo. Thank you all for participating in our earnings release call. I'd like to cover Slide #3 with some highlights of the 2023 cycle to date. This first quarter also represents halfway through the 2023 commercial cycle, which goes from October 2022 to September 2023. And we have delivered all of our economic and financial results as per our guidance. Vasta concluded the 2023 cycle to date with a 18% subscription revenue growth over the same period of last year, which translates in subscription revenues totaling BRL 801 million.

Complementary Solutions continues to present the highest growth rate among the business segments with a 44% expansion in the cycle to date compared to the same period last year. As anticipated in the previous quarter, the 2023 ACV is slightly less concentrated in the first 2 quarters, with a cumulative ACV recognition of 65% compared to cumulative ACV recognition of 66.5% in prior commercial cycle to date. This is due to the different seasonality and mix of products. The nonsubscription segment, as expected, grew 9% in this commercial cycle, and it represents now only 12% of Vasta's net revenue. Thus, in 2023 cycle to date, the net revenue grew 17% to BRL 908 million. Moreover, we continue to see the normalization trend of the company's profitability and cash flow generation. Vasta's adjusted EBITDA grew 10% to BRL 332 million and reached a margin of 36.5%.

It is worth mentioning that the adjusted EBITDA and adjusted net profit were negatively impacted by the BRL 15 million due to provision for adopt accounts made in connection with a large retail that entered in bankruptcy proceedings in Brazil. Vasta's free cash flow totaled BRL 36 million in the first quarter of 2023, a significant 188% improvement from the BRL 13 million in Q1 2022. In the 2023 cycle to date, free cash flow totaled negative BRL 7 million, an 89% improvement from negative BRL 65 million in 2022 commercial cycle to date. Worth mentioning that free cash flow to adjusted EBITDA conversion rate measured for the last 12 months period improved from a negative 52% to a positive 31% as a result of the company growth and constant efficiency pursuant. And finally, we would like to introduce 2 growth opportunities that will be pursuing as a relevant for Vasta this year.

An important pillar of our growth agenda Start-Anglo continues to ramp up. And in the first quarter of 2023, we acquired 51% interest in capital of Escola Start Ltda. It is a flagship school focusing on promoting bilingual education with high performance in responding to an increasingly strong demand from families and students for academic excellence, bilingual education, and innovation. This will be a modern institution for the franchise project that we have launched this week at Bett Brasil, the biggest education events in Latin America. Another key aspect of our business, we would like to highlight is that starting this year, Vasta entered with its products and services to the Brazilian public sector, B2G.

Our broad portfolio of core content solutions, digital platform, and complementary products together with customized learning solutions tested over decades by the private sector will now be available to K-12 public schools. K-12 public sector in Brazil comprises more than 32 million students, 5x the number of students in the Brazilian K-12 private sector. Both initiatives will be covered in more details ahead in this presentation. I will now turn back to Marcelo Werneck, who will talk about the financial results of the quarter and the 2023 cycle to date.

Thank you, Melega. In the slides we present the composition of Vasta's net revenue. As you can see on the left side, in the first quarter, total net revenue increased 6% organically year-on-year to BRL 403 million. Moving to the right side, we can see the components of the revenue growth. In total, subscription revenue grew 7%. Excluding PAR, subscription revenue increased 10% year-on-year, reflecting the superior quality of revenue mix in the 2023 ACV. PAR net revenue fell 15% to BRL 31 million, and the nonsubscription revenue decreased 3% to BRL 46 million, which is aligned with our strategy of shifting revenue from tax books to learning systems and digital platform.

Moving to Slide #5. We analyzed the net revenue for the 2023 commercial cycle to date. Net revenue grew 17% organically in 2023 to BRL 980 million. From the center to the right, total subscription revenue grew 18% on an organic basis. Subscription revenue, excluding PAR, jumped 22% to BRL 703 million, while PAR revenue went down by 3% to BRL 980 million. Subscription revenue, which affords greater loyalty, profitability, and results predictability represents now 88% of our total revenue, while non-subscription revenue represents now only 12% of our total revenue. Moving to Slide #6. We analyze the performance of the revenue in comparison to the guidance provided in the last quarter. In the last quarter, we provided the guidance for net revenue, subscription revenue, and loan-to-discretion revenue.

We can now confirm that both the quarter and cycle results to date were in accordance with our guidance range with the subscription revenue at the upper end of the guidance and the nonsubscription revenue at the low end of the guidance. Worth mentioning that 2023 ACV cycle to date reached 65.1%. Moving to Slide #7. Adjusted EBITDA in this quarter totaled BRL 131 million and reached a margin of 32.6%, impacted by higher inventory costs caused by rising inflation on paper and production costs that were partially offset by gains in operating efficiency, cost savings, and the sales mix that benefited from the growth of subscription products. On the right side of the slide, we see that adjusted EBITDA for 2023 cycles to date increased 10%, reaching BRL 332 million and a margin of 36.5%.

It's worth mentioning that cycle margin was negatively impacted by the BRL 50 million, which represents 170 basis points due to the provision for doubtful accounts made in the first quarter of this commercial cycle in connection with a large retail that entered into bankruptcy proceedings in Brazil. Moving to the next slide. In the first quarter of 2023, adjusted net profit totaled BRL 26 million. And in the 2023 commercial cycle to date, adjusted net profit decreased 6% to BRL 98 million. Moving now to Slide #9, we show the free cash flow evolution. The first quarter of '23, free cash flow totaled BRL 36 million, an improvement of 188% from a free cash flow of BRL 13 million in the first quarter of 2022. In the 2023 cycle to date, the free cash flow totals negative BRL 7 million, also an improvement compared to previous year, which had a consumption of BRL 65 million.

I would like to draw your attention to an important measure of the financial health of Vasta as we continue to see the normalization of the company's profitability and cash flow generation. The last 12 months adjusted EBITDA to free cash flow conversion rate improved from negative 52% considering the period from the second quarter of 2021 for the first quarter of 2022 to a positive 31% considering the period from second quarter of 2022 to the first quarter of '23. This is the result of the company's growth and constant efficiencies were forcing the message that cash flow generation continues to be a key area of focus of our business. Moving now to Slide #10. I will give you more details on the provision for doubtful accounts. Reported provision for doubtful accounts BDA grew 1.8 percentage points between the compare commercial cycles.

This increase in PDA was due to the provisioning of 100% of accounts receivable on a large retail company in Brazil undergoing bankruptcy procedures in the amount of BRL 15 million and represents 1.7 percentage points of our growth in the reported provision for doubtful accounts in the 2023 commercial cycle to date. Excluding this factor, the participation of the PDA in relation to Vasta's net revenue remained stable, 2.6% in the 2023 commercial cycle compared to 2.5% in the 2022 commercial cycle. Moving to the next slide. We see the average payment terms of Vasta's accounts receivable portfolio was 199 days in the first quarter of 2023, 1 day higher than the first quarter of the previous year and aligned with the seasonality of our business. I will conclude my part of this presentation with Slide 12.

As of the end of the first quarter of '23, Vasta's recorded net debt in the amount of BRL 1.42 billion. equal to the net debt position of the fourth quarter of '22. The impact of higher interest rates was offset by the cash flow generated in the period. In comparison to the first quarter of '22, net debt position increased by BRL 103 million due to the impact of higher interest rates and investments made in the minority stake acquisition of the Educbank and the acquisition of Phidelis in the first quarter of 2022, both of which were partially offset by our positive cash flow generated in the period. The net debt by the last 12 months adjusted EBITDA of 2.85x as of the first quarter of '23 is 0.07x higher than the fourth quarter of '22 and 0.82x lower than the first quarter of '22 in the comparable quarter. With that being said, I pass the word back to our CEO, Guilherme Melega, who will give you more details about some of our growth initiatives.

Thank you, Marcelo. Let me now bring you more color on a new revenue streamline that is the public sector for B2G. Starting in the first semester, we begin offering our products and services to clients in the public sector, in addition to our existing private schools client base. Our broad portfolio of content solutions includes for the public sector. Our existing Plurall platform as a virtual learning environment, printed and digital structure content, adaptive diagnostic assessment and teaching, and the preparation of students for the public sector for main Brazilian assessments such as (inaudible) and ENEM.

Moreover, we have a robust portfolio of existing complementary solutions such as computation, thinking, socioemotional and bilingual. As we can see in the graphic in the far right, the total K-12 sector in Brazil comprises more than 39 million students according to the latest expenses. Of this total 83% or 32.8 million comprises students from the public sector and only 17% or 6.6 million are students enrolled in the private sector. We know that our country is very unequal and providing quality education for part of the population we own increase in equality, which does not speak to our ESG agenda as we can certainly capture good results by entering the public sector. The total addressable market for the public sector is more than BRL 406 billion. Our initial assessment, taking into consideration the areas of prioritization and our penetration capacity.

We estimate a prioritized service addressable market of BRL 1.9 billion. We're not providing any guidance of this segment as we begin to capture revenue from the public sector, we will provide full disclosure about it. Moving to Slide 15. Let me give you some update on the Start-Anglo. In this quarter, we acquired a 51% stake in Escola Start Ltda for BRL 4.5 million. Escola Start is located in Sao Jose do Rio Preto, Sao Paulo. And it will be our flagship school, boosting our entrance in the bilingual franchise business in response to an increasing demand of families and students for academic excellence. In this case, powered by Anglo content, bilingual education, and innovation. The launch of Start-Anglo implies low CapEx and high know-how as we capture the synergies from existing products combined together.

This will be a model institution for the franchise project that we have just launched this week in the Bett Brasil fair. I will end my presentation with Slide 16. We are proud to say that Vasta's brands maintained literally best universities according to SISU, Unified Selection Systems. Our top-of-mind brand, Anglo, expanded its leadership in admissions across the best universities and is the most competitive carrier in the country, with an overall increase of 12% in admitted students compared to 2022 and near 12,000 students approve it overall. The top performance at Brazil's best university is among the key attributes considered by K-12 schools when choosing accountant partners. Having said that, I will finish our presentation and invite you all to the Q&A section.

(Operator Instructions) Your first question comes from the line of Marcelo Santos with JPMorgan.

wanted to explore the B2G initiative. How does the go-to-market work in this segment? I mean, what -- are you going to cities or states that have, I don't know, how say, this high bidding processes open? Are you going to -- how are you going to approach and deal with this product? I think -- and what's the time frame for you start generating these results. And the second question, what did you include in the SAM of BRL 1.9 billion? Is this mostly a content that the cities or states would use to replace the national book program content? Or are you considering more other services?

Marcelo, thank you very much for your questions. Let me give you more color about B2G. So on the B2G initiative, we are focusing to serve large public systems, either states or big municipalities. And we are targeting to enhance the learning of students using digital platform, adaptive diagnostic assessments, and [preparation for], mainly now.

And the way we are approaching it is definitely reaching the big states and large municipalities for auction process and open opportunities to serve with these products. We established a business director that are pursuing these opportunities, and we have right now some good contracts being discussed. Regarding the SAM, we are presenting the BRL 1.9 billion here, and this is the prioritized large municipalities and states with the basic teaching materials and platforms, and assessments. We use an external consulting firm to help us to target those top large public systems.

Your next question comes from the line of Lucas Nagano with Morgan Stanley.

We have 2. The first one is on costs. So should the paper inflation keep pressuring margins for the rest of the cycle? Or do you see some room for improvement? And what are your expectations for the next cycle? And the second question is also about the 2G strategy. But I wanted to understand how is the business mode exactly? Are you selling the exact same product? Or do you need to make some type of adaptation? And from the strategic point of view, why are you seeking to do this now?

Let me start with the margins. We expect the price increase in paper and printing, and it's already factored in our numbers. What we are pursuing this year is to be around the 30% EBITDA margins, the 30% level. We do not expect any other impact that is not reflected on the figures right now. You mentioned the cycle. I understand that you were asking for the sales campaign for 2024. We already launched the GTM for 2024. We are very excited with the initial numbers. Normally, up to April to the end of April, we account for 10% of the total growth of a normal cycle, and we are seeing very positive figures from the very beginning.

Regarding B2G strategy, we are not -- we are -- the contracts that we are discussing right now are very customized contracts to enhance the learning process of students, leveraging on all of our digital tools, the platform, adaptive diagnostic assessment, and some of the discussions with tailor-made solutions and content for them to address their specific needs on the public system. So we do not plan to use our products in the private market to serve the public. We are counting on leveraging our scale for digital solutions to serve the public sector with products and everything that we are pursuing right now are white-label products for the public sector. And we're doing it right now, obviously, because of the large TAM of the market, and now we have the technology and the products to scale up with digital solutions for the public sector.

(Operator Instructions) And you have a follow-up question from Marcelo Santos with JPMorgan.

Thank you for providing the follow-up opportunity. I wanted to understand better if there's going to be a margin impact of this B2G initiative, given that you're using different products? Are we -- is this something that's going to be noticeable maybe in this cycle than -- the cycle already gave the idea of the margin, 30% for the year. But in the next couple of years, is this going to impact somehow your margin profile? And the second question is regarding the franchise model that you announced using this Start school that you acquired, how does the franchise model differs from, for example, a school client of yours that adopts Anglo and puts the Anglo brand -- I mean what are the main differences between these 2 models?

Regarding B2G margins, I'd say that it's too early to tell about their margins since it will be based on digital materials mainly, we do not expect lower margins than the public market -- than the private market. But it's too early to tell. We don't have any contracts yet. But we definitely expect to be very sound margins since it is digital. Regarding the franchise model that we are just launching at Bett fair with our flagship in Sao Jose do Rio Preto, we bundled together Anglo Solutions with a brand new curriculum of bilingual product, tied up with innovation materials such as headbands and other tools with a different -- but it's not the same product of a regular private school will have access to.

And we are also leveraging the new brand of Start. Putting everything together, we will set a new pricing point for new entrants. We have this model already established in Sao Jose do Rio Preto. Sao Jose do Rio Preto has an Anglo and an Anglo-Start. And they are completely different schools with different publics, severing different targets. We are very confident that this will be a very sound business of franchise, providing the full know-how to a new entrant in the business.

There are no further questions at this time. I will now turn the call back to Guilherme Melega, CEO.

Thank you all very much to participate on Vasta Q1 conference call. We are very excited about the new growth opportunities on B2G and on Start-Anglo. And we had a very good start on our sales cycle for 2024 campaign. And lastly, we're very proud of our student performance in 2023 university admission cycle. And we are very excited about the perspectives of 2023 results and 2024 commercial cycle. Thank you very much. Looking forward to see you all in Q2.

This concludes today's conference call. You may now disconnect your lines.