Q1 2024 Earnings Summary
- Strong Margin Expansion Across All Segments: Afya reported gross margin expansion in all three segments: Undergrad margins increased by around 1.5 percentage points, Continuing Education by nearly 4 percentage points, and Digital Services (Medical Practice Solutions) by over 5 percentage points. This improvement is attributed to operational efficiencies, synergies from restructuring, and integration of acquisitions, leading to enhanced profitability.
- Acquisition of Unidompedro Adding Significant Growth: The company acquired Unidompedro and Faculdade Dom Luiz, contributing 300 operating medical seats in Salvador, Bahia, bringing the total seats acquired over three years to 640, surpassing their guidance of acquiring 200 seats per year. This acquisition is expected to close in July 2024 and will expand Afya's presence in a key market, potentially enhancing revenue growth.
- Undergrad Revenue Growth Exceeding Expectations: Undergrad revenue grew by 13.5% in the quarter, higher than the initial expectation of around 10% growth for the year. This growth was driven by both increased volume (student enrollment up 9%) and higher tuition fees (up 6%). The company expects this strong trend to continue, indicating potential outperformance relative to guidance.
- The planned acquisition of Unidompedro is expected to cause near-term margin dilution, as Unidompedro operates at lower margins than Afya's Undergrad segment. Margins may not improve until 2025, impacting short-term profitability.
- There is a risk that 175 out of the 300 medical seats from Unidompedro could be canceled due to an ongoing judicial process, which could negatively affect future revenue and growth potential. Despite management's confidence, the outcome remains uncertain.
- Postponement of B2B revenue recognition in the Medical Practice Solutions segment suggests potential issues with revenue timing, leading to a 6% decline in net revenue compared to the same quarter last year.
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Unidom Acquisition Funding
Q: How will you fund the Unidom acquisition?
A: We have over BRL 600 million in cash, which will cover the downpayments for the Unidom acquisition expected to close in July. If attractive opportunities arise, we may secure additional funding. -
Margin Impact of Unidom
Q: What is the expected margin impact after consolidating Unidom?
A: We anticipate some margin dilution this year, as Unidom's margins are lower than our Undergrad segment. However, we expect margins to improve from 2025 onwards as we integrate Unidom into our ecosystem, leveraging operational efficiencies similar to past integrations. -
Risk of Seat Cancellation
Q: What is the likelihood of the 175 Unidom seats being canceled?
A: The 175 seats have been operating since 2021, and the chance of cancellation is remote. We've structured the payment over 10 years to protect ourselves. Even in a worst-case scenario, we would benefit economically from the enrolled students without further payments, increasing our IRR. -
Undergrad Revenue Growth
Q: Is Undergrad revenue growth ahead of expectations?
A: In Q1, Undergrad revenue grew by 13.5%, exceeding the expected 10% growth, primarily due to strong intake and organic growth. We expect this trend of 13–15% growth to continue in the first half of 2024. However, our net revenue guidance for 2024 remains between BRL 3.15 billion and BRL 3.25 billion. -
B2B Revenue Adjustments
Q: How does invoice postponement affect B2B revenue growth?
A: Due to invoicing delays, B2B revenues appeared to decrease by 6%. Adjusting for this, the organic growth would be around 20–30% compared to the same period last year. -
Gross Margin Expansion
Q: Which segments contributed most to gross margin expansion?
A: All segments saw margin expansion: Undergrad increased by around 1.5 points, Continuing Education by nearly 4 points, and Digital Services by over 5 points. This was driven by campus maturation, faster integration of acquisitions, and cost-saving reorganizations. -
Guidance on Continuing Education
Q: How should we view the Continuing Education revenue guidance?
A: Our long-term guidance of BRL 1.2 billion in Continuing Education revenues by 2028 will be reorganized due to restructuring. Pillar 1 is now combined with Continuing Education, and we'll update the market with more details when appropriate. -
Cost Rationalization Efforts
Q: How advanced is the cost rationalization process?
A: We completed significant restructuring in Q4 2023, dismissing around 200 people and integrating acquired companies, especially in digital. While we've achieved major cost efficiencies, our future focus is on top-line growth rather than further cost reductions. -
Competitive Environment
Q: How was competition during the recent intake season?
A: Competition remained stable, with 5–8 candidates per seat over the past four years. Our strong brand and extensive network of over 300,000 physicians and medical students help us attract quality students. We've successfully priced tuition slightly above inflation since 2019. -
M&A Plans Post-Guidance
Q: Should we expect more acquisitions in undergrad med courses?
A: Having surpassed our guidance of acquiring 200 seats per year with 640 seats over three years, we're open to assets that fit our profile at the right price. We'll try to maintain this rhythm, though matching transaction size with targets can be challenging.