Vasta Platform - Earnings Call - Q2 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the Vasta Platform Second Quarter twenty twenty Conference Call. At this time, all participants' lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr.

Pedro Gomez with Investor Relations. Thank you. Please go ahead, sir.

Speaker 1

Hello. Good morning, everybody, and thank you. I'm very pleased to welcome you to Vaca's first ever earnings conference call. And we are here to discuss our second quarter twenty twenty results. With me on the call today, we have Mario Guil, Vaca's CEO Grovis Prozecchi, our CFO Guilherme Menega, Vaca's COO and Bruno Giardino, Cognizant's IR Officer.

During today's presentations, 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, our financial performance, our expectations for future periods, our expectations regarding our strategic product initiatives and their related benefits and our expectations regarding the markets. 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 issued yesterday night 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 the future events and we disclaim any obligation to update any forward looking statements except as required by law. In addition, management may refer to non IFRS financial measures on this call. The non IFRS financial measures are not intended to be considered in violation of as a substitute for results prepared in accordance with IFRS. Let me now turn the call over to Mario Guillaume, Vase's CEO, please.

Sorry to interrupt you, but the line isn't very good. If we could please restart, we really appreciate.

Speaker 2

Let's start again. I was emphasizing our satisfaction in presenting fastest

Speaker 3

Gil, sorry to interrupt you, Gil. This is Guilherme. We cannot hear you well. Would you mind if I lead from here from the beginning? Connect.

And then we Okay. I guess that was a yes. So let me start here. I would also want to emphasize our satisfaction in presenting Vafta first earnings as a public health company. I would like to start today's presentation on Slide five, which shows the main highlights of Vafta's IPO, which was successfully Sorry, Gil, we cannot hear you.

Speaker 2

So let's move on. Okay.

Speaker 3

Thank you. So highlights of Vasta's IPO, which was successfully concluded at the beginning of the month after years of hard work. We listed 25% of the company on NASDAQ, which brought in a total of $4.00 $5,000,000 the biggest IPO ever held by a Brazilian education company. Our $19 price was above the initial range, and demand was very strong with volume at 15 times the total offered. Our IPO funding means we are in a very comfortable position cash wise, and we have a strong balance sheet to further accelerate our growth trajectory.

If conditions were already very favorable for Vastas growth, which our current offering of services, the IPO funds are set to act as a catalyst for an even more prosperous horizon. But first, let's look at the reasons that have made us a real success story with lots of potential for organic growth. In this respect, I would like everyone to go to Slide seven, where we present our mission.

Speaker 2

Nelica, I am now connected. Can you hear me now? Yes.

Speaker 3

Now perfect, Guil. I was just about to start Slide number seven.

Speaker 2

Yes. I'm so sorry. I apologize for that. But because of the COVID crisis, we are apart, and my connection was not that good. So moving to Slide seven.

So here is Vasta's mission, helping Brazilian private K-twelve schools to be better in terms of quality and more profitable by supporting their digital transformations. Nowadays, basic education faces unprecedented challenges, all of us have to resort to remote education in order to avoid interrupting the school year. This digitalization for which the pandemic was the catalyst highlighted the importance of technology in teaching, learning process and together has helped shatter old models. Which is our digital education platform, Vasta has offered thousands of private partner schools the possibility of continuing their operation and their activities. It enabled thousands of other partners to fulfill our mission of being a full service department for Brazilian students.

By working through these difficult times, we are living in an offering the Brazilian market's best teaching solutions. Moving to Slide number eight. This is a vision of our platform and all the solutions offered. Note that we have three different markets here. The core education market, where in addition to mobile, we also have Prudal for digital learning and profits helping teachers and preparing them to teach better using our solutions.

Then we have the complementary content market with all the extra hour solutions we have to offer, like language such as English Stars, social emotional programs such as OLIDERIMIN, esteemed subjects with Mindmakers and MAPIFIC and the academic side with OLYMPE PLURAL. On the bottom layer of the mandala are digital services, in which, so far, we only have our e commerce channel, which is LibroFasto. So there are three major themes to be explored here. First, LibroFasto is the only company that has a full solution for any private school regardless of which method they are using. Bear in mind that 55% of schools in Brazil K-twelve market are now using traditional learning systems, while the other 45% are using textbooks at their solutions.

Vasta not only has six different learning systems brands in the Brazil, it's different price spectrum. It also has the only company it is also the only company with a textbook based learning system, the PAR brand, as a unique product to operate addition. We have the most reptile brands in the market, the best quality indicators and technological solutions for the market. The second theme related to complementary activities. And here, it's important to note that in the 2020 ACD, we had only two solutions available, English starts and the leader in me.

Current penetration through partner schools is still very low, is 0.5% of this market. Therefore, we have a whole avenue to be explored in this market at a time when schools are increasingly looking to engage more new services. So here we go on to the third thing, which is the beauty of the platform set. Because as soon as we add another service to the platform, on the very next day, we have this service available for more than 4,000 schools. Adding a services does not necessarily mean we have to develop from scratch as we did with English Stars.

We can acquire as we did with Mindmakers at the beginning of the year,

Speaker 4

Thank you, Gil, and good morning, everyone. It's a huge pleasure being here with all of you. Moving to Slide number 10. The purpose of this slide is to underscore the message that all the numbers for this first six months of the year were absolutely in line with the flash numbers shown in our IPO documents. In fact, they were near the high end of the forecasting range, which highlights the predictability of our business.

In other words, despite all the uncertainties related to the current period, there was no surprise in the result, and we are confident that 2020 can be another year of strong growth for Vasta's story. This confidence is based on what we see on the next slide, the number 11. Here, an important reminder is that our business cycle and annual contract value, the ACV recognition runs between the fourth quarter and the following year's third quarter. So the behavior is unlike what we see in the fiscal year. Therefore, as we can see on this slide, we are heading towards the 2020 business cycle's conclusion with just one quarter remaining.

And as we can see, we have already got 86 of and there is only 14% left to reach our target. Another point that is clear from this graph is the seasonality of our business, which more revenues recognition in the first half of the cycle from fourth quarter to the first one. So the second quarter and the third quarter numbers obviously looks weaker. And finally, I would also like to emphasize that this year, we have experienced even stronger seasonality with a higher incidence of revenue at the beginning of the cycle, which ultimately affected our second quarter this year comparison to the same period of the previous year, okay? This behavior can also be observed when we analyze the info we present in the next Slide number 12.

In this slide, we have for revenues and adjusted EBITDA, revenues in the left part of the slide and adjusted EBITDA in the right one, the contribution of each quarter to the overall performance for the year for each respective metric. As you can see, in 2019, the fourth quarter and first quarter represented 73% of the revenues of the year, which means the second and third quarters being responsible for 27%. For adjusted EBITDA, the relevance of the fourth and first quarter is even greater. In 2019, these two quarters were responsible the fourth quarter and the first one were responsible for almost 97% of the adjusted EBITDA for the whole year, with the second quarter and third quarters together representing slightly more than 3% of the adjusted EBITDA of last year. And just a comment, given this behavior, that's why we do not encourage investors to analyze our business in an individual quarterly basis.

For this year, what we see is that despite different seasonality across fiscal years, the earnings recognition curve for 2020 is showing a trend pretty much similar to the one that we had in 2019, which lead us to believe that assuming all the impact regarding COVID being limited to this year 2020 and also we are gradually moving to a normal state, which means the students returning to the schools next year and the student pay being recomposed to fulfill our twenty twentytwenty twenty one cycle with revenues regarding this next cycle starting in the fourth quarter as usual in our business, okay? With all of that happening, the point we would like to make is that there is no reason to believe in a curve for this year that would be pretty much different than the one we had last year, plusminus a couple of percentage points. The percentage we may have this year may be somehow different than the ones we had left year, but nothing that in our belief will change dramatically this U shaped curve, okay? And another point that inspires confidence is that our campaigns for 2021 business cycle have already started. And so far, we are getting a solid result in terms of sales conversion, especially now that we have our Plural Virtual Platform, which has been configured as the main support base for schools to keep to academic calendar, since the schools here in Brazil are still closed.

So we feel confident to predict that fourth quarter earnings will leave our expectations as another strong quarter. Moving to next Slide number 13. And as we saw on the previous one, our first quarter revenue recognition was stronger than the second, which skew the basis of comparison between second quarter this year and second quarter twenty nineteen earnings. However, when we analyze the six month performance, we see solid year over year growth against 2019. This growth rate is even higher if we take the entire business cycle.

In this analysis, our subscription revenues annual growth rate from fourth quarter last year through second quarter this year was 22, which is completely in line with the curve that in the end of the cycle will match with the 18% ACP we have announced. On the numbers themselves, we can see that the semester revenues reached BRL512.7 million with a gross profit of approximately million, adjusted EBITDA of million and a net loss of million. And now I hand the call to Melega to continue with the final part of the presentation.

Speaker 3

Thank you, Clovis. As was commented on the slide showing our service platform, we are now going through a very peculiar period due to the pandemic, one in which the whole of the society have had to adapt to this period of social isolation. In this respect, Plurals crucially enable our partner schools to continue their school activity, having previously been used to provide support for students. The platform took on a key role in the digital school as we have called the transition from analog to virtual classroom environment. Since mid March, when physical presence classes were halted, we have counted more than 3,000,000 live classes, 2,400,000,000 interactions inside the platform and 200,000,000 activities using this tool.

One in four of Brazilian basic education students enrolled in private schools have started using this resource, which the added attraction of not having to leave their homes, which shows how successful the platform has been. And this becomes even clearer when we look at Slide 15. Here, we see that we accounted for over 50% of all educational traffic generated by Brazilian private schools over the last three months. This is a very strong message because just when schools needed it, we have the platform that was best prepared to support oncoming demand, which was precisely plural. This was only made possible by all our investment in digital transformation in recent years.

But our work is not restricted to supporting digital transformation in schools. We want to increasingly become an integral partner for Brazilian's private schools. We believe that the post pandemic world will highlight the need for hybrid schools, and Vasta is very well placed to support Brazilian schools as they transition to this new reality. Firstly, we have developed the whole digital sales strategy with an inside sales team remotely managing to run the entire sales conversion process inside the platform. This has been essential for the company to keep up the dynamics expected to generate a solid number of contracts for the coming year.

Secondly, we are making a series of investments in science and learning to further boosters the efficacy of our solutions and their results. In other words, what we are now proposing for our partners in relation to the use of technology is not merely a palliative to help schools get through this difficult time, but a whole range of solutions that will help migration and disrupt the analog model that is still very much rooted in the academic environment. Now let me turn back to Gil for his for the final slide, see if his connection is available. We cannot hear you well. Would you mind if I go through the last slide, please?

Speaker 2

Please go ahead.

Speaker 3

Okay. Thank you. So on Slide 16, that is why we are fully convinced that we are now offering a winning proposal for all stakeholders, for students because in addition to innovative content of proven quality, they have a whole digital platform at their disposal. One that has increasingly sought to deliver a customized product that meets their real needs and ensures better learning for families who are able to monitor their children's development in real time, which is a series of indicators available on our platform.

Speaker 2

In

Speaker 3

addition to the certainty that their children are using the best materials and will be better prepared to face any challenges they may choose for their futures. For teachers who now have access to statistical data showing the performance of each student and each class, who can transmit a more assertive content in addition to having a complete platform of videos, games and questions to assist the pedagogical process. And finally, for school owners who, in addition to having the best content solution and best digital platform, are getting satisfied customers as a means of avoiding evasion and being able to charge a price that ensures the best return. This message concludes our presentation. So now I will open our Q and A session.

Thank you very much.

Speaker 0

Our first question comes from Diego Aiego with Goldman Sachs. Your line is now open.

Speaker 5

Yes. Good morning, Thank you for taking my question. I guess the first question is on the competitive landscape. If you can just provide some views and some colors. On how do you think schools are, let's say, willing to eventually change or adopt a different platform?

And how positioned you are at this point to, let's say, to increase your sales, to increase the penetration of your platform? I think this will be the first question.

Speaker 3

Diego, thanks for your question. The let me give you an overview about the competitive landscape and how we are moving our goals through Eats. We have a very large base of schools and with very low penetration in many of our products, complementary products. So as Gil mentioned, when he were talking about the Mandalis Live, we have much room to grow ACV just with our current customer base. I think this is focus number one.

Secondly, we supported a lot of prospect schools on the first semester by providing our platform today to them free of charge to support their classes. And this became a new sales funnel for this year, a funnel that is actually moving really well. So we are converting schools that we helped during the crisis, giving our platform to them. Now we are converting them into contracts. This is also helping a lot our sales campaign.

And lastly, we have very strong skills in inside sales because we have been investing in this methodology for the last three years. We didn't learn how to operate in distance selling through during the crisis. We have large team with 40 members that does the inbound marketing, generating leads, qualified the leads and then presenting them to our closers that reach them to close the contracts. So by leveraging on internal skill that we already have, we moved our 180 hunters to the same methodology, and we are keeping the pace on the sales conversion digitally. That's my overview about what we So are doing in the competitive landscape.

Speaker 2

You said the can you hear me fine?

Speaker 5

It's a little More or actually, Bill.

Speaker 3

More or yes.

Speaker 2

Okay. So what we are seeing is that the mid business market is not competing very well this year because they didn't have the kind of technology schools need today to operate. So what is different this year is who invested in technology, who has the best digital platforms, we win this game in 2020. That's the main difference from this year and all the other commercial years prior to 2020, right? So very important to highlight that is a game for big guys and guys that are tech enabled, tech able to provide all the services to the schools, right?

And secondly, I think it's important to mention that we are not seeing price as a war of prices, I mean. Because of that, because it's a year where technology and being able to support the school is the name of the game, right?

Speaker 5

That's super helpful. Thank you very much for this. And I guess just maybe as a follow-up here. And when we look forward, what do you think you need in terms of new solutions and applications looking to your portfolio of offering? I mean, how should we be thinking about your strategy to either develop these internally or eventually to pursue M and A to add new features to your platform?

Thank you.

Speaker 2

Great. May I start, Malaga? Then if the connection is bad, you continue, okay? There is always a decision to be done, which is making or buying, right? When we see there is an opportunity to plug a new service in our platform, usually, if we consider that we should be able to develop the service, we do.

If we consider, it's a key ability, but we don't have that ability internally. We prefer to buy. So the main decision of making and buying is a key ability we should be able to do or to acquire a company that is able to do it. If we don't consider that the ability, the skill, it should be proprietary, then we can consider the third way to plug a new service into our platform, which is partnering and plugging, just as we did with Matific. Matific is a company dedicated to gamification in mass.

We didn't consider that we could do that kind of content, and we decided to partner and plug in our platform. So that's what is in our mind when we are looking for a new acquisition.

Speaker 5

Perfect. That's very helpful. If I may just one very short question here, just because we got like a few emails and few questions from investors. But can you just explain quickly the main difference between your accounting standard to Cognizant's accounting?

Speaker 4

It's Claudio speaking. Let's say, we have two different auditors, okay, different numbers, different criteria. I would say to you, don't forget that in our case, we have the carve out of eight companies, let's say, composing our historical numbers, and this leads to some differences between the numbers of the two companies, okay? When analyzing Vasta, what we do is strongly recommend taking our figures, okay? They are all, let's say, built based on the same criteria.

When analyzing Cogna, use them. What I can tell you is that difference is much more related to the past. Things are now, if you compare the accumulated basis, are pretty much closed, and we should have no more difference from now on, okay?

Speaker 5

And one last comment,

Speaker 4

if I'm I'm pretty sure that in Cognizant's call later this morning, they will present a reconciliation, let's say, between the two numbers, okay?

Speaker 5

Okay, clear. Thank you very much.

Speaker 0

Thank you. Our next question comes from Vinayus Riviere with UBS. Your line is now open.

Speaker 6

Yes. Good morning, guys. Can you hear me okay?

Speaker 4

So so. It's also not Well, so well aligned, let's I'll try to make it quick so that we don't have issues with the connection. So just on

Speaker 6

the on a follow-up on the 2021 go to market. Can you give us an update on how renewals and new sales and complementary services are going?

Speaker 3

Vinicius. Thanks for your question. Yes, let me give you an overview. Our campaign starts on the first half of the year. Let's split it in two.

One is regarding renewals, so retaining our base. And we had a very good start this year, especially because 90 plus percent of our school partners are 100% using plural, and we had a very significant conversion and renewals from the base. I can point out that renewals so far are much better from comparing to last year's. And regarding the sales campaign, we reached pretty much the one fourth of the campaign because peak season is about to start. It's from September to November.

And we had a great start in the first quarter of the campaign. As I mentioned before, due to the plural and the conversions of the schools that we helped during the crisis with the freemium version of the plural. Now they are being converted in long term contracts on our base. But we still have much to perform on the campaign because threefour of the campaign will be generated this on the second half of the year. And we are confident that we'll reach our goals.

Speaker 2

Hi, Denisios. This is Giro speaking. I would like to compliment Malaga saying that regarding to the complementary solutions area you asked, this is the first go to market that we really I would say, we really organized the go to market in the complementary solutions area because last year, our first go to market, of course, we were focusing on bringing new schools to our platform, right? And besides that, we have six products now to market in our complementary solutions. And comparing to the last year, we had only two products, right?

So we see the cross sell as a huge opportunity. We did the research internally, and we discovered that if we are able to sell the six products we already have in our complementary area portfolio. To all the students, we could reach more than million only in cross sell opportunities. So that's why we are super focused this year in making cross sell in a better way than we did last year, right?

Speaker 1

Okay. Perfect, guys. If I

Speaker 4

may and then I could hear you perfectly, Guillaume. If I may, just on the 2020 ACV, part

Speaker 6

of the review on the number was related to some dropouts related to the pandemic. Do you guys anticipate recovering these contracts for 2021? Or these schools went bankrupt?

Speaker 2

Question, Felicius. It's not I can start here, Meliga. Let's have in mind that it's not we didn't lose the contract, but the schools, they face dropouts, especially in the preschool, right, in the kindergarten. So we have the contracts. The school is our partner.

And we are considering, as all the schools are also considering that the preschool kids that today are out of the school because digital education for this specific age is almost impossible. These kids are going back to school at the end of this year or in the beginning of the next year. So we consider that the first step for the next year is the full ACV of 2020, right? Because of these effects of kids, young kids dropping out of the school is a transitory effect in at the end of this year, again, or in the beginning of the next year, we will see those kids back to school, and we will see the full 2020 ACV. And on top of that, we are building the 2021 ACV.

Speaker 6

Crystal clear, Yil. Thanks. And thanks, Malaga, for the other answers.

Speaker 0

Thank you. Our next question comes from Ed Kuzma with BlackRock. Your line is now open.

Speaker 7

Yes. Hello, guys. Can you hear me?

Speaker 3

Yes, we can hear you well.

Speaker 7

Okay, very good. So I just saw that in the second quarter, the EBITDA was impacted by some extraordinary expenses such as higher PDA to align with the current situation, some higher tax expense and some inventory adjustments. So can you just go through those? And like are we sure that they're not recurring? What makes them a one off for this quarter?

Speaker 4

Okay. Good question. Just a reminder, the PDA was in the first quarter this year, okay? So we are adjusting. Regarding the PDA, that's the BRL5.7 million and also the nonrecurring expenses, the BRL8.3 million.

I will start with the second one. The BRL8.3 take into consideration the following. This is 100% related to our recounting that we had in our e commerce inventory, okay? Don't forget, this is a business that we bought beginning 2018, okay, from a family it was a family business. And let's say, this year, when we start, let's say, integrating the business, we realized the need for a recounting and then we had this $8,300,000 adjustment, okay?

That's not the nature of the expense that we say should be adjusted because recounting inventory is happens in an annual basis. But we are, let's say, advising investors to consider this as an adjustment because we don't expect this amount of adjustment BRL 8,000,000 in a recurring basis. Again, that was the first time we made given the integration. And with regards to the PDA, this is 100% related to COVID pandemic, nineteen pandemic, okay? That was an increase in our provision for debt full accounts to adjust, let's say, the balance to what we have in terms of the momentum.

These two are the main ones.

Speaker 7

Okay. So and the PDA, as you mentioned, it was 100% related to the first quarter. Do you expect to have additional provisioning for DAFFO accounts in the second half?

Speaker 4

Yes, yes. We that relates to adjustment that was made in the first quarter and appears in our figures here in the first half accumulated figures.

Speaker 7

And what's the outlook for provisioning for doubtful accounts for the second half of this year?

Speaker 4

No, there was no provision for the provision for doubtful accounts then that we had in the second quarter. We are not, let's say, advising to any adjustment because it's the regular business. We do have in a regular way something about 1%, 1.1% of the revenues, okay, we expense as a provision, okay? And that relates to future expectations of losses. Given the nature of the business of our business, we believe this is a quite low percentage, but it's okay and it's based on historical losses, okay?

Speaker 7

Thank you very much.

Speaker 4

You're welcome.

Speaker 6

Thank you.

Speaker 0

Our next question comes from Marcelo Santos with JPMorgan. Your line is now open.

Speaker 8

Good morning, Guillaume, Alega, Pedro. Thanks for taking my questions. I have two. The first question would be just in the media, there were some news saying that the schools that took plural free version, they committed to hiring some solutions from Vasta next year. Could you just please clarify what kind of commitments were made?

And like exactly that, what commitments were made? And the second question would be, I wanted to get your perspective on how the complementary solutions behave under a difficult macro scenario. We understand that the demand for core K-twelve is very resilient. Parents will do the most to keep their children in private school. But does that also apply to after class activities?

Or how are you seeing demand in face of like high unemployment? If you could comment on that, it would be great.

Speaker 2

Thank you. Great. Marcelo, this is Gil speaking. I will start with your second question, and then I'll pass the floor to Malaga to cover the first, okay? We are seeing a positive trend for bringing complementary education, Marcelo, to the school.

Let's have in mind that families are already investing in complement or were already investing in complementary education, but outside the school. For instance, they were bringing their kids to a street franchise to teach English. And that kind of activity is not the best way to provide English education today. So we are seeing that many families, they are concerned to make their kids traveling around the city to have the complementary education. So families and schools are willing to have all the activities in the school, but not in a presidential way, right?

Not on campus, not inside the school every day. So that's why it's so important to have Plural because for core education and complementary education, this new normal for schools is to be a hybrid school. So for sure, plural, it's the backbone of everything. And also because we are providing digital products in order to complement students' education. When we say we are offering English Stars, part of the everything through Plural, right?

They don't need to go to school to have classes in English Stars. They if the school prefers, they go to school to have classes. But if the school is closed, they have classes using Plurals, and there is no problem. And moreover, we have many digital features that are helping students to have complementary solution in their homes as well. So by in short, my answer is the trend is positive for complementary solutions that are hybrid solutions with lots of digital features, right, and everything transforming the school in the new hub of the full education.

So for us, we see as a positive trend. For sure, for the street franchises will be a hard time.

Speaker 3

Marcelo, long time now talking to you. Pleasure to reconnect. Regarding your first question about Durao and what were the commitments that were made for the school. And the answer is none. There is no commitment whatsoever for the schools that use the Plural premium version during the crisis to commit with a contract with us.

What happens is a natural movement of schools that was that were supported during the crisis by us and are happy with the rural solution, they are becoming long term partners signing contracts with us. It's a natural movement, but we did not require any commitment from them, And it was a very supportive action from Vasta's side. And this action is resulting in a good sales conversion.

Speaker 8

Perfect. Thank you very much and very good to reconnect. Thank you all.

Speaker 0

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Mario Guilla for any closing remarks.

Speaker 2

Thank you. Thank you all for participating in our first earnings release, and hope to see you in the next and have a

Speaker 4

good day. Bye bye. Thank you.

Speaker 0

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.