Vasta Platform - Earnings Call - Q4 2020

Transcript

Speaker 0

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

Please go ahead.

Speaker 1

Good morning, everyone, and thank you for joining me in this conference call to discuss Vaster Platform's Fourth Quarter twenty twenty results. With me on the call today, we have Mario Guillo, Vasta's CEO Clovet Pogeti, our CFO and Guilherme Melaga, Vasta's COO. 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, or expectations regarding our strategic product initiatives and their related benefit, 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 issued yesterday, 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 information available to us as of the date hereof. You should not rely on them as a predictor of future events, and we disclaim any obligation to update any forward looking statements except as required by law. In addition, management may reference to 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 Mario Ville, our CEO, to make his opening statements.

Speaker 2

Thanks, Bruno. Thanks very much for participating in our earnings release call. I would like to start on Slide number five with some highlights of the year. The annual contract value, ACV, for 2021 commercial year totaled BRL $850,000,000, 23% higher than the amount subscription revenues recognized in 2020 commercial year, obtaining exclusively by organic means. The growth of traditional learning system was even higher, 26%, highlighting the strength of the brands and assertive commercial strategy that knew how to make the best of the technological and quality features as competitive edges in order to increase market share.

Complementary Solutions experienced a 65% annual increase in the number of deals closed in the ACV for 2021 and accounted for 8% of the total ACV this year. And expectation is that they will further increase their significance as we move forward in terms of the portfolio of solutions offer. On top of that, we also announced three acquisitions so far. Moving on to Slide number six, I would like to make some comments about the pandemic scenario. The second wave of COVID in Brazil is worse than the first, leading to a drop in the textbook sales due to the reuse of books by families, impacting not only the non subscription revenue, but also the behavior of the par learning system based on textbooks.

The second wave is also affecting the enrollment process of children in partner schools. Families have postponed enrollment by comparison with the previous years, while others have transferred their children to public schools. According to 2020 official school census, 2.5% of the students in private schools migrated to public schools. And the trend for 2021 is that this percentage will continue to grow. All of these factors can affect our revenues in this commercial year.

Now I'll pass the floor to our CFO, Clavius Progetti.

Speaker 3

Thank you, everyone. Moving to next Slide number seven. On this slide, we present the main financial highlights for the fourth quarter as well as for the whole year. Despite the fourth quarter being slightly below the same period 2019 in terms of revenues, what we can see is that we performed better than the same period in 2019 in almost all the other lines, with a gross profit growing 14 percent, adjusted EBITDA 14% as well. This better performance or this solid year over year growth against 2019 is also clear accumulated twelve month figures of the year.

Regarding the numbers themselves, we can see that the accumulated revenue for the whole year reached $998,000,000, a slight increase of 1% when compared to the previous year, which is fair enough considering all the impacts of COVID-nineteen in our society and economy. With a gross profit of approximately $620,000,000, 14% increase when compared to 2019 and adjusted EBITDA of EUR $296,000,000, in line with the market consensus for the year and a robust 17% growth when compared to 2019. In terms of adjusted EBITDA margin, a sound improvement of four percentage points during the year, moving from the 26% we had in 2019 to 30% in 2020. With regard to the net income, worth it to mention that these figures for 2020 are impacted by the non recurring events we had during the year, the IPO as an example. Without such impact, net income would be growing 48% in the quarter, and we will be close to breakeven in the year.

And one last info that is also worth it to highlight was our free cash flow of almost EUR 134,000,000 during 2020 and adjusted EBITDA to cash conversion of 45.2. Moving to next slide, number eight. The idea here is to go deeper in our analysis regarding the revenues of the company, given that the fourth quarter in any fiscal year is in fact the first quarter of our commercial cycle. This more detailed breakdown is important to highlight the different impacts and behaviors presented during the beginning of 2021 business cycle, appeared characterized unfortunately by uncertainties in connection with the possible second wave of COVID-nineteen, which ended up becoming apparent early this year. And first of all, important to highlight as well that despite the fact that the business is comprised of two reportable operating segments: one, Content and AdTech platform and two, Digital platform we present in this slide a supplemental information in terms of the sub segment, composing the operating ones I have just described.

Having said that, as you can see, the net revenue subscription products, which includes all educational solutions with recurring revenue accounting for 83% of the company's total revenue during the fourth quarter, was up almost 31% over the same period 2019. Important here to highlight that this 31% growth of subscription revenues in the fourth quarter is the one that in the end of the cycle will match with the ACV we have just announced. In turn, it should be noted that while the subscription revenue has shown a solid growth this fourth quarter, revenue from the non subscription business was down 59% by comparison with the same period last year, which is why the total net revenue decreased by 5.3% compared to the fourth quarter twenty nineteen. This behavior reflects the impact of the pandemic that led to a sharp drop in the purchase of books by schools and bookstores on account of the uncertainties related to the start of 2021 school year. And it our view that this is likely to continue throughout the back to school period, and therefore also have an impact in the first quarter twenty twenty one.

And one last point I would like call your attention in this analysis is to the fact that our PAR learning system, which makes up the subscription revenue, posted a similar performance to that of textbook sales. In other words, it was negative by current circumstances and by a higher volume of reutilization observed in the period. On the other hand, when we analyze the traditional learning system, we'll see that the performance of this sub segment was even stronger, with revenues growing close to 60% in the quarter. In summary, we are not immune to the effects of the pandemic, but the effects are quite different depending on the product and subsegment being analyzed. For example, regarding the ones driven by textbooks, which means the non subscription part of the business, as well as the fast learning system, the impacts are more severe because of the reutilization as I just mentioned.

On the other hand, regarding the ones related to traditional learning systems, as well as complementary solutions, the ones with higher margins worth mentioning, the impacts are not so severe, which means our business has demonstrated certain resilience. Moving to Slide nine, this one is an old acquaintance acquaintance of us, and its purpose is just to reinforce messages that we convey in the last two calls regarding our results, that despite the different seasonality that we have between the quarters of the year, with a strong recognition of results more concentrated in the fourth and in the fourth quarter, the result recognition curve in 2020 was very similar to the one in 2019. This time, we are presenting the curves for revenues and adjusted EBITDA for the subscription part of the business. As you can see, we had an even greater recognition of revenues in the fourth quarter twenty twenty, when compared to the same period of the previous year, with 2020 being four percentage points above the level presented in 2019. As a consequence of anticipation of part of the sales of subscription products, due to the uncertainties related to the pandemic in the beginning of 2021 academic year.

This means that many schools have anticipated their orders, which should negatively impact the results for the first quarter this year. On top of that, investors should also consider a gap in the ACV realization higher than the 3% we have in our land commercial cycle. Having said that, I would like to yield the floor to Melega to continue with the presentation. Melega, please.

Speaker 4

Thank you, Clausius. Now moving on to slide 11. We present here three growth cycles that will guarantee a healthy and sustainable performance for the coming years. The first step is to increase the student base both organically and through acquisitions. The second growth cycle will come from the increase in the penetration of complementary solutions that have already experienced a 65% annual increase in the volume of contracts closed in the 2021 ACV.

Finally, the third cycle will come from growth through new technologies and digital transformation. Going a little further into the details of our organic growth, we can see on Slide 13 that the competitive advantage presented by Vaster throughout 2020 ensured solid growth for both the main products, which despite being a more mature solution showed an increase of 11% in the numbers of school and 14% in the total numbers of students served. As well as in complementary solutions that experienced a much higher growth due to their still low penetration in our base, presenting an increase of 75% in the numbers of school and 64% in the total numbers of students. This solid growth in the number of new students and cross selling sales were not only levers that guarantee the strong growth in ACV, As you can see on the slide 14, in addition, we have Prudhau operating as an essential and transformative tool for schools to continue their academic activities during the pandemic. Serving as both an important catalyst for attracting new clients to our base and also an important retention agent as Vaster posted one of the highest contract renewal rates ever recorded in its history.

The combination of all these factors resulted in 23% ACV growth over twenty twenty subscription revenues. Now on slide 16, we brought an additional way to analyze the commercial cycle by showing the breakdown of the ACV and the relevance of traditional learning systems for our operation. On the left hand side, we can see that 75% of the ACV is made up of traditional learning systems, while complementary solutions accounted for 8% and par for 17%. In the graph on the right, we can see the annual growth rates in this last commercial cycle. Companionary were those that showed the greatest growth given their still low penetration and the strong increase in the portfolio of solutions offered.

In turn, traditional learning systems, while in much more mature solutions showed a growth of 26% year over year, highlighting the competitive differentials shown by Vaster during the pandemic. Finally, as previously mentioned, PHAR ended up being more impacted by the effects of the pandemic and practically did not grow in this last commercial cycle. With this operational highlights, I turn back to Gil to continue the presentation.

Speaker 2

Thanks, Malaga. Moving on to the Slide number 16. In addition to the organic growth, Vasta also made progress in its M and A front in core education by announcing the acquisition of the Eleva learning system, the fifth largest in the country, which is a learning system with a strong premium brands and an operation with high margins that we will enable scale gains and operational synergies by adding more than 177,000 students to our base. In addition, Vasta has signed a commercial agreement with 11 proprietary schools for the next ten years. Moving to Slide number 18.

If the first stage seems to be well underway and already delivering a solid growth rate, we still have many other levers to be unlocked. In this sense, we want to take this opportunity to present a new way of exploring our platform with new solutions that we started to operate as of this year. The main news for the next commercial cycle includes the incorporation of all the features offered in the Plural Store plus the Plurals private class platform. Sovos Integra in the digital front and many other opportunities and solutions that are being developed such as edutainment. On Slide 19, we have the Plural Store that has already presented in the last conference call, and is a platform with 100% digital services that are very affordable to families.

But the biggest news here is the launch of the beta version of Plurals private class platform. With this service, all students who need support will be able to contract classes directly through Plural, chosen the time, the teacher with the best score, and the price they wanna pay. Moving to slide number 20, we present the last step in our growth strategy, which is digital solutions. This is the field where Vasta has managed to differentiate itself more and competitors. And where we are putting many efforts to ensure a digital transformation for our partners.

Moving to slide 21, we present here the three phases that we are developing to facilitate the digital acquisition of students for our partner schools. The first step is to allow digital integration between schools and offer a solution for the front end. So that the schools have a more attractive portals to attract families and to convert leads into new enrollments. On that front, both Somos Integra that we'll talk about on the next slide, and the recent acquisition of SEL were important steps to overcome this phase. The second step is to offer more branded content to partner schools, which SEL also fits perfectly in this pursuit.

And finally, the digital enrollments that we intend to bring more news in the near future. On Slide 20, we have the opportunity to present Somus Integra, which is an important tool for connecting kindergarten schools and SOMUS partner schools, with a view to digitally capturing the flows of the students from kindergarten to elementary schools. By bringing this tool, Vasta in addition to offer in a digital integration tool between partner schools, is able to guarantee a continuous and sustainable flow for children within our ecosystem. Moving to slide 23. Finally, in these last slides, we present more details regarding the digital front end and the rationale behind the acquisition of SEL.

SEL's technology helps to develop, manage and update online portals for a school, for a specific school or for school networks. It also allows content creation in a customized and scalable way, so that schools can better communicate with its community and can differentiate themselves from competitors, and has important clients such as SESSI and McKinsey Learning System. And incorporation of the services will be important for VASTA to organize all the communication for Portland schools and help them to enroll more students. Having said that, I finish our presentation and I now open the Q and A section. Thank you.

Speaker 3

Thank you.

Speaker 0

Our first question comes from Diego Aragao with Goldman Sachs. You may proceed with your question.

Speaker 5

Yes. Thank you. Good morning, Leo and team. This is Diego Aragao with Goldman. Thank you very much for taking the question.

So the first question, if I may, is related to the overall results of your complementary solution and also the Plurals store, quite interesting by the way. It was interesting to see how fast the complementary business is expected to grow this year despite the fact that the schools are still facing a quite challenging environment and dealing with this reopening process of their facility. So I was wondering if you guys can give us some colors on the opportunity you see for complementary solutions and how fast the business segment can grow on things stabilizing Brazil and hopefully the domestic crisis is behind us? So this is my first question. Thank you.

Speaker 2

Hi, Diego. This is Gil. Good morning. Thank you for your question. Actually, Diego, the middle of the last year, we were very concerned about the behavior of complementary solution in the midst of a pandemic.

But then we realized that if we could offer digital solutions, I mean, 100% digital solutions, because in a digital solution doesn't matter if the school is open, hybrid, or if the school is closed, right? So realizing that we started to develop the Plural STORE concept, right? So the best way to understand how we are dealing with this tough moment is offering PluralStore 100% digital content for proprietary or third party contents, right? And they are also very affordable if compared to many other solutions in the market, right? So that was super important to the ACV building for this year.

But important to comment that all the revenues that we are going to come from plural store, plural my teacher and so on, they are not included in the ACV. We are only considering ACV, you know, the stack of the contract signed by the schools. Regarding to the second part of your question, Diego, we are considering that in the second semester, we can see or we are expecting to see schools and families coming to the normal, to a more traditional education to a more traditional school year. That's what we are expecting. In our case, I guess, worst is behind all the factors we had, especially in the textbooks, in the non subscription part of the business.

And also in part, they are only occurring in the first quarter of any given year in the first quarter of the following year, right? So the worst part of this year is behind, And we are expecting to see everything coming to normal in the second semester, okay?

Speaker 5

Okay, Gil. Thank you for that. Quite helpful. So look, my second question is related to the current stock price and liquidity. Are you concerned about these two things?

And if so, what are the options that you and the company are analyzing to eventually address? What is also a growing investment concern? Thank you.

Speaker 2

Yes, Diego. Likewise, we are also concerned with that. And we are studying and analyzing all the solutions we can have for this problem. And in the near future, can choose one of the options we have, and we will keep everybody posted about it.

Speaker 5

Okay, thank you.

Speaker 0

Thank you. I would now like to turn the call back over to Bruno Giordano.

Speaker 1

So we have here a question from Pedro Mariani, Bank of America. Thank you very much, Pedro, for the questions. Actually, he has three questions. First one, is Mind Makers included in the ACD guidance? And how much does that represent?

Second, does the ACD already include the potential cancellations from COVID-nineteen in 2021. And third, he asks for more details on the receivables on the fourth quarter. These are the questions.

Speaker 2

Okay. So, hi Pedro, this is Gil. I will answer the two first questions and Claus will cover your last question. Regarding to MIDI makers, yes, it's included in the ACV because we bought MIDI makers in January, right? So with this new go to market, coding and robotics that are the services Mind Makers is providing is included in our complementary solutions.

Regarding to the second question, yes, devolutions, cancellations, everything is included in the ACV. And by that, I mean the ACV is net of devolutions, cancellations, and so on. If the behavior of the curve of devolutions and cancellations are the same of the historical behavior we know, right? So when we build the ACV, we always deduct from the ACV any kind of impact that we know, okay? So the answer to your second question is yes.

Now I'll pass the floor to Claus.

Speaker 3

Hi, Pedro. With regard to receivables, we do see an increase, let's say, of thirty seven days when compared to the fourth quarter twenty nineteen. And I think it's important to highlight this increase is directly related to, let's say, company renegotiating and extending terms with our customers, trying to support them in this period of short and tight cash flow. And with regard to the comparison between the fourth quarter and the third quarter last year, we see increase of almost ninety days. This is completely normal considering the seasonality of the business, okay?

We are, let's say, in part of the peak season. This may vary from almost two hundred days in the peak going to sixty days, let's say, when we are in the valley of season in terms of sales. So should be no concern on this regard. And this seasonality, again, related to the fact that in the fourth quarter in first quarter, we have close to 70% of the revenues of the company. Okay?

Speaker 2

Yes. Maybe I could just add, Pedro, that in a certain moment last year, we had the opportunity or to offer a discount to our clients, facing more problems or to give them more oxygen, more working capital to pass through the pandemic. So we decided not to offer discounts, we decided to offer more time for paying their debts with us. And we believe that was the best way to deal with the situation. And as Melega mentioned in the presentation, the churn we had this year was a benchmark not only for us, I guess, the market, okay?

Speaker 1

Just a clarification here. In the ACV, we include returns and cancellations for as if it was a normal year, right? What regarding COVID is out of the ACV we are getting.

Speaker 2

Yes, if COVID brings impacts that are different from the previous year that will impact the not the ACV, but the recognition of revenues coming from the ACV. Perfect.

Speaker 0

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

Speaker 2

Thanks again for participating in our earnings release. I hope you all stay safe and also hope to see you again in our next call.

Speaker 3

Bye bye.

Speaker 0

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