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Arco Reports Third Quarter 2020 Financial Results

·21-min read

Arco delivered 2020 ACV in line with contracted value, confirms margin guidance for 2020 FY and expects solid growth between 20% and 25% for 2021 ACV

Arco Platform Limited, or Arco (Nasdaq: ARCE), today reported financial and operating results for the third quarter of 2020 ended September 30th, 2020.

Letter from Ari de Sá Cavalcante Neto, Arco’s founder and CEO

The year of 2020 has been a testament to the resilience of our business, and we have planted seeds that will help us grow our company for years to come. As technology took a leading role in education overnight, we were able to quickly evolve to better serve existing clients and attract prospects, as well as deliver strong financial and operational results. As student, parent and educator habits changed drastically, we are excited at the opportunity to continue to disrupt our sector and shape the future of education.

While mostly working remotely from the safety of their homes, our team has delivered strong results during the first nine months of 2020. Arco has recorded 117% YoY revenue growth for the period, 148% increase in adjusted EBITDA and confirms its adjusted EBITDA guidance of 35.5-37.5% for the 2020 fiscal year. We have achieved these results while continuing to invest in our team, our solutions and our brand equity, the ingredients of our virtuous cycle focused on long-term growth. During this period, there have been no layoffs or pay-cuts; on the contrary, we have continued to grow our team by recruiting talented professionals in technology, pedagogical, frontline and management roles.

The accelerated evolution of our solutions and go-to-market strategy during the period has been a source of pride for us. Within days of the COVID-19 outbreak, we offered our partner schools a portfolio of technology tools, digital content and remote pedagogical support that helped them to continue providing high-quality education to students and perceived value to parents. As a result, we are experiencing high levels of user engagement and customer retention and satisfaction. In our business, trust and reputation are determinant to long term success, and we believe these results will drive growth for years to come.

Additionally, the change in our go-to-market strategy from in-person to digital-first has delivered a record number of leads at a lower cost per lead than past commercial cycles. Since September, when schools started to reopen and our sales team resumed travel, we have seen a strong rebound in new school intake. We expect to deliver solid annual contract value (ACV) growth of 20 to 25% for the 2021 school year.

The evolution in the way we operate and serve our clients has further reinforced our brand reputation, quality and distribution. While some companies perished and other benefited only in the short term, Arco emerges stronger with brighter long-term perspectives. With a 4% share in a R$25 billion fragmented market in urgent need of high-quality education, today continues to be day 1 for us. We thank our partner investors for their support and guidance during this period and Arco’s team for their relentless pursuit of excellence and value to our partner schools.

Key Messages

Resilient business leading to strong financial results

  • Delivered 2020 ACV in line with contracted value: 4% gap to contracted value as temporary schools closure due to COVID-19 resulted in minor student dropout

  • 3Q20 net revenues of R$208.7 million, 196% above 3Q19; 9M20 net revenues of R$ 705.2 million, 117% above 9M19

  • 9M20 adjusted EBITDA grew 148% versus 2019, resulting in a margin of 36.2%

  • On track to deliver FY adjusted EBITDA guidance of 35.5-37.5%

Solid growth expected for 2021 cycle

  • Guidance for 2021 ACV growth between 20% and 25%, with a 2021 ACV guidance of R$1,150 to R$1,200 million

  • Broader guidance range due to additional growth potential from delayed sales cycle

  • Conservative assumptions for student dropout recovery

Bright long-term perspectives from stronger winning factors

  • Accelerated product evolution delivered 3x user engagement and leading NPS levels

  • Outstanding retention rates and healthy price increases

  • Revamped go-to-market strategy led to record pipeline of leads

  • As salesforce returned to the field, new school intake sharply rebounded

Exciting organic and M&A opportunities ahead to continue capturing large total addressable market

  • Still scratching the surface of a large and fragmented market

  • Robust M&A pipeline in all target verticals

  • Positivo acceleration demonstrates our repeatable model of acquiring & improving

  • Closing of Escola da Inteligência1 unlocks new vertical for Arco, the high-growth social-emotional learning

Conference Call Information

Arco will discuss its third quarter 2020 results today, November 30th, 2020, via a conference call at 4:30 p.m. Eastern Time. To access the call, please dial: +1 (412) 717-9627, +1 (844) 204-8942 or +55 (11) 3181 8565. An audio replay of the call will be available through December 7th, 2020 by dialing +55 (11) 3193 1012 and entering access code 1608874#. A webcast of the call will be available on the Investor Relations section of the Company’s website at https://investor.arcoplatform.com/.

___________________
1
Escola da Inteligência transaction is subject to customary closing conditions, including antitrust and other regulatory approvals.

Information related to COVID-19 pandemic

As of September 30th, 2020, there was a total impact of R$10,915 on the Company's condensed consolidated financial statements related to the COVID-19 pandemic mainly related to: (i) revision of the Company’s estimated credit losses from its trade receivables based on expected increases in financial default and in unemployment rates in Brazil for the next months, which resulted in an increase of R$4,943 thousand, (ii) the Company incurred additional expenses of R$5,685 related to IT, network infrastructure and an integrated teaching platform, as well as expenses to maintain protective measures.

The future impact of the COVID-19 pandemic on an ongoing basis is still uncertain, and the Company’s management team will continue to closely monitor and assess the potential impacts it may have on the Company’s business, its financial performance and position.

For full disclosure regarding the COVID-19 discussion, please refer to the September 30th, 2020 condensed consolidated financial statements submitted to the Securities and Exchange Commission on Form 6-K.

About Arco Platform Limited (Nasdaq: ARCE)

Arco has empowered hundreds of thousands of students to rewrite their futures through education. Our data-driven learning, interactive proprietary content, and scalable curriculum allows students to personalize their learning experience with high-quality solutions while enabling schools to provide a broader approach to education.

Forward-Looking Statements

This press release contains forward-looking statements as pertains to Arco Platform Limited (the "Company") within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, the Company’s expectations or predictions of future financial or business performance conditions. The achievement or success of the matters covered by statements herein involves substantial known and unknown risks, uncertainties, and assumptions, including with respect to the COVID-19 pandemic. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, the Company’s results could differ materially from the results expressed or implied by the statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward looking statements are made based on the Company’s current expectations and projections relating to its financial conditions, result of operations, plans, objectives, future performance and business, and these statements are not guarantees of future performance.

Statements which herein address activities, events, conditions or developments that the Company expects, believes or anticipates will or may occur in the future are forward-looking statements. You can generally identify forward-looking statements by the use of forward-looking terminology such as "anticipate," "believe," "can," "continue," "could," "estimate," "evaluate," "expect," "explore," "forecast," "guidance," "intend," "likely," "may," "might," "outlook," "plan," "potential," "predict," "probable," "project," "seek," "should," "view," or "will," or the negative thereof or other variations thereon or comparable terminology. All statements other than statements of historical fact could be deemed forward looking, including risks and uncertainties related to statements about our competition; our ability to attract, upsell and retain customers; our ability to increase the price of our solutions; our ability to expand our sales and marketing capabilities; general market, political, economic, and business conditions in Brazil or abroad; and our financial targets which include revenue, share count and other IFRS measures, as well as non-IFRS financial measures including Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, Adjusted Net Income Margin, Free Cash Flow and Adjusted Free Cash Flow.

Forward-looking statements represent the Company management’s beliefs and assumptions only as of the date such statements are made, and the Company undertakes no obligation to update any forward-looking statements made in this presentation to reflect events or circumstances after the date of this press release or to reflect new information or the occurrence of unanticipated events, except as required by law.

Further information on these and other factors that could affect the Company’s financial results is included in filings the Company makes with the Securities and Exchange Commission from time to time, including the section titled "Risk Factors" in the Company’s most recent Forms 20-F and 6-K. These documents are available on the SEC Filings section of the Investor Relations section of the Company’s website at: https://investor.arcoplatform.com/

Key Business Metrics

ACV Bookings: we define ACV Bookings as the revenue we would contractually expect to recognize from a partner school in each school year pursuant to the terms of our contract with such partner school, assuming no further additions or reductions in the number of enrolled students that will access our content at such partner school in such school year (we define "school year" for purposes of calculation of ACV Bookings as the twelve-month period starting in October of the previous year to September of the mentioned current year). We calculate ACV Bookings by multiplying the number of enrolled students at each partner school with the average ticket per student per year; the related number of enrolled students and average ticket per student per year are each calculated in accordance with the terms of each contract with the related partner school.

Non-GAAP Financial Measures

To supplement the Company's condensed consolidated financial statements, which are prepared and presented in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board—IASB, we use Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, Adjusted Net Income Margin, Free Cash Flow and Adjusted Free Cash Flow which are non-GAAP financial measures.

We calculate Adjusted EBITDA as profit (loss) for the year (or period) plus/minus income taxes, plus/minus finance result, plus depreciation and amortization, plus share of loss of equity-accounted investees, plus share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units), plus M&A expenses, plus non-recurring expenses and plus effects related to COVID-19 pandemic. We calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by Net Revenue.

We calculate Adjusted Net Income as profit (loss) for the year (or period) plus share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units), plus amortization of intangible assets from business combinations (which refers to the amortization of the following intangible assets from business combinations: (i) rights on contracts, (ii) customer relationships, (iii) educational system, (iv) trademarks, (v) non-compete agreement and (vi) software resulting from acquisitions), plus/minus changes in fair value of derivative instruments (which refers to (i) changes in fair value of derivative instruments—finance income, and plus (ii) changes in fair value of derivative instruments—finance costs), plus/minus changes in accounts payable to selling shareholders plus share of loss of equity-accounted investees, plus/minus changes in current and deferred tax recognized in statements of income applied to all adjustments to net income, plus/minus foreign exchange gains/loss on cash and cash equivalents, plus/minus interest expenses (income), net, plus M&A expenses, plus non-recurring expenses and plus effects related to COVID-19 pandemic. We calculate Adjusted Net Income Margin as Adjusted Net Income divided by Net Revenue.

We calculate Free Cash Flow as Net Cash Flows from Operating activities less acquisition of property and equipment less acquisition of intangible assets. We consider Free Cash Flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by operating activities and cash used for investments in property and equipment required to maintain and grow our business. We calculate Adjusted Free Cash Flow as free cash flow for the year (or period) plus (i) interest change in financial investments, (ii) M&A expenses and,(iii) non-recurring expenses.

We understand that, although Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, Adjusted Net Income Margin, Free Cash Flow and Adjusted Free Cash Flow are used by investors and securities analysts in their evaluation of companies, these measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results of operations as reported under IFRS. Additionally, our calculations of Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, Adjusted Net Income Margin Free Cash Flow and Adjusted Free Cash Flow may be different from the calculation used by other companies, including our competitors in the education services industry, and therefore, our measures may not be comparable to those of other companies.

Arco Platform Limited

Interim Condensed Consolidated Statements of Financial Position

September 30,

December 31,

(In thousands of Brazilian reais)

2020

2019

Assets

(unaudited)

Current assets

Cash and cash equivalents

526,844

48,900

Financial investments

906,671

574,804

Trade receivables

260,576

329,428

Inventories

52,714

40,106

Recoverable taxes

27,688

15,612

Financial instruments from acquisition of interest

-

3,794

Related parties

-

1,298

Other assets

20,089

14,630

Total current assets

1,794,582

1,028,572

Non-current assets

Financial instruments from acquisition of interest

27,887

32,152

Deferred income tax

223,784

156,748

Recoverable taxes

9,528

6,613

Financial investments

4,820

4,690

Related parties

15,186

14,813

Other assets

17,164

14,399

Investments and interests in other entities

70,252

48,574

Property and equipment

21,988

21,328

Right-of-use assets

19,351

21,631

Intangible assets

1,830,999

1,811,903

Total non-current assets

2,240,959

2,132,851

Total assets

4,035,541

3,161,423

September 30,

December 31,

(In thousands of Brazilian reais)

2020

2019

Liabilities

(unaudited)

Current liabilities

Trade payables

30,799

34,521

Labor and social obligations

115,146

68,511

Taxes and contributions payable

17,513

7,508

Income taxes payable

38,162

52,038

Advances from customers

5,481

25,626

Lease liabilities

8,501

6,845

Loans and financing

2,186

98,561

Accounts payable to selling shareholders

376,310

117,959

Other liabilities

847

607

Total current liabilities

594,945

412,176

Non-current liabilities

Labor and social obligations

296

2,801

Lease liabilities

15,922

19,012

Loans and financing

300,618

-

Financial instruments from acquisition of interest

25,234

33,940

Provision for legal proceedings

774

251

Accounts payable to selling shareholders

919,712

1,098,273

Other liabilities

825

160

Total non-current liabilities

1,263,381

1,154,437

Equity

Share capital

11

11

Capital reserve

2,201,316

1,607,622

Share-based compensation reserve

80,680

84,546

Accumulated losses

(104,792

)

(97,369

)

Total equity

2,177,215

1,594,810

Total liabilities and equity

4,035,541

3,161,423

Arco Platform Limited

Interim Condensed Consolidated Statements of Income

Three months period ended
September 30,

Nine months period ended
September 30,

(In thousands of Brazilian reais, except earnings per share)

2020

2019

2020

2019

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Net revenue

208,730

70,572

705,173

325,193

Cost of sales

(44,485

)

(14,188

)

(154,825

)

(61,884

)

Gross profit

164,245

56,384

550,348

263,309

Operating expenses:

Selling expenses

(98,612

)

(47,639

)

(274,582

)

(123,089

)

General and administrative expenses

(72,108

)

(69,515

)

(199,030

)

(135,273

)

Other income (expense), net

3,234

(471

)

3,993

2,451

Operating profit (loss)

(3,241

)

(61,241

)

80,729

7,398

Finance income

13,418

16,187

35,597

47,104

Finance costs

(44,812

)

(104,968

)

(113,903

)

(133,823

)

Finance result

(31,394

)

(88,781

)

(78,306

)

(86,719

)

Share of loss of equity-accounted investees

(4,042

)

(794

)

(8,041

)

(1,953

)

Loss before income taxes

(38,677

)

(150,816

)

(5,618

)

(81,274

)

Income taxes - income (expense)

Current

(14,218

)

(3,103

)

(68,841

)

(32,254

)

Deferred

25,407

45,433

67,036

61,582

Total income taxes – income (expense)

11,189

42,330

(1,805

)

29,328

Net loss for the period

(27,488

)

(108,486

)

(7,423

)

(51,946

)

Basic loss per share – in Brazilian reais

Class A

(0.49

)

(2.11

)

(0.13

)

(1.02

)

Class B

(0.49

)

(2.11

)

(0.13

)

(1.02

)

Diluted loss per share – in Brazilian reais

Class A

(0.49

)

(2.11

)

(0.13

)

(1.02

)

Class B

(0.49

)

(2.11

)

(0.13

)

(1.02

)

Weighted-average shares used to compute net loss per share:

Basic

55,545

50,709

55,144

50,505

Diluted

55,737

51,276

55,336

51,072

Arco Platform Limited

Interim Condensed Consolidated Statements of Cash Flows

Three months period ended
September 30,

Nine months period ended
September 30,

(In thousands of Brazilian reais)

2020

2019

2020

2019

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Operating activities

Loss before income taxes

(38,677

)

(150,816

)

(5,618

)

(81,274

)

Adjustments to reconcile loss before income taxes

Depreciation and amortization

29,715

8,106

89,763

24,449

Inventory reserves

(305

)

643

3,339

4,203

Allowance for doubtful accounts

15,679

7,286

28,233

9,489

Loss on sale/disposal of property and equipment and intangible assets disposed

72

462

1,524

593

Fair value change in financial instruments from acquisition interests

421

8,483

(438

)

10,349

Changes in accounts payable to selling shareholders

12,978

81,781

19,872

81,781

Share of loss of equity-accounted investees

4,042

795

8,041

1,953

Share-based compensation plan

(2,339

)

17,997

15,309

32,431

Accrued interest on loans and financing

9,077

-

16,052

-

Interest accretion on acquisition liability

13,013

10,270

49,990

24,710

Income non-cash equivalents

(4,200

)

-

(9,856

)

-

Interest on lease liabilities

641

449

2,060

1,231

Provision for legal proceedings

-

(111

)

594

100

Provision for payroll taxes (restricted stock units)

(10,212

)

16,881

(1,166

)

23,399

Foreign exchange income

(551

)

(532

)

(371

)

(16

)

Changes in fair value of step acquisitions

(3,248

)

-

(3,248

)

-

Gain on sale of investment

-

34

-

(3,252

)

Other financial income, net

(811

)

(279

)

(1,849

)

(1,481

)

25,295

1,449

212,231

128,665

Changes in assets and liabilities

Trade receivables

22,354

48,195

40,821

39,786

Inventories

(489

)

(8,937

)

(8,052

)

(10,968

)

Recoverable taxes

(514

)

(2,177

)

(4,818

)

(7,550

)

Other assets

11,582

1,167

(7,319

)

(6,659

)

Trade payables

(76

)

7,833

(3,791

)

8,492

Labor and social obligations

29,210

6,986

44,832

18,340

Taxes and contributions payable

12,576

507

9,797

(540

)

Advances from customers

(31,099

)

(17,335

)

(20,273

)

(2,337

)

Other liabilities

95

(26

)

(887

)

(380

)

Cash generated from operations

68,934

37,662

262,541

166,849

Income taxes paid

(26,392

)

(5,430

)

(90,412

)

(28,640

)

Interest paid on lease liabilities

(476

)

(177

)

(1,186

)

(397

)

Interest paid on investment acquisition

(47

)

-

(47

)

-

Interest paid on loans and financing

(9,867

)

-

(9,867

)

-

Net cash flows from operating activities

32,152

32,055

161,029

137,812

Investing activities

Acquisition of property and equipment

(1,621

)

(1,780

)

(5,663

)

(7,609

)

Payment of investments and interests in other entities

(19,953

)

(1,218

)

(32,628

)

(5,418

)

Acquisition of subsidiaries, net of cash acquired

(22,002

)

-

(22,002

)

(16,137

)

Acquisition of intangible assets

(23,589

)

(7,982

)

(63,069

)

(26,361

)

Net purchases of financial investments

(199,739

)

(25,903

)

(322,141

)

(88,432

)

Loans to related parties

-

-

-

(14,000

)

Net cash flows used in investing activities

(266,904

)

(36,883

)

(445,503

)

(157,957

)

Financing activities

Capital increase

-

-

-

13,829

Capital increase proceeds from public offering

591,898

-

591,898

-

Share issuance costs

(17,531

)

-

(17,531

)

(673

)

Payment of lease liabilities

(1,949

)

(1,629

)

(5,728

)

(2,709

)

Payment of loans and financing

(300,314

)

(38

)

(300,314

)

(52

)

Payment to selling shareholders

47

-

(954

)

-

Loans and financing

300,000

-

498,372

-

Dividends paid by subsidiaries

-

-

(3,696

)

-

Net cash flows from (used in) financing activities

572,151

(1,667

)

762,047

10,395

Foreign exchange effects on cash and cash equivalents

551

533

371

17

Increase (decrease) in cash and cash equivalents

337,950

(5,962

)

477,944

(9,733

)

Cash and cash equivalents at the beginning of the period

188,894

-

48,900

12,301

Cash and cash equivalents at the end of the period

526,844

(5,962

)

526,844

2,568

Increase (decrease) in cash and cash equivalents

337,950

(5,962

)

477,944

(9,733

)

Arco Platform Limited

Reconciliation of Non-GAAP Measures

Three months period
ended September 30,

Nine months period
ended September 30,

(In thousands of Brazilian reais)

2020

2019

2020

2019

Adjusted EBITDA Reconciliation

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Loss for the period

(27,488

)

(108,486

)

(7,423

)

(51,946

)

(+/-) Income taxes

(11,189

)

(42,330

)

1,805

(29,328

)

(+/-) Finance result

31,394

88,781

78,306

86,719

(+) Depreciation and amortization

29,715

8,106

89,763

24,449

(+/-) Share of loss of equity-accounted investees

4,042

794

8,041

1,953

EBITDA

26,474

(53,135

)

170,492

31,847

(+) Share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units).

19,840

34,878

51,280

55,830

(+) M&A expenses

1,697

8,486

5,688

12,909

(+) Non-recurring expenses

6,694

2,467

16,752

2,467

(+) Effects related to COVID-19 pandemic

2,922

-

10,915

-

Adjusted EBITDA

57,627

(7,304

)

255,127

103,053

Net Revenue

208,730

70,572

705,173

325,193

EBITDA Margin

12.7

%

-75.3

%

24.2

%

9.8

%

Adjusted EBITDA Margin

27.6

%

-10.3

%

36.2

%

31.7

%

Three months period
ended September 30,

Nine months period
ended September 30,

(In thousands of Brazilian reais)

2020

2019

2020

2019

Adjusted Net Income Reconciliation

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Loss for the period

(27,488

)

(108,486

)

(7,423

)

(51,946

)

(+) Share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units).

19,840

34,878

51,280

55,830

(+) Amortization of intangible assets from business combinations

18,483

3,623

54,718

9,688

(+/-) Changes in fair value of derivative instruments

421

8,483

(438

)

10,349

(+/-) Changes in accounts payable to selling shareholders

12,978

81,781

19,872

81,781

(+/-) Share of loss of equity-accounted investees

4,042

794

8,041

1,953

(+/-) Tax effects

(12,768

)

(40,733

)

(55,192

)

(54,457

)

(+/-) Foreign exchange on cash and cash equivalents

(551

)

(532

)

(371

)

(16

)

(+/-) Interest expenses (income), net

12,513

10,008

49,009

23,889

(+) M&A expenses

1,697

8,486

5,688

12,909

(+) Non-recurring expenses

6,694

2,467

16,752

2,467

(+) Effects related to COVID-19 pandemic

2,922

-

10,915

-

Adjusted Net Income

38,783

769

152,851

92,447

Net Revenue

208,730

70,572

705,173

325,193

Adjusted Net Income Margin

18.6

%

1.1

%

21.7

%

28.4

%

Three months period
ended September 30,

Nine months period
ended September 30,

(In thousands of Brazilian reais)

2020

2019

2020

2019

Free Cash Flow Reconciliation

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Cash generated from operations

68,934

37,662

262,541

166,849

(-) Income tax paid

(26,392

)

(5,430

)

(90,412

)

(28,640

)

(-) Interest paid on lease liabilities

(476

)

(177

)

(1,186

)

(397

)

(-) Interest paid on investment acquisition

(47

)

-

(47

)

-

(-) Interest paid on loans and financing

(9,867

)

-

(9,867

)

-

Cash Flow from Operating Activities

32,152

32,055

161,029

137,812

(-) Acquisition of property and equipment

(1,621

)

(1,780

)

(5,663

)

(7,609

)

(-) Acquisition of intangible assets

(23,589

)

(7,982

)

(63,069

)

(26,361

)

Free Cash Flow

6,942

22,293

92,297

103,842

(+) Interest change in financial investments

4,200

-

9,856

-

(+) M&A expenses

1,697

-

5,688

-

(+) Others

(1,765)

-

12,643

-

(+) Labor and social obligations of restricted stock units

(13,548

)

-

(13,548

)

-

Adjusted Free Cash Flow

(2,474)

22,293

106,936

103,842

View source version on businesswire.com: https://www.businesswire.com/news/home/20201130005922/en/

Contacts

Investor Relations Contact:
Arco Platform Limited
Carina Carreira
IR@arcoeducacao.com.br