Vasta Platform Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 11, 2023

There are 5 speakers on the call.

Operator

Hello, and welcome to the FASTA Platform First Quarter 2023 Financial Results. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I will now turn the conference over to Marcelo Werneck, VASTAS IR. Please go ahead.

Speaker 1

Good evening, everyone, and thank you for joining us in this conference call to discuss Vasta Platform's Q1 of 2023 results. My name is Marcelo Werneck, Vastra's IR. And with me on the call today, we have Guilherme Emelega, Vastra's CEO and Cesar Aztiva Vazquez, CFO. Before we begin, I would like to read the forward looking statements. During today's presentation, our executives will make forward looking statements.

Speaker 1

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, expectation for future periods, our expectation regarding our strategic product initiatives and their related benefits and our expectation regarding the market. Forward looking statements are based on our management's beliefs and assumptions and all 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.

Speaker 1

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 Let me now give the call over to Gilen Melega to make his opening statements.

Speaker 2

Thank you, Marcelo. Thank you all for participating in our earnings release call. I'd like to cover Slide number 3 with some highlights of the 2023 cycle to date. This Q1 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.

Speaker 2

Vasta concluded the 2023 cycle to date with 18% subscription revenue growth over the same period of last year, which translate in subscription revenues totaling BRL801 1,000,000. 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 1st 2 quarters with a cumulative ACV recognition of 65%. Compare it to cumulative ACV recognition of 66.5% in prior commercial cycle to date. This is due to the different seasonality and mix of products.

Speaker 2

The non subscription 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 BRL908 1,000,000. 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 1,000,000 And reached a margin of 36.5%. It is worth mentioning that the adjusted EBITDA and adjusted net profit were negatively impacted By the BRL50 million due to provision for doubtful accounts made in connection with a large retail that entered in bankruptcy proceedings in Brazil.

Speaker 2

Vasta's free cash flow totaled BRL36 1,000,000 in the Q1 of 2023, A significant 188 percent improvement from the $30,000,000 in Q1 2022. In the 2023 cycle to date, free cash flow totaled negative $7,000,000 an 89% improvement from negative $65,000,000 in 2022 commercial cycle today. 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 Two growth opportunities that we'll be pursuing as relevant for Vasta this year.

Speaker 2

An important pillar of our growth agenda, Start Ungru, continues to ramp up and in this quarter In the Q1 of 2023, we acquired 51% interest in capital of Skolestati, LETDA. 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 model institution for the franchise project that we have launched this week at BETTI Brazil, The biggest education event in Latin America. Another key aspect of our business we would like to highlight Starting this year, Vasta entered with its products and service 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, we will now be available to K-twelve public schools.

Speaker 2

K-twelve public sector in Brazil comprises more than 32,000,000 students, 5 times the number of students in the Brazilian K-twelve private sector. Both initiatives will be covered in more details ahead in this presentation. I will now turn back to Marcelo Vernac, who will talk about the financial results of the quarter And the 2023 cycle to date.

Speaker 1

Thank you, Malaga. In these slides, we present the composition of VASTA's net revenue. As you can see on the left side, in the Q1, total net revenue increased 6% organically year on year to BRL403 million. Moving to the right side, we can see the components of the revenue growth. In total, subscription revenue grew 7%.

Speaker 1

Excluding par, subscription revenue increased 10% year on year, reflecting the superior quality of revenue mix in the 2023 ACV. Far net revenue Well, 15% to $31,000,000 and the non subscription revenue decreased 3% to $46,000,000 which is aligned with our strategy of shifting revenue from textbooks to learning system and digital platform. Moving to Slide number 5. We analyze the net revenue for the 2023 commercial cycle to date. Net revenue grew 17% organically in 2023 to BRL 980 1,000,000.

Speaker 1

From the center to the right, total subscription revenue grew 18% on an organic basis. Subscription revenue excluding Par jumped 22% to BRL703 1,000,000, While power revenue went down by 3% to $98,000,000 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 number 6. We analyze the performance of the revenue in comparison to the guidance provided last quarter. In the last quarter, we provided guidance for net revenue, subscription revenue and non subscription revenue.

Speaker 1

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 non subscription revenue at the low end of the guidance. Worth mentioning that 20 23 ACVU cycle to date reached 65.1%. Moving to Slide number 7. Adjusted EBITDA in this quarter totaled BRL131 million and reached a margin of 32.6 percent Impacted by higher inventory costs caused by rising inflation on paper and production costs That was 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 cycle to date, increased 10%, reaching 332,000,000 And a margin of 36.5%.

Speaker 1

It's worth mentioning that cycle margin was negatively impacted By the BRL15 million, which represents 170 basis points due to the provision for doubtful accounts Made in the Q1 of this commercial cycle in connection with a large retail that entered into bankruptcy procedures in Brazil. Moving to the next slide. In the Q1 of 2023, adjusted net profit Total BRL26 million and in the 2023 commercial cycle to date, adjusted net profit decreased 6% to R98 $1,000,000 Moving now to Slide number 9, We show the free cash flow evolution. In the Q1 of 2023, free cash flow totaled 36,000,000 An improvement of 108 percent from a free cash flow of 13,000,000 In the Q1 of 2022, in the 2023 cycle to date, the free cash flow totaled negative 7,000,000 Also an improvement comparing to previous year, which had a consumption of BRL65 1,000,000. I would like to draw your attention to an important measure of the financial health of VASTAS as we continue to The normalization of the company's profitability and cash flow generation.

Speaker 1

The last 12 months adjusted EBITDA To free cash flow conversion rate improved from negative 52%, considering the period from the Q2 of Considering the period from Q2 of 2022 to the Q1 of 2023. This is a result of the company's growth and constant efficiency, reinforcing the message that cash flow generation continues to be a key areas of focus of our business. Moving now to Slide number 10. I'll give you more details on the provisions for doubtful accounts. Reported provision for doubtful accounts, PDA, grew 1.8 percentage points between the compared commercial cycles.

Speaker 1

This increase in PDA was due to the provisioning of 100% Of accounts receivable on a large retail company in Brazil undergoing bankruptcy Proceeds in the amount of $15,000,000 and represents 1.70 percentage points of Our growth in the reported provisions 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 Q1 of 2023, one day higher than the Q1 of the previous year And aligning with the seasonality of our business. I will conclude my part of this presentation with Slide 12. As of the end of the Q1 of 2023, VASA's record Net debt in the amount of BRL1.42 billion equal to the net debt position of the Q4 of 2022.

Speaker 1

The impact of higher interest rates Was offset by the cash flow generated in the periods. In comparison to the Q1 of 2022, Net debt position increased by $103,000,000 due to the impact of higher interest rates and investments made The minority stake acquisition of the Duque Bank and the acquisition of Fidelis in the Q1 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 2.85 times as of the first quarter of 23 is 0.07 times higher than the Q4 of 2022 And the 0.82 times lower than the Q1 of 2022, the comparable quarter. With that being said, I pass the word back to our CEO, Guilherme Melegan, who will give you more details about some of our growth initiatives.

Speaker 2

Thank you, Marcelo. Let me now bring you more color on a new revenue streamline that is the public Sector or B2G. Starting in the 1st 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 For Content Solutions includes for the public sector, our existing plural 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 Saebi and NN. Moreover, we have a robust portfolio of existing complementary solutions such as computation thinking and social emotional and bilingual.

Speaker 2

As you can see in the graphic in the Far right, the total K-twelve secondtor in Brazil comprises more than 39,000,000 students according to the latest census. Of this total, 83 percent or 32,800,000 comprises students from the public sector And only 17% or 6,600,000 are students enrolled in the private sector. We know that our country is very unequal and providing quality education for parts of the population, we own increase inequality, 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 BRL406 BRL1 1,000,000. Our initial assessment taking into consideration the areas of prioritization and our penetration capacity, We estimate a prioritized service addressable market of BRL1.9 billion.

Speaker 2

We're not providing any guidance of this segment, but 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 Starp angle. In this quarter, we acquired a 51% stake in ScholarlyTDA for R4.5 million dollars. Skolestar is located in Sao Jose do Hill Pareto, Sao Paulo. And it will be our flagship school boosting our entrance in the bilingual franchise business in response to an increasingly demand of Families and students for academic excellence.

Speaker 2

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 Petri, Brazil fair. I will end my presentation with Slide 16. We are proud to say that VASTAS Brands maintained leaders of best universities according to CECL, the unified selection systems.

Speaker 2

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 In the year, 12,000 students approved overall. The top performance at Brazil's best university Is among the key attributes considered by K-twelve schools when choosing an accountant partner. Having said that, I will finish our presentation and invite you all to the Q and A section.

Operator

Thank Your first question comes from the line of Marcelo Santos with JPMorgan. Please go ahead.

Speaker 3

Hi, good evening. Thank you for taking my questions. I wanted to explore a bit 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 to say these, digitized bidding processes open.

Speaker 3

Are you going to Like how are you going to approach and deal with this product? I think and what's the timeframe for you to start generating these results? The second question, what did you include in the SAM of $1,900,000,000 Is this mostly content that the cities or states would use to replace The national book program content or are you considering more other services? Thank you.

Speaker 2

Hi, 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 Saebi 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 this product, we established a business director that are pursuing these opportunities and we have right now Some good contracts being discussed.

Speaker 2

Regarding the SAM, Representing the €1,900,000,000 here and this is the prioritized Large municipalities and states with the basic teaching materials and platforms and assessments. We use the external consulting firm to help us to target those top Large public systems.

Speaker 3

Perfect. Thank you very much, Malaga.

Operator

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

Speaker 4

Hey, good evening. Thanks for taking our questions. 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?

Speaker 4

And what are your expectations for the next cycle? And the second question is also about the 2 gs strategy. I wanted to understand How is the business model exactly? Are you selling the exact same product? Or do you need to make some type of adaptation?

Speaker 4

And from the strategic point of view, why are you seeking to do this now?

Speaker 2

Thank you very much, Lucas, for your questions. Let me start with the margins. We expected the price increase in paper and printing and it's already Factor in our numbers, what we are pursuing this year is to be around the 30% EBITDA margins, the thirty level. We do not expect any other impact that is not reflected On the figures right now. You mentioned the cycle.

Speaker 2

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 assessments 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 White label products for the public sector.

Speaker 2

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. Thanks for your question, Lucas.

Speaker 4

Very helpful. Thank

Operator

And you have a follow-up question from Marcelo Santos with JPMorgan. Please go ahead.

Speaker 3

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 the cycle? And the cycle already gave the idea of the margin, 30% for this year. But In the next couple of years, is this going to impact somehow your margin profile?

Speaker 3

And the second question is regarding the franchise model that you Announced using this cool start school that you acquired. How does 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 two models? Thank you.

Speaker 2

Thank you, Marcelo for your questions. Regarding B2G margins, I would 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 contract yet, But we definitely expect to be very sound margins since it is digital. Regarding the franchise model that we are just launching at the Betty Fair, With our flagship in Sao Jose del Rio Pareto, 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 it's not the same product of a regular private school we'll have access to.

Speaker 2

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 del Rio Pareto. Sao Jose del Rio Pareto has an Anglo and an Anglo start. They are completely different schools with different publics, serving Different targets.

Speaker 2

We're very confident that this will be a very sound business Our franchise providing the full know how to a new entrant in the business.

Speaker 3

Right. Thank you very much.

Operator

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

Speaker 2

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 StartAnglo, 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.

Powered by Quartr
Earnings Conference Call
Vasta Platform Q1 2023
00:00 / 00:00