Coinbase Global Q2 2023 Earnings Call Transcript

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August 9, 2023

There are 5 speakers on the call.

Operator

Hello, and welcome to the VAST Platform Second Quarter 2023 Financial Results. My name is Christa, and I'll be the conference operator today. During today's presentation, our executives will make a forward looking statement. 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, our expectations regarding our strategic product initiatives and their related benefit and our expectations regarding the market.

Operator

Forward looking statements are based on our management's belief and assumptions and on 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. 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.

Operator

The non IFRS financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with IFRS. I will now turn the call over to Marcelo Wernicke, Investor Relations. You may begin.

Speaker 1

Good evening, everyone. Thank you for joining us In this conference call to discuss VASTA Platform's Q2 of 2023 results. I am Marcelo Verneck, VASTA's Investor Relations. And today with me, we have the presence of Guilherme Emelega, VASTA's CEO And Cesar Silva, Vazas, CFO, who will be joining me on the call. During this call, we will cover key highlights, financial insights and strategic developments that have shaped our performance in the 2023 cycle to date.

Speaker 1

We'll also have plenty of time for your questions at the end of this presentation. Let me now hand over the floor to Glenn Emelyga, our CEO, 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. As we approach the end of the current cycle, We are pleased to report that in 2023 cycle to date, our net revenue had a substantial growth of 22% and reached BRL1.179 billion. Moreover, our accumulated subscription revenue during the 2023 cycle to date has reached BRL1.12 billion, representing an 18.5% increase compared to the previous year.

Speaker 2

This growth closely aligns with the 20% growth projected by our 2023 ACV, indicating that Vasta has truly evolved into a robust platform with consistent and recurring revenue. Notably, our complementary solutions segment continues to stand out, showcasing the highest growth rate among our business segments, with a remarkable 45% increase in the current cycle compared to the previous cycle. In 2023, Vasta made a significant stride by expanding its product and service offering to the Brazilian Public Sector, P2G. During the Q2 of 2023, we generated BRL4 1,000,000 in revenue from the B2G sector. Moving to the company's profitability.

Speaker 2

In the 2023 cycle to date, our adjusted EBITDA Experienced a growth of 19%, reaching $372,000,000 while maintaining And adjusted EBITDA margin close to the 32%. Finally, we continue to see the normalization of our company's cash flow generation. In the 2023 cycle to date, our free cash flow reached $87,000,000, 131% increase from the $37,000,000 recorded in 2022 cycle. It represents €50,000,000 improvement in the free cash flow generation between the cycles. It's worth noting that our last 12 months free cash flow to adjusted EBITDA conversion rate was seeing significant improvement, rising from 11% to 26%.

Speaker 2

This progress is a direct outcome of our company's growth and unwavering commitment to operational efficiency. I will now turn back to Marcelo, who will talk about the financial results in the 2020

Speaker 1

Thank you, Malaga. In this slide, we present the composition of Vasta's net revenue. On the left side, you can observe the significant organic year on year growth in the total net revenue for the 2nd quarter, which increased by 43% reaching BRL 271 1,000,000. Shifting our focus to the right side, let's detail the key components of this revenue growth. Firstly, subscription revenue had a substantial increase of 21%.

Speaker 1

Excluding par, our subscription revenue experienced even higher growth of 24.5% year on year. This expansion is a result of good part of revenue mix achieved in the 2023 ACV. Moreover, we are delighted to share that in 2023, VAST achieved a significant milestone by expanding its products and service offering to the Brazilian public sector. During the Q2 of 2023, we Successfully generated $40,000,000 in revenue from the B2G sector. We will provide more detail in the upcoming section of this presentation.

Speaker 1

Non subscription revenue increased by 23%, primarily driven by the introduction of a new revenue stream from our flagship school start Anglo. Moving to Slide number 5, we analyze The net revenue for the 2023 commercial cycle to date. In 2023, we achieved an organic net revenue growth of 22% amounting to BRL1.179 billion. Continuing from the left To the right, our total subscription revenue experienced strong growth, increased by 18.5% on an organic basis. Subscription revenue excluding PAR saw an increase of 22.4 percent reaching BRL911 million.

Speaker 1

Faa revenue declined by 7.8 percent amounting to 101,000,000 Subscription revenue continues the major contributor to our total revenue, representing a significant 86% share, while non subscription revenue now comprises only 11% of the total revenue. Furthermore, our Exceptional expansion in the Brazilian public sector has used promising results contributing to 3% of our overall revenue in the cycle to date. Moving to Slide number 6. In this quarter, our adjusted EBITDA amount to BRL41 1,000,000 with a margin of 15%. This positive performance can be attributed to several factors, including strong sales results, cost dilution and operational efficiencies.

Speaker 1

Turning our attention The right side of the slide, the adjusted EBITDA for the 2023 cycle to date exhibited Strong growth increasing by 19 percent to reach BRL372 1,000,000 with a margin of 31.6%. These results are evidence that VASTA's Operational efficiency and financial performance are now operating at a much higher level, aligning closely with the company's potential for sustainable growth. In the upcoming slide, we'll see the breakdown of the components contributing to the adjusted EBITDA margin. In Slide number 7, the EBITDA margin show a slight decrease of 70 basis points compared to the last cycle to date from 32.3 to 31.6. This decrease can be mainly attributed to 2 factors provisions for doubtful accounts PDA made in the Q4 of 2020 2, resulting from a large retail bankruptcy proceeds in Brazil and higher inventory costs due to the rising global inflation in paper and production expenses affecting our gross margin in the current cycle.

Speaker 1

Despite this challenge, there are several positive aspects to highlight. First, we managed to offset the impact of these increases Through significant operational efficiency gain and cost saving measures, this show Our resilience and adaptability navigating through market fluctuation. Furthermore, our improved product mix fueled by the growth of our subscription products has played a crucial role in mitigating the effects of the major factors. It's also worth noting that as a percentage of net revenue, our commercial expenses demonstrated an improvement of 40 basis points indicating greater cost effectiveness in our sales and marketing efforts. Additionally, our adjusted G and A expenses improved by 2 10 basis points, showing a prudent financial management.

Speaker 1

Overall, while facing certain challenges in the current cycle, we remain focused on leverage our strength and implementing strategic measures To optimize performance, the positive developments in operational efficiencies and cost management Couples the growth of our subscription products reflects our commitment to driving sustainable value for our companies and shareholders. Moving to Slide number 8. The adjusted net loss in the Q2 of 2023 amounted to BRL32 1,000,000, representing a 24% increase compared to the same period in 2022 when we recorded an adjusted net loss of $42,000,000 While finance costs in a scenario of a spike in interest rates continue to impact our bottom line, we have remained committed to deleveraging by reducing our net debt and improving our net debt position as you see further in this presentation. Moreover, it's important to highlight that our adjusted net profit The 2023 cycle to date has shown an improvement increasing by 6% compared to the same period Moving to Slide 9, we show the free cash flow evolution. We continue to observe the normalization of the company's cash flow generation.

Speaker 1

In the Q2 of 2023, the free cash flow totaled BRL94 1,000,000, representing an 8.4% decrease compared to $103,000,000 in the Q2 of 2022. Moreover, to the right side, in the 2023 cycle to date, our free cash flow reached 87,000,000 marking a remarkable 132% increase from the $37,000,000 recorded in the 2022 cycle. It's worth noting that our last 12 months free cash flow to adjusted EBITDA conversion rate We've seen an improvement rising from 11% to 26%. This progress is a direct outcome of our company's robust growth and commitment to operational efficiency, Reinforcing the message that cash generation continues to be a key area of focus of our business. Moving to Slide number 10, I'll give you more details on the provision for doubtful accounts.

Speaker 1

Reported provision for doubtful accounts, PDA, So a substantial reduction when comparing the quarters, decreasing from 1.9% of net revenue in the Q2 of 2022 to 0.4% in the Q2 of 2023. However, it's important to note That this quarter results were positively impacted by a partial recovery of a retail provision. If we exclude this effect, the normalized PDA for the quarter should have been 2.5% of net revenue, which is more in line with the typical course of our business. Moving to the right side of the slide, We can observe the PDA for the 2023 cycle to date. Reported provision for doubtful accounts Increased by 100 basis points between the comparable commercial cycles.

Speaker 1

This increase in PDA This is still influenced by the one off provisioning of accounts receivable from the large retail Brazilian company mentioned earlier. If we exclude this factor, the participation of PDA in relation to VASTA's net revenue remain stable, accounting to 2.6% in the 2023 commercial cycle compared to 2.4% in the 2022 commercial cycle. Moving to the next slide, We observed that the average payment terms of VASTA's accounts receivable portfolio was 149 days in the Q2 of 2023, which is 50 days lower than the Q1 of this year And the line with the seasonality of our business. I will now conclude my presentation with Slide 12. As of the end of the Q2 of 2023, Vasta achieved a reduction in net debt, which amount to BRL1.15 billion showcasing an improvement of BRL27 million compares to the net debt position in the Q1.

Speaker 1

This achievement is attributed to the positive cash Flow generated during the period, which not only suppressed the impact of interest accrual and M and A outflows. On the right side of the slide, we can observe that as of the Q2 of 2023, The net debt by the last 12 months adjusted EBITDA ratio stands at 2.57 times, which marks an improvement of 0.28 times compared to the Q1 of 2023 and an improvement of 0.5 times when compared to the Q2 of 2022. The reduction in net debt and by lowering the net debt by the last 12 months adjusted EBITDA ratio Showcase our commitment to good financial management and sustainable growth. By continuous It's striving to reduce our net debt. We can enhance our financial flexibility, lower interest costs and enable us to navigate any economic challenge more effectively, ensuring a more With that being said, I pass the words to our CEO, Pilani Nelliger, He will give more details about some growth initiatives.

Speaker 2

Thank you, Marcelo. Let me now provide a recap in Slide 14 into a new segment, the Pulley Sector or B2G. In 2023, Vasta took a major step forward by expanding its products and service offerings to the Brazilian public sector. In terms of market size, as illustrated in the graph on the left, the total K-twelve secondtor in Brazil comprises more than 39,000,000,000 According to the latest census, among this total, 83% are students from the public sector, while only 17 are students enrolled in the private sector. Entering the public sector presents an opportunity for capturing Positive financial results.

Speaker 2

The total addressable market TAM for the public sector amounts to more than BRL406 1,000,000,000. And based on our initial assessment considering prioritization areas, penetration capacity and Market share, we estimate a prioritized serviceable addressable market of 1,900,000,000. Regarding our go to market strategy, our target audience consists of states and large municipalities, especially those with low results in the Hidade, which the aim of improving the quality of education for these students. To lead the segment effectively, we have appointed a new dedicated Business Director and tailored an attractive portfolio of In parallel, we are establishing a robust framework of corporate governance, which includes the diligence compliance team, continuous training of our team members and a rigorous audit process. This commitment to corporate governance ensures that we maintain the highest standards and uphold the trust Our stakeholders place in us.

Speaker 2

Regarding the Q2 results, we are delighted to have secured an opportunity Contract aimed at enhancing PAIB's course. PAIB is a crucial national assessment that measures the quality of basic education and plays a vital role in identifying areas that need improvement to foster educational development. Our program focus on developing core skills in Portuguese and mathematics, laying a strong foundation for students' academic growth. We have successfully captured EUR 40,500,000 of this contract in Q2. This is a testament of our capability in securing strategic partnerships and delivering tangible results.

Speaker 2

We are immensely proud to have the opportunity to contribute to the improvement of education in the public sector. Making a positive impact on such a large scale is at the heart of our mission and this project aligns perfectly with our commitment to driving educational progress in Brazil. By collaborating with educational institutions and governments, We aim to create lasting improvements in the quality of education, empowering students to reach their full potential and fostering A brighter future for our society as a well. Moving to Slide number 15, Let me give you some update on the STAARF handle. In the Q1 of 2023, We took a significant step by acquiring a 51 stake in START, a renowned school located in Sao Jose del Rio Breto, Sao Paulo State.

Speaker 2

STAAD will serve as our flagship school, marking our entry into the bilingual franchise business. This strategic move combines academic excellence powered by our premium brand, Anglo, with bilingual education and innovation. The launch of Startango represents an opportunity of synergy, enabling us to leverage existing products And expertise to minimize CapEx while maximizing know how. This integration allows us to offer a compelling and competitive Educational solution to the market. We are delighted to announce that our efforts have already borne fruit as we have successfully signed our initial contracts.

Speaker 2

This achievement means that the first franchised Schools will be fully operational by 2024. Our foray into the bilingual franchise and business demonstrates our commitment to Innovation and diversification by offering higher quality education and leverage our strong brand presence. As we move forward, we will continue to build on this momentum, expanding our franchise network and enriching the Landscape in Brazil. We are excited about the prospects of making a positive impact on even more students, fostering academic excellence and bilingual proficiency, while driving the growth of our brand and company. Now moving to the last slide, Slide 16, ESG.

Speaker 2

As you know, VASTA reports updates about the ESG standards, including a panel of key ESG indicators. The Q2 information is available in the release and all consolidated data can be found in VASTA's sustainability report. However, one topic I would like to highlight is that VASTA in 2023 through the SOMOS Institute Took on the organization of Educador Notadeis award. This is the largest and most important award In Public Basic Education in Brazil. In its 25th edition, the award recognizes and values teachers Both these important initiatives.

Speaker 2

Having said that, I finish my presentation and invite you all to the Q and A session.

Operator

Your first question comes from the line of Marcelo Santos from JPMorgan. Please go ahead. Your line is open.

Speaker 3

Good evening, Malaga, Marcelo. Thanks for taking the questions. I have 2. The first question is if you could give a bit more details on the B2G contract that you closed. Perhaps you said in the remarks, but I couldn't hear that well.

Speaker 3

So Who was the buyer of that contract? Is it something like one off you mentioned spot? Is it something just this quarter or is it recurring? And what exactly did you sell it? I just wanted to get a little bit more information on this first contract.

Speaker 3

And the second one is kind of related, the second question. You had a strong EBITDA, especially This is a seasonally weak quarter and EBITDA was strong. Was it mostly because of this contract or there was a material improvement in the private business, In the non B2G business. These are the two questions. Thank you.

Speaker 2

Marcelo, thanks very much for your questions. Let me take the opportunity to give more color about this important contract. Our client is the state of Para. We are serving around 300,000 students, more than 4,000 teachers and it's a contract Where we provide content for the Saebi assessment, digital platform Assessments and pedagogical support. It's mainly focused on the 5th, 9 and high school Rates, focusing on mathematic and Portuguese.

Speaker 2

And yes, we are considering this a spot contract, Could be recurring in the 2nd semester, but it's On the main role of opportunistic contracts that we see a lot in the B2G market. So we do expect to have more confidence of this type in the future. Given a little bit color about margin, I'd say we are pretty much on our running rate margin. The B2G margin is not neither enhancing or jeopardizing the current margins that we have. We're pretty much seeing the same margins on both markets with the little experience that we have so far.

Speaker 2

What we are seeing in terms of margins is actually our running rate in the cycle to date.

Speaker 3

Perfect. Thank you very much.

Operator

Your next question comes from the line of Lucas Nagorno from Morgan Stanley. Please go ahead. Your line is open.

Speaker 4

Hey, good evening. Thanks for taking our questions. I have two questions. The first one is related to the 2024 sales cycle. Can you comment a little bit on the progress so far And give some color on the churn rate, intake process and how much you expect to readjust in prices.

Speaker 4

And the second one is related to is a follow-up on margins. Can you comment How was the effect of the higher prices For paper on this quarter, because you mentioned that you are on the running rate. So it doesn't mean that You're not seeing any impact on paper costs? Thank you.

Speaker 2

Hi, Lucas. Thanks for your questions. Let me update about 2024 sales cycle. We just ended the first half of the cycle, which normally accounts for 30% of the total cycle, And we are very excited about the results. We are seeing improvement year over year, significant improvement either in new schools intakes and lower churns.

Speaker 2

But again, this is an initial perspective. We have The 2nd semester, which accounts for 70% of the 2024 cycle. So, so far, so good. And we are confident about the second half. Regarding margins, let me give you margins and prices.

Speaker 2

Let me give you more color on that. What I mentioned regard margins and we have a slide on the presentation is that considering the cost Increases that we faced this year with paper and printing and the gross margin shows that We are some points behind last cycle. This is the new running rate that we have for the company. We have more cost pressure on the COGS side. And prices for next cycle, we expect to recover those points above inflation Because we definitely face it will be a cost based price adjustment due to the cost that you can see That we had on our P and L.

Speaker 2

Okay.

Operator

Your next question comes from the line of Marcelo Santos from JPMorgan. Please go ahead. Your line is open.

Speaker 3

Hi. Thanks for the follow-up. I have two extra questions. The first, given that you're following all these public tenders that are going on, Could you give us an idea like of like for all the tenders that are open now, what is the total value that is on the table? I believe this should be public information, but we don't have this information.

Speaker 3

So it would be very interesting if you could give us some number on how much is being offered to the market right now on all the tenders that you could participate or any information in that regard? And the second question is, you had some large non recurring M and A effects on your P and L this quarter. What Could you give some color on those? Thank you very much.

Speaker 2

Sure, Marcelo. Let me try to provide and This will help us to expand a little bit our approach to the B2G sector. There are no public tenders Open right now at least that we are aware of what we do is pretty much identify the opportunity To the channels that we have with the states and by tailoring the solution, We generate the demand and then the public offer occurs. It's a It's a tailored solution. It's a different approach from selling standard products to the public sector.

Speaker 2

So we generate the demand, identify and tailor it the demand using our current portfolio. So it's a low CapEx solution Because we leverage on what we have and we identify the specific need of a state or a large municipality. So I have no figure to share with you because we are generating the demand. And once the demand is generated, it will become a public offering and we will participate, okay? The second one is regarding M and A, yes, we have the recognition of an earnout.

Speaker 2

It's a one time event Regarding complementary solutions that we acquired in the past that went really well and we recognize the last payment This quarter is a one off payment. There is nothing else expected in the future.

Speaker 3

Perfect. It's very clear and thanks for the explanation on the on your go to market approach, very interesting.

Operator

And we have no further questions in the queue at this time. Marcelo, I will turn the call back over to you.

Speaker 2

Thank you all for participating on VASTA Q2 earnings call. We believe our cycle to date results demonstrate The consistency of our strategy combining growth and capital expenditure discipline. We are also very positive about 2024 ACV campaign and about the good start of the B2G business. Looking forward to seeing you in the next call. Have a great quarter.

Speaker 2

Thank you.

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Coinbase Global Q2 2023
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