Vasta Platform Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 8, 2024

There are 6 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vasta Platform First Quarter 2024 Financial Results. Before we begin, I would like to read a forward looking statement. During today's presentation, our executives will make forward looking statements.

Operator

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 products 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. This release includes 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.

Operator

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 obligations 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 substitute for results prepared in accordance with IFRS. Thank you.

Operator

I would now like to turn the conference over to Marcelo Werneck, Vasta's Investor Relations. Please go ahead.

Speaker 1

Good evening, everyone. Thank you for joining us in this conference call to discuss Vasta Platform's Q1 of 2024 results. I'm Marcelo Verneck, VASTA's Investor Relations. And today, we have the presence of Guilherme Melega, VASA's CEO and Cesar Silva, VASA's CFO, who will be joining me on the call. Let me now hand over the floor to Guilherme Melega, 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 our 2024 cycle to date. This Q1 also represents halfway through the 2024 commercial cycle, which goes from October 2023 to September 2024, and we have delivered strong economic and financial results. Vasta concluded the 2024 cycle to date with a 12% net revenue growth over the same period last year, mostly due to the conversion of ACV into revenue and to the performance of the B2G business unit.

Speaker 2

VASTA subscription revenue has reached BRL 872,000,000, a 9% increase compared to 2023. Complementary Solutions continue to present the highest growth rate among our business segments with a 21% expansion in the cycle to date compared to the same period last year. And thus per announced in our last earnings release, we have already renewed our first B2G contract for 2024, and we have generated BRL69 1,000,000 from the B2G sector in the Q1 of 2024. Moving to the company's profitability. In 2024 cycle to date, our adjusted EBITDA experienced a growth of 21%, reaching BRL402 million, while increasing an adjusted EBITDA margin to 39.6%.

Speaker 2

This increase was mainly driven by improved gross margin benefiting from better product, a reduction impact of product cost and operating efficiencies. Finally, we continue to see significant improvement in our cash flow. In the 2024 cycle today, free cash flow totaled BRL52 million, a BRL59 million increase from negative BRL7 million in 2023. In the last 12 months, free cash flow to adjusted EBITDA conversion rate improved from 31% to 43% as a result of Vasta's growth and implementation of efficiency measures. I will now move to Slide number 4 to discuss 2024 ACV.

Speaker 2

In line with our commitment to total transparency, we have adjusted our ACV bookings for 2024 sales cycle. It's important to note that our previous ACV booking has been revised downward by 3.7 percent to BRL 1,350,000,000. Due to the effective number of students at our partner schools after complementary orders in Q1. New ACV bookings represent an organic growth of 12% compared to 2023 sales cycle. Our top performers continue to be Premium Brands and our complementary solutions.

Speaker 2

On Slide number 5, as previously mentioned, VASTA subscription revenue in 2024 cycle to date has reached BRL 872,000,000, a 9% increase compared to the same period last year. It's noteworthy that the distribution of subscription revenue throughout 2024 deferred slightly from the previous year, with less concentration in the 1st two quarters. The 2024 cycle to date accounts for 64.5% of the total ACV compared to 66.4% in the previous cycle, mainly due to product deliveries migrate to 3rd commercial quarter and different seasonality of new contracts. I will now turn back to Marcelo Bernanke, who will talk about the financial results of the quarter in 2024 cycle to date.

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 organic year on year growth in total net revenue for the Q1, which increased by 14%, reaching BRL 461,000,000. Total subscription revenue was flat in this quarter with $357,000,000 on revenues, mainly due to the effects mentioned before by Guilherme. Non subscription, which now represents only 7% of the total revenue, dropped 24% to BRL 35,000,000.

Speaker 1

And with the B2B sector, we generated BRL 69,000,000 in revenue in the Q1 of 2024 due to the contract renew with the state of Para. Moving to the right side, we analyze the net revenue for 2024 sales cycle to date. We achieved on a grant net revenue growth of 12% amounting to BRL 1,015,000,000. Subscription revenue had an increase of 9% reaching BRL 872,000,000 and continues the major contributor to our total revenue, representing 86% of the revenue share. Non subscription revenue, as expected, dropped 31% to $74,000,000 and the B2G contributed to 7% of our overall revenue in the 24 cycle to date.

Speaker 1

Moving to Slide number 7. In this quarter, our adjusted EBITDA amounted to $2,000,000 and with a margin of 35.2 percent, a relevant increase of 24% from the $131,000,000 in the Q1 of 2023. On the right side, we see that adjusted EBITDA in 2020 4 sales cycle increased by 21% and reached BRL402 million with a margin of 39.6 percent or 3.1 percentage points above the 2023 cycle to date. Let's move to the next slide and explain the breakdown of adjusted EBITDA margins. In Slide number 8, we can observe that EBITDA margin improved 3.1 percentage points from 36.5% in the 2023 sales cycle to 39.6% in the 2024 sales cycle to date.

Speaker 1

Firstly, our gross margin increased 3 percentage points and the increase in gross margin benefited from better product mix and reduced the impact of product costs as 2023 wasn't a year that the industry faced higher inventory costs caused by global inflation on paper and production costs. Provision for doubtful accounts, PDA, was stable between the years in line with the revised credit landscape. As a percentage of net revenue, our commercial expenses increased by 2.7 percentage points, driven by higher expenses related to business expansion and marketing investments. And adjusted cash G and A expenses improved by 2.6 percentage points, mainly driven by workforce optimization and budgetary discipline measures. Moving to Slide number 9, we show the adjusted net profit.

Speaker 1

In the Q1 of 2024, adjusted net profit totaled BRL 50,000,000, a 97% increase compared to adjusted net profit of BRL 26,000,000 in the Q1 of 2023. In the 2024 sales cycle to date, adjusted net profit reached $146,000,000 a 49% increase from the adjusted net profit of $98,000,000 in the 2023 sales cycle. Moving to Slide number 10, we show the free cash flow evolution. In the Q1 of 2024, the free cash flow totaled BRL52 million, representing an increase of 44% compared to BRL 36 1,000,000 in the Q1 of 2023. On the right side, in the 2024 sales cycle to date, our free cash flow reached BRL 52,000,000, a solid BRL 59,000,000 increase from the negative BRL 5,000,000 in 2023 cycle.

Speaker 1

On another important metric, our last 12 months free cash flow to adjusted EBITDA conversion rate improved from 31% to 43%, reinforcing the message that cash generation continues to be a key focus area of our business. Moving to Slide 11, we show the provision for doubtful accounts. Total expenses with PDA in the Q1 of 2020 24 totaled BRL 13,000,000 representing 2.9 percent of total net revenue compared to an expenses of BRL 10,000,000 in in the comparable quarter. Moving to the right side of the slide, we can observe that PDA for 2024 sales cycle shows us a slight improvement, although still impacted by the credit landscape review. It dropped 0.1 percentage points to 4.2 percentage of the net revenue.

Speaker 1

Moving to the next slide. We observe that the average payment terms of VASTA's accounts receivable portfolio was 180 days in the Q1 of 24, which is 19 days lower than the comparable quarter and in line with the seasonality of our business. Moving now to Slide number 13, let's take a closer look on the net debt movement. As of the Q1 of 2024, Vasta had a net debt position of BRL 1,669,000,000, a BRL 5,000,000 increase compared to the last quarter, mainly due to impacts of financial interest costs and the second repurchase program, which were fully completed during this quarter. In comparison to the Q3 of 2023, the beginning of the 2024 sales cycle, the net debt position increased BRL 71,000,000 from BRL 998,000,000 driven also by the financial interest costs and the second repurchase program, which were partially offset by the positive cash flow of $52,000,000 in the period.

Speaker 1

I will conclude my part of this presentation with Slide number 14, where we can observe that as of the Q1 of 2024, the net debt to the last 12 months adjusted EBITDA ratio continues to improve for the 4th consecutive quarter and now stands at 2.22 times, which marks an improvement of 0.14 times compared to the Q4 of 2023 and an improvement of 0.63 times when compared to the Q1 of 2023. With that being said, I'll pass the word to our CEO, Guilherme Melga.

Speaker 2

Thank you, Marcelo. In Slide 15, let me provide you with an exciting update on our significant avenue of growth of Vasta. As mentioned last quarter, the launch of the Startango franchise combining bilingualism with academic excellence continues to ramp up and signifies a strategic expansion in our new revenue streams. Both of our 2 fully operational units in 2024 are exceeding expectation, and our first franchise in Alphavily is now operating with over 190 students, surpassing our target of 120 students. We have signed 5 new contracts and we now have 20 contracts.

Speaker 2

Security distributed across 10 states in Brazil and over 200 prospects in negotiation. This broad geographic presence and strong pipeline underscore the robust potential for future growth and market penetration of start earning. Moving to Slide 16. Finally, I would like to introduce our latest breakthrough unveiled at Batche do Car last month, which has been met with tremendous success, the teacher and student intelligent assistant, our rural AI platform. In summary, we gathered all of our excellent content from our basic education systems that we want to enable and put AI itself.

Speaker 2

Divides, classifies and prepares the content creating several knowledge bases separated by brand and material, which each iteration throughout AI understands your request, searches or related knowledge and decides its best response. Building on its preparation, generative AI enables teachers to create supplementary lessons, plans, generate images, scripts for presentation, question lists and help students develop study guidelines. This innovation aims to empower teachers in the teaching process and enhance students' learning. This groundbreaking tool is reshaping how educators and learners engage, offering a more dynamic and efficient educational experience. With the Plural AI platform, we are transforming education, providing a smarter and more inspiring learning environment, and we can't wait to see how it will further enhance teaching and learning nationwide.

Speaker 2

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

Operator

Thank you. We will now begin the question and answer session. Your first question comes from the line of Mirella Oliveria with Bank of America. Your line is open.

Speaker 3

Good evening, everyone. Thank you for the time for making questions. I have 2 on my side. First on the ACV contract, could you comment a little bit on the recognition seasonality if this is a new seasonality or it's more of a one off from the 2024 cycle? And secondly, on the B2G contract, we previously understood that these contracts were more expected from the Q2 onwards due to the seasonality of government contracts.

Speaker 3

So could you comment a bit on the specifics of this revenue recognition in the 1st Q? Is this related to Saeb or is another contract? Thank you.

Speaker 2

Thank you, Mirela, for your questions. I will start with the ACV and the seasonality. Every year, we have a slightly different seasonality. This year, we have more contracts, more new contracts that we are serving twice a year. So concentrates a little bit the recognition on Q2 and Q3.

Speaker 2

So that's why we expect more recognition of ACV as mentioned on the presentation on Q2 and Q3 related to last year to the same period last year. And for now, you can expect the seasonality because that's the landscape that we have from our contracts. And related to the ACV bookings, to the reduction of ACV bookings, We are seeing a soft market in terms of enrolled students at our partner schools, and we do expect it to be a one off this year. Regarding B2G, we recognized the orders that we received so far from the same contract that we had last year from the government of Paraaso, we already secured BRL 69,000,000 from that contract, and we can have more orders coming in Q2 and also more services being provided in Q2. We don't secure the orders yet, but we definitely expect more to come regarding this contract.

Speaker 2

And yes, this contract is related to the Saab enhancement product that we are serving Para.

Speaker 3

Thank you.

Operator

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

Speaker 4

Hi, good evening, Malaga, Vernak. Thanks for taking my questions. I wanted to go a little bit deeper on this B2G product Saab enhancement. What would be the extra orders you could get? Like just try to understand the mechanics.

Speaker 4

I mean, so you didn't service all the students in the Q1 or they would be buying for just wanted to get a little bit better the dynamics. And I would wanted to ask as a second question, how do you see the margin outlook for 2024 when compared to 2023? I mean you had a very good start in the beginning of the year. So is that something that we should expect for the following quarters to remain in place? Thank you very much.

Speaker 2

Hi, Marcelo. Thanks for your questions. Let me give you more details about the B2G contract. This year, we are serving not exactly the same grades that we served last year. This year, we are serving 4th, 8th and second grade in high school, which represents a different number of students.

Speaker 2

But there are more products that were not shipped in Q1, such as teacher training materials and assessments that we can provide in Q2. That's pretty much it from this contract. We do not expect much more to be recognized, but there is room to improvement in the same contract. Regarding the margin outlook for the remaining of the year. We had a great start.

Speaker 2

This good start is related to a better mix. We are focusing on premium products. We have stated that our strategy is growth on premium products, obviously, with better margins. And this is already reflected on Q1 margin. And we have the huge recognition of B2G that dilutes our fixed costs.

Speaker 2

So looking to and we don't have the same costs, the same pressure that we had in production costs as we had last year. So when we look to the remaining of the year, we expect a better margin, but it realigned as on more volume of B2G. With fewer volume in B2G, we should convert a little bit above the historical margin.

Speaker 4

Thank you. Thank you very much. Next question

Speaker 5

Thank you. Thank you for the opportunity. I have two questions. First one, if you could detail a little bit more about the revision of the ACV, exactly the mechanisms in which it happens. So as far as I understand, there was kind of a tolerance in the context for licensed students.

Speaker 5

And you saw that there would be less students this year than it was foreseen originally in the contract. So if you can explain a little bit the mechanism that allowed this kind of variation and how it translates to the future, if there we should expect kind of a variance in the ACV versus revenue recognition throughout the years? And my second question is about the mix. If you could comment a little bit on your strategy of in terms of mix, how you want to play in the private market in terms of products, their positioning and how it could help you in the gross margin, in EBITDA, etcetera? Thank you.

Speaker 2

Thank you. Thank you very much, Mauricio, for your questions. Let me give you more details about the ACV mechanism. ACV, when we share our ACV bookings, we are sharing our contracts, the number of students that we have on our contracts with the price the new price and discounts that we have secured in the contract with each of our customers. There is some room in the contract for the schools to order fewer students.

Speaker 2

Normally, it doesn't happen. We see normally a breakeven in the contracts, in the overall contracts or is slightly above. This year, during the complementary orders, because in Q4, we fulfilled the majority of the contracts to the schools. And in Q1, we received complementary orders depending on the pace of enrollments. What we observed in this quarter is that we received fewer complementary orders than expected in the conference.

Speaker 2

And the schools are reporting fewer students than initially contracted. So our decision was to respect that number of students and do not push products to the chain. And we are sharing with you this impact of 3.7%, slightly above the ACV bookings previously reported. But the mechanics is pretty much the same. What we have this year is, in our opinion, a soft market that impacts much more the mainstream schools and the premium schools are always more protected and that's obviously why our strategy is on premium schools.

Speaker 2

That allows me to comment on mix. Our strategy is to pursue a better market share for our premium brands. I'm talking about Anglo, PH, Fibonacci and Amplia. And we are moving fast. We had a very good start to in Q1 sales campaign for 2025, where we are investing our campaign in enhancing product.

Speaker 2

As I mentioned, the plural AI that goes pretty much focusing on the premium brands. And we are enhancing product, enhancing sales campaign for the premium schools. And the Q1 of our 2025 sales campaign let us very optimistic that we are in the right track. But what we are pursuing is to grow on premium and cross sell complementary products to those schools.

Operator

There are no further questions at this time. Mr. Guilherme Melega, I turn the call back over to you.

Speaker 2

Thank you very much to participate in Fasta's Q1 conference call. I would like to make some comments. We just launched our sales campaign for 2025, and we had a very strong first quarter. We already signed a 3x more contract than we had on the same period last year. Obviously, it's not yet very significant amount in terms of total of the campaign, but a very good start is very important to make us confident that we are on the right track.

Speaker 2

We have a very robust pipeline on B2G. We expect to have more contracts soon signed this quarter. On StartUn Group Bilingual School, we already reached 20 contracts. It's already ahead of our forecast sales, and we have a huge demand for it. And we're very confident that in a few years, this will be a very important segment for us.

Speaker 2

And lastly, but very important, we're implementing a big breakthrough technology in our Plurals platform with the implementation of AI that will allow us our allow our teachers to save time and to be much more efficient producing materials for their classes and their students. And by doing so, we really believe that we are strong in our relationship with our schools and our network of teachers. Having said that, we are very optimistic for the remaining of the year, and I look forward to talk with you in Q2 earnings call. Thank you very much.

Operator

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

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