Arco Platform Limited Reports First Quarter 2020 Financial Results

May 27, 2020
Arco reaffirms its mission with a fast, client-oriented and employee-focused response to COVID-19 challenges

SÃO PAULO, Brazil, May 27, 2020 (GLOBE NEWSWIRE) -- Arco Platform Limited, or Arco (Nasdaq: ARCE), today reported financial and operating results for the first quarter 2020.

“2020 started at a strong pace for our business and the challenges faced by our partner schools given the COVID-19 pandemic has further strengthened our role as a mission critical partner for them. During the schools’ shutdown, Arco’s digital transformation accelerated years. We believe our consistent and intense investments in technology over the years as well as the evolution of out platform will put us in a stronger competitive position as our value proposition becomes even greater to all schools. We are grateful and incredibly inspired by the tireless work of our 1,900 employees who, over the past couple of months, contributed in an unprecedent way to our clients and our community. We are very excited with the outlook ahead and hopeful that we will all overcome this period soon.”

First Quarter 2020 Results

  • Net Revenue of R$261.6 million;
  • Net Profit of R$3.8 million;
  • Adjusted Net Income of R$56.2 million; and
  • Adjusted EBITDA of R$96.9 million.

Revenue Recognition and Seasonality

As we report the first quarter 2020 results, it is important to highlight the revenue recognition and seasonality of our business.

We typically deliver our Core Curriculum content four times each year, in March, June, August and December and our Supplemental Solutions content twice each year, in June and December, usually two to three months prior to the start of each school quarter. The amount of revenue recognized is proportional to the amount of content made available, which is not linearly distributed among the quarters, which causes revenue seasonality in our business.

A significant portion of our expenses is also seasonal. Due to the nature of our business cycle, we require significant working capital, typically in September or October of each year, to cover costs related to production and accumulation of inventory, selling and marketing expenses, and delivery of our teaching materials at the end of each fiscal year in preparation for the beginning of each school year. Therefore, such operating expenses are generally incurred in the period between September and December of each year.

Second Quarter 2020 guidance:

  • We expect to recognize in the second quarter (2Q20) ~20% of the consolidated ACV Bookings for 2020.

Full Year 2020 guidance:

  • Adjusted EBITDA Margin is expected to be in the range of 35.5% to 37.5%.

Information related to COVID-19 pandemic:
As discussed in more detail in our March 31, 2020 consolidated financial statements submitted to the Securities and Exchange Commission on Form 6-K, the COVID-19 pandemic has not had a material impact on the Company’s operations, distribution capacity and revenue recognition so far. As of March 31, 2020, except for the 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$3,115 thousand, there were no other material impacts to the Company’s financial performance or position.

Despite legally mandated school closures, the Company did not suspend its activities and, following health and social distancing guidelines, its workforce continues to work remotely from home, for which investments in IT and network infrastructure were made in order to enable stable remote operations. In order to safeguard the health and safety of its employees, customers and suppliers, the Company has taken several preventive measures. Our content production continues according to the scheduled curriculum calendar and the current educational material has been delivered to the schools according to the planned schedule, enabling the Company to recognize the revenues on these products.

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.

The extent to which the coronavirus (COVID-19) impacts our financial results and operations will depend on future developments, which are uncertain, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the impact of the coronavirus (COVID-19) pandemic. Based on future developments of the coronavirus (COVID-19), it is possible that we may, in the future, be required to take actions or steps in relation to our business that could have a disruptive or a material and adverse effect on our business.

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 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 for the year (or period) plus income taxes, plus/minus finance result, plus depreciation and amortization, plus share of loss of equity-accounted investees, plus share-based compensation plan, 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 for the year (or period) plus share-based compensation plan, 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), less/plus 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), less/plus changes in accounts payable to selling shareholders plus share of loss of equity-accounted investees, plus interest expenses, 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 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) non-recurring expenses, (ii) M&A expenses and (iii) interest change in financial investments.

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.

Conference Call Information

Arco will discuss its first quarter 2020 results today, May 27, 2020, via a conference call at 4:30 p.m. Eastern Time. To access the call (ID: 8895947), please dial: (866) 679-4032 or +1 (409) 217-8315. An audio replay of the call will be available through June 10, 2020 by dialing (855) 859-2056 or +1 (404) 537-3406 and entering access code 8895947. A webcast of the call will be available on the Investor Relations section of the Company’s website at https://arcoeducacao.gcs-web.com/.

Investor Relations Contact:

Arco Platform Limited
[email protected]
Source: Arco Platform Ltd.

 
Arco Platform Limited
Interim Condensed Consolidated Statements of Financial Position
       
  March 31,   December 31,
(In thousands of Brazilian reais) 2020   2019
  (unaudited)    
Assets      
Current assets      
Cash and cash equivalents 72,991     48,900  
Financial investments 759,944     574,804  
Trade receivables 343,973     329,428  
Inventories 41,120     40,106  
Recoverable taxes 23,382     15,612  
Financial instruments - call options on equity method investments 3,957     3,794  
Related parties 1,311     1,298  
Other assets 31,286     14,630  
Total current assets 1,277,964     1,028,572  
       
Non-current assets      
Financial instruments - call options on equity method investments 27,893     32,152  
Deferred income tax 182,327     156,748  
Recoverable taxes 6,483     6,613  
Financial investments 4,765     4,690  
Related parties 14,980     14,813  
Other assets 14,915     14,399  
Investments and interests in other entities 60,543     48,574  
Property and equipment 22,169     21,328  
Right-of-use assets 20,471     21,631  
Intangible assets 1,800,352     1,811,903  
Total non-current assets 2,154,898     2,132,851  
       
Total assets 3,432,862     3,161,423  
       


  March 31,   December 31,
(In thousands of Brazilian reais) 2020   2019
  (unaudited)    
           
Liabilities          
Current liabilities          
Trade payables 47,159     34,521  
Labor and social obligations 66,716     68,511  
Taxes and contributions payable 4,948     7,508  
Income taxes payable 32,391     52,038  
Advances from customers 75,106     25,626  
Lease liabilities 6,774     6,845  
Loans and financing 298,069     98,561  
Accounts payable to selling shareholders 143,089     117,959  
Other liabilities 567     607  
Total current liabilities 674,819     412,176  
           
Non-current liabilities          
Labor and social obligations 4,942     2,801  
Lease liabilities 17,714     19,012  
Loans and financing 1,211     -  
Financial instruments - put options on equity method investments 29,899     33,940  
Provision for legal proceedings 284     251  
Accounts payable to selling shareholders 1,096,313     1,098,273  
Other liabilities 142     160  
Total non-current liabilities 1,150,505     1,154,437  
           
Equity          
Share capital 11     11  
Capital reserve 1,607,622     1,607,622  
Share-based compensation reserve 93,453     84,546  
Accumulated losses (93,548)     (97,369)  
Total equity 1,607,538     1,594,810  
           
Total liabilities and equity 3,432,862     3,161,423  
           


Arco Platform Limited
Interim Condensed Consolidated Statements of Income
       
  March 31,   March 31,
(In thousands of Brazilian reais, except earnings per share) 2020   2019
  (unaudited)   (unaudited)
Net revenue 261,579     117,055  
Cost of sales (67,220)     (21,869)  
Gross profit 194,359     95,186  
Operating expenses:      
Selling expenses (87,900)     (36,135)  
General and administrative expenses (66,783)     (20,832)  
Other income, net 412     3,359  
Operating profit 40,088     41,578  
Finance income 9,387     16,956  
Finance costs (38,339)     (16,481)  
Finance result (28,952)     475  
Share of loss of equity-accounted investees (706)     (492)  
       
Profit before income taxes 10,430     41,561  
Income taxes - income (expense)      
Current (32,188)     (18,252)  
Deferred 25,579     7,532  
Total income taxes – income (expense) (6,609)     (10,720)  
Net profit for the period 3,821     30,841  
Equity holders of the parent 3,821     30,841  
Non-controlling interests -     -  
       
Basic earnings per share – in Brazilian reais      
Class A 0.07     0.61  
Class B 0.07     0.61  
Diluted earnings per share – in Brazilian reais      
Class A 0.07     0.59  
Class B 0.07     0.59  
       
Weighted-average shares used to compute net income per share:      
Basic 54,939     50,298  
Diluted 55,336     51,157  
           


Arco Platform Limited
Interim Condensed Consolidated Statements of Cash Flows
       
  March 31,   March 31,
(In thousands of Brazilian reais) 2020   2019
  (unaudited)   (unaudited)
Operating activities      
Profit before income taxes for the period 10,430     41,561  
Adjustments to reconcile profit before income taxes      
Depreciation and amortization 28,675     7,240  
Inventory reserves 2,106     2,228  
Allowance for doubtful accounts 6,168     1,653  
Loss on sale/disposal of property and equipment and intangible assets disposed 672     102  
Fair value change in financial instruments from acquisition interests 54     1,866  
Changes in accounts payable to selling shareholders 6,600     -  
Share of loss of equity-accounted investees 706     492  
Share-based compensation plan 8,907     137  
Accrued interest 1,242     -  
Interest accretion on acquisition liability 20,266     5,942  
Income from non-cash equivalents (2,039)     -  
Interest on lease liabilities 732     395  
Provision for legal proceedings 33     79  
Provision for payroll taxes (restricted stock units) 5,888     -  
Foreign exchange income (742)     (76)  
Gain on sale of investment -     (3,288)  
  89,698     58,331  
Changes in assets and liabilities      
Trade receivables (20,712)     (16,201)  
Inventories (485)     36  
Recoverable taxes (1,694)     (4,972)  
Other assets (17,036)     1,952  
Trade payables 12,638     686  
Labor and social obligations (5,542)     4,774  
Taxes and contributions payable (2,560)     (572)  
Advances from customers 49,480     20,828  
Other liabilities (58)     (301)  
Cash generated from operations 103,729     64,561  
Income taxes paid (57,543)     (18,035)  
Interest paid on lease liabilities (425)     -  
Net cash flows from operating activities 45,761     46,526  
       
Investing activities      
Acquisition of property and equipment (2,377)     (2,793)  
Payment of investments and interests in other entities (12,675)     -  
Acquisition of intangible assets (17,059)     (11,492)  
Purchase of financial investments (183,176)     (26,291)  
Loans to related parties -     (14,000)  
Net cash flows used in investing activities (215,287)     (54,576)  
       
Financing activities      
Capital increase -     1,218  
Share issuance costs -     (673)  
Payment of lease liabilities (2,354)     (515)  
Loans and financing 198,925     -  
Dividends paid by subsidiaries (3,696)     -  
Net cash flows from financing activities 192,875     30  
       
Foreign exchange effects on cash and cash equivalents 742     76  
       
Increase (decrease) in cash and cash equivalents 24,091     (7,944)  
Cash and cash equivalents at the beginning of the period 48,900     12,301  
Cash and cash equivalents at the end of the period 72,991     4,357  
Increase (decrease) in cash and cash equivalents 24,091     (7,944)  
           


Arco Platform Limited
Reconciliation of Non-GAAP Measures
 
  March 31,   March 31,
(In thousands of Brazilian reais) 2020   2019
Adjusted EBITDA Reconciliation (unaudited)   (unaudited)
Profit for the period 3,821     30,841  
(+) Income taxes 6,609     10,720  
(+/-) Finance result 28,952     (475)  
(+) Depreciation and amortization 28,675     7,240  
(+) Share of loss of equity-accounted investees 706     492  
EBITDA 68,763     48,818  
(+) Share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units). 15,960     137  
(+) M&A expenses 1,564     -  
(+) Non-recurring expenses 7,231     -  
(+) Effects related to Covid-19 pandemic 3,402     -  
Adjusted EBITDA 96,920     48,955  
       
Net Revenue 261,579     117,055  
EBITDA Margin 26.3%     41.7%  
Adjusted EBITDA Margin 37.1%     41.8%  
       
  March 31,   March 31,
(In thousands of Brazilian reais) 2020   2019
Adjusted Net Income Reconciliation (unaudited)   (unaudited)
Profit for the period 3,821     30,841  
(+) Share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units). 15,960     137  
(+) Amortization of intangible assets from business combinations 17,983     2,980  
(+/-) Changes in fair value of derivative instruments 54     1,866  
(+/-) Changes in accounts payable to selling shareholders 6,600     -  
(+) Share of loss of equity-accounted investees 706     492  
(-) Tax effects (20,428)     (2,992)  
(+) Foreign exchange on cash and cash equivalents (742)     (76)  
(+) Interest expenses (income), net 20,018     7,524  
(+) M&A expenses 1,564     -  
(+) Non-recurring expenses 7,231     -  
(+) Effects related to Covid-19 pandemic 3,402     -  
Adjusted Net Income 56,169     40,772  
       
Net Revenue 261,579       117,055  
Adjusted Net Income Margin 21.5%     34.8%  
       
  March 31,   March 31,
(In thousands of Brazilian reais) 2020   2019
Free Cash Flow Reconciliation (unaudited)   (unaudited)
Cash generated from operations 103,729     64,561  
(-) Income tax paid (57,543)     (18,035)  
(-) Interest paid on lease liabilities (425)     -  
Cash Flow from Operating Activities 45,761     46,526  
(-) Acquisition of property and equipment (2,377)     (2,793)  
(-) Acquisition of intangible assets (17,059)     (11,492)  
Free Cash Flow 26,325     32,241  
(+) Interest change in financial investments 2,039     -  
(+) M&A expenses 1,564     -  
(+) Others 11,581     -  
Adjusted Free Cash Flow 41,509     32,241  

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Source: Arco Platform Ltd.

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