Arco Platform Limited Reports Second Quarter and First Half 2019 Financial Results

August 27, 2019
On-track to Deliver 2019 ACV Bookings of R$441 million (37% growth YoY)

SÃO PAULO, Brazil, Aug. 27, 2019 (GLOBE NEWSWIRE) -- Arco Platform Limited, or Arco (Nasdaq: ARCE), today reported financial and operating results for the second quarter 2019 ended June 30, 2019.

“We continue to focus on our clients and invest in content and technology. We are confident that our efforts and competitive advantages will maintain our market positioning and generate sustainable, long-term oriented results.” said Ari de Sá Neto, CEO and founder of Arco.

First Half 2019 Results

  • Net Revenue of R$254.6 million;
  • Net Income of R$56.5 million;
  • Adjusted Net Income of R$91.6 million; and
  • Adjusted EBITDA of R$110.3 million.

Second Quarter 2019 Results

  • Net Revenue of R$137.6 million;
  • Net Income of R$25.7 million;
  • Adjusted Net Income of R$50.9 million; and
  • Adjusted EBITDA of R$61.4 million.

Revenue Recognition and Seasonality

As we report the second quarter 2019 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. This causes revenue seasonality in our business, in which the third quarter revenue is the lowest point of the year.

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.

Third Quarter 2019 Guidance:

We expect to recognize in the third quarter (3Q19) 15% of the 2019 ACV Bookings of R$440.9 million.

Full Year 2019 Guidance:

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

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. 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. Moreover, all statements in this press release, whether forward looking or of historical fact, are based on the limited information available to the Company during the due diligence process of Positivo and its business operations (the “Positivo Business”) prior to the signing of the acquisition agreement discussed herein. This limited access to information may have impaired the Company’s ability to conduct a full and comprehensive assessment of the Positivo Business, thus leading to risks and uncertainties. Reasons for this uncertainty include, but are not limited to, the following: (i) the Positivo Business is a carve out of an entity with different businesses and, therefore, the analysis was conducted on the basis of pro forma, unaudited and adjusted financial statements of the Positivo Business; (ii) the accounting parameters and criteria adopted by the Positivo Business are different from the ones adopted by the Company; (iii) the transfer of the Positivo Business to a new entity limits the Company’s ability to assess the proper transfer of all assets and rights to such new entity. In addition, the forward-looking statements regarding the Positivo Business include risks and uncertainties related to statements about competition for the combined business; risks relating to the continued use of the Positivo brand in schools not run by the Company; restrictions and/or limitations on the acquisition of the Positivo Business that may be imposed by antitrust authorities or other regulatory agencies; risks relating to the Company’s ability to attract, upsell and retain customers of the Positivo Business; general market, political, economic, and business conditions in Brazil or abroad; and the Company’s financial targets are based on measures which include revenue, share count and other IFRS measures, as well as non-IFRS financial measures including gross margin, operating margin, net income per diluted share, EBITDA (as defined herein), Adjusted EBITDA (as defined herein) and 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 and Adjusted Net Income Margin 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 and plus M&A expenses.

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, and (v) non-compete agreement) 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) plus share of loss of equity-accounted investees plus interest expenses plus/minus changes in deferred tax assets and liabilities recognized in statements of income (corresponding to financial instruments from acquisition of interests, tax benefit from tax deductible goodwill, share-based compensation, restricted stock units and amortization of intangible assets), plus/minus foreign exchange gains/loss on cash and cash equivalents and plus M&A expenses.

We calculate Free Cash Flow as Net Cash Flows from Operating activities less acquisition of property and equipment less acquisition of intangible assets.

We understand that, although Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income and Adjusted Net Income Margin 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 and Adjusted Net Income Margin 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 second quarter 2019 results today, August 27, 2019, via a conference call at 4:30 p.m. Eastern Time. To access the call (ID: 9876489), please dial: (866) 679-4032 or +1 (409) 217-8315. An audio replay of the call will be available through September 10, 2019 by dialing (855) 859-2056 or +1 (404) 537-3406 and entering access code 9876489. 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
Unaudited Interim Condensed Consolidated Statements of Financial Position
 
    June 30,     December 31,  
(In thousands of Brazilian reais)   2019     2018  
Assets   (unaudited)        
Current assets            
Cash and cash equivalents   8,530     12,301  
Financial investments   869,141     806,789  
Trade receivables   142,943     136,611  
Inventories   14,598     15,131  
Recoverable taxes   20,690     11,227  
Other assets   12,838     6,091  
Total current assets   1,068,740     988,150  
Non-current assets        
Financial instruments from acquisition of interests   21,261     26,630  
Deferred income tax   133,419     99,460  
Recoverable taxes   1,033     1,033  
Financial investments   4,473     4,370  
Loans to related parties   15,631     1,226  
Other assets   6,027     1,060  
Investments and interests in other entities   58,113     11,862  
Property and equipment   15,959     13,347  
Right-of-use assets   17,593     -  
Intangible assets   157,960     187,740  
Total non-current assets   431,469     346,728  
         
Total assets   1,500,209     1,334,878  
             
Liabilities        
Current liabilities        
Trade payables   13,991     14,845  
Labor and social obligations   31,786     15,888  
Advances from customers   20,506     5,997  
Lease liabilities   4,736     -  
Loans and financing   161     -  
Taxes and contributions payable   1,509     2,555  
Income taxes payable   26,731     17,294  
Financial instruments from acquisition of interests   15,562     51  
Accounts payable to selling shareholders   90,829     830  
Other liabilities   138     428  
Total current liabilities   205,949     57,888  
Non-current liabilities        
Labor and social obligations   2,064     -  
Lease liabilities   16,752     -  
Loans and financing   376     -  
Financial instruments from acquisition of interests   49,242     25,046  
Accounts payable to selling shareholders   106,931     180,551  
Provision for legal proceedings   342     131  
Deferred income tax   1,560     1,378  
Other liabilities   125     -  
Total non-current liabilities   177,392     207,106  
         
Equity        
Share capital   10     10  
Capital reserve   1,066,710     1,089,505  
Share-based compensation reserve   81,783     67,350  
Accumulated losses   (31,635 )   (86,687 )
Equity attributable to equity holders of the parent   1,116,868      1,070,178  
Non-controlling interests   -     (294 )
Total equity   1,116,868     1,069,884  
         
Total liabilities and equity   1,500,209     1,334,878  
             


Arco Platform Limited
Unaudited Interim Condensed Consolidated Statements of Income
 
  Three-month period ended June 30,   Six-month period ended June 30,
(In thousands of Brazilian reais, except earnings per share) 2019   2018   2019   2018
  (unaudited)   (unaudited)   (unaudited)   (unaudited)
Net revenue 137,566     81,436     254,621     195,070  
Cost of sales (25,827 )   (16,862 )   (47,696 )   (42,702 )
Gross profit 111,739     64,574     206,925     152,368  
Operating expenses:              
Selling expenses (39,315 )   (24,074 )   (75,450 )   (48,386 )
General and administrative expenses (44,926 )   (17,033 )   (65,758 )   (30,728 )
Other (expense) income, net (437 )   (1,476 )   2,922     2,172  
Operating profit 27,061     21,991     68,639     75,426  
Finance income 13,961     3,582     30,917     7,291  
Finance costs (12,374 )   (3,840 )   (28,855 )   (7,765 )
Finance result 1,587     (258 )   2,062     (474 )
Share of loss of equity-accounted investees (667 )   (229 )   (1,159 )   (294 )
               
Profit before income taxes 27,981     21,504     69,542     74,658  
Income taxes - income (expense)              
Current (10,899 )   (6,071 )   (29,151 )   (20,879 )
Deferred 8,617     (1,517 )   16,149     528  
Total income taxes – income (expense) (2,282 )   (7,588 )   (13,002 )   (20,351 )
Profit for the period 25,699     13,916     56,540     54,307  
Equity holders of the parent 25,699     14,143     56,540     54,682  
Non-controlling interests -     (227 )   -     (375 )
                       
Basic earnings per share – in Brazilian reais                      
Class A 0.51     0.28     1.12     1.09  
Class B 0.51     0.28     1.12     1.09  
Diluted earnings per share – in Brazilian reais              
Class A 0.49     0.27     1.09     1.04  
Class B 0.50     0.27     1.10     1.05  
                       
Weighted-average shares used to compute net income per share:                      
Basic 50,709     50,261     50,505     50,261  
Diluted 51,276     51,242     51,072     51,242  


 
Arco Platform Limited
Unaudited Interim Condensed Consolidated Statements of Cash Flows
 
  Three-month period ended June 30,
  Six-month period ended June 30,
(In thousands of Brazilian reais) 2019     2018     2019     2018  
Operating activities (unaudited)     (unaudited)     (unaudited)     (unaudited)  
Profit before income taxes for the period 27,981     21,504     69,542     74,658  
Adjustments to reconcile profit before income taxes                  
Depreciation and amortization  9,103      4,528       16,343     8,902  
Inventory reserves  1,332      1,146       3,560     3,242  
Allowance for doubtful accounts  550     (397 )     2,203       3,137  
Residual value of property and equipment and intangible assets disposed  29      -       131     138  
Changes in fair value of derivative instruments  -     (367 )     1,866      (1,974 )
Share of loss of equity-accounted investees  667      229       1,159      294  
Share-based compensation plan  138      344     275       687  
Restricted stock units  14,158      -     14,158     -  
Provision for payroll taxes (restricted stock units)  6,518      -     6,518     -  
Accrued interest  8,498      1,972     14,440       4,052  
Interest in lease liabilities  387      -     782     -  
Provision for legal proceedings  132      76     211     76  
Foreign exchange results, net  592      -     516     -  
Alienation of investment  2      -     (3,286 )   -  
Other financial cost/revenue, net (1,202 )    -     (1,202 )   -  
   68,885      29,035     127,216     93,212  
Changes in assets and liabilities              
Trade receivables  7,792      18,949       (8,409 )    3,087  
Inventories (2,067 )   (3,226 )     (2,031 )     (947 )
Recoverable taxes (401 )   (307 )     (5,373 )    (1,190 )
Other assets (9,778 )   (8,262 )     (7,826 )    (8,556 )
Trade payables (27 )    2,166       659       1,574  
Labor and social obligations  6,580      3,457       11,354       3,757  
Taxes and contributions payable (475 )    355       (1,047 )     639  
Advances from customers (5,830 )    4,638       14,998      7,645  
Other liabilities (53 )    937       (354 )    (911 )
Cash generated from operations  64,626      47,742     129,187     98,310  
Income taxes paid (5,175 )   (4,691 )   (23,210 )   (21,031 )
Interest paid on lease liabilities (220 )   -     (220 )   -  
Net cash flows from operating activities  59,231      43,051     105,757     77,279  
               
Investing activities              
Acquisition of property and equipment (3,036 )   (1,228 )   (5,829 )   (2,158 )
Payment of investments and interests in other entities (4,200 )    -     (4,200 )   -  
Acquisition of subsidiaries, net of cash acquired (16,137 )   (5,775 )   (16,137 )   (13,820 )
Acquisition of intangible assets (6,887 )   (3,056 )   (18,379 )   (4,911 )
Financial investments (36,238 )    53,756     (62,529 )   33,470  
Loans to related parties  -      -     (14,000 )   -  
Net cash flows from (used in) investing activities (66,498 )    43,697     (121,074 )   12,581  
               
Financing activities              
Capital increase  12,611      -     13,829     -  
Share issuance costs  -      -     (673 )   -  
Payment of lease liabilities (565 )    -     (1,080 )   -  
Payment of loans and financing (14 )    -     (14 )   -  
Dividends paid  -     (85,050 )   -     (85,050 )
Net cash flows from (used in) financing activities  12,032     (85,050 )   12,062     (85,050 )
               
Foreign exchange effects on cash and cash equivalents (592 )   -     (516 )   -  
               
Increase (decrease) in cash and cash equivalents  4,173      1,698     (3,771 )   4,810  
Cash and cash equivalents at the beginning of the period  4,357      3,946     12,301     834  
Cash and cash equivalents at the end of the period  8,530      5,644     8,530     5,644  
Increase (decrease) in cash and cash equivalents  4,173      1,698     (3,771 )   4,810  

                                                                                          


Arco Platform Limited
Reconciliation of Non-GAAP Measures

  Three-month period ended
  Six-month period ended
  June 30,
  June 30,
(In thousands of Brazilian reais) 2019     2018     2019     2018  
Adjusted EBITDA Reconciliation (unaudited)   (unaudited)   (unaudited)   (unaudited)
Profit for the period 25,699     13,916     56,540     54,307  
(+) Income taxes 2,282     7,588     13,002     20,351  
(+/-) Finance result (1,587)     258     (2,062)     474  
(+) Depreciation and amortization 9,103     4,528     16,343     8,902  
(+) Share of loss of equity-accounted investees 667     229     1,159     294  
EBITDA 36,164     26,519     84,982     84,328  
(+) Share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units). 20,814     344     20,951     687  
(+) M&A expenses 4,423     -     4,423     -  
Adjusted EBITDA 61,401     26,863     110,356     85,015  
               
Net Revenue 137,566     81,436     254,621     195,070  
EBITDA Margin 26.3%     32.6%     33.4%     41.3%  
Adjusted EBITDA Margin 44.6%     33.0%     43.3%     43.6%  


  Three-month period ended
  Six-month period ended
  June 30,
  June 30,
(In thousands of Brazilian reais) 2019     2018     2019     2018  
Adjusted Net Income Reconciliation (unaudited)   (unaudited)   (unaudited)   (unaudited)
Profit for the period 25,699     13,916     56,540     54,307  
(+) Share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units). 20,814     344     20,951     687  
(+) Amortization of intangible assets from business combinations 3,085     2,798     6,065     5,831  
(+/-) Changes in fair value of derivative instruments -     (367)     1,866     (1,974)  
(+) Share of loss of equity-accounted investees 667     229     1,159     294  
(-) Tax effects (10,732)     (954)     (13,724)     (832)  
(+) Foreign exchange on cash and cash equivalents 592     -     516     -  
(+) Interest expenses (income), net 6,357     2,326     13,881     4,824  
(+) M&A expenses 4,423     -     4,423     -  
Adjusted net income 50,905     18,292     91,677     63,137  
               
Net Revenue 137,566     81,436     254,621     195,070  
Adjusted Net Income Margin 37.0%     22.5%     36.0%     32.4%  




    Three-month period ended
  Six-month period ended
    June 30,
  June 30,
(In thousands of Brazilian reais)   2019     2018     2019     2018  
Free Cash Flow Reconciliation   (unaudited)   (unaudited)   (unaudited)   (unaudited)
Cash Generated from Operations   64,626     47,742     129,187     98,310  
(-) Income Tax Paid   (5,175)     (4,691)     (23,210)     (21,031)  
(-) Interest paid on lease liabilities   (220)     -     (220)     -  
Cash Flow from Operating Activities   59,231     43,051     105,757     77,279  
(-) Acquisition of property and equipment   (3,036)     (1,228)     (5,829)     (2,158)  
(-) Acquisition of intangible assets   (6,887)     (3,056)     (18,379)     (4,911)  
Free Cash Flow   49,308     38,767     81,549     70,210  
                         

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Source: Arco Platform Ltd.

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