Arco Platform Limited Reports Third Quarter 2019 Financial Results

November 26, 2019
Arco Delivered Above its 2019 ACV Bookings Guidance of R$441 million and Expects Another Strong Year for ACV Bookings in 2020

SÃO PAULO, Brazil, Nov. 26, 2019 (GLOBE NEWSWIRE) -- Arco Platform Limited, or Arco (Nasdaq: ARCE), today reported financial and operating results for the quarter ended September 30, 2019.

“We successfully surpassed our ACV guidance for 2019 as a result of our tireless commitment with our clients. As we look forward, we are thrilled to announce strong expectations for ACV Bookings for 2020. This result reflects the consistency of our platform's superior academic results, the power of our competitive advantages and our focus on generating sustainable, long-term oriented results,” said Ari de Sá Neto, CEO and founder of Arco.

Nine Months 2019 Results

  • Net Revenue of R$325.2 million;
  • Net Loss of R$51.9 million;
  • Adjusted Net Income of R$92.4 million; and
  • Adjusted EBITDA of R$103.1 million.

Third Quarter 2019 Results

  • Net Revenue of R$70.6 million;
  • Net Loss of R$108.5 million;
  • Adjusted Net Income of R$0.8 million; and
  • Adjusted EBITDA of R$ -7.3 million.

Revenue Recognition and Seasonality

As we report the third 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.

Full Year 2020 (From October 2019 to September 2020) ACV Bookings guidance:

  • ACV Bookings for Arco Platform is expected to be approximately R$1,000 million.
  • ACV Bookings for Arco, excluding Positivo, is expected to grow between 32% and 34%.

Full Year 2019 guidance:

  • We expect to recognize in the fourth quarter (4Q19) 26% to 29% of the consolidated ACV Bookings 2020.
  • Adjusted EBITDA Margin for Arco, excluding Positivo, is expected to be in the range of 35.5% to 37.5%.

Preliminary results from Purchase Price Allocation (PPA) for Positivo Soluções Didáticas (“Positivo”): Arco´s preliminary PPA for the acquisition of Positivo based on June 2019 figures resulted in an estimate of approximately R$1,500 million of both identifiable intangible assets and goodwill, which should generate an estimated tax benefit of R$510 million over their amortization period, from the time the incorporation of Positivo by EAS Educação is finalized, which we expect will happen in the third quarter 2020.

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, as they relate to the Positivo Business (as defined below) 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. 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 third quarter 2019 results today, November 26, 2019, via a conference call at 4:30 p.m. Eastern Time. To access the call (ID: 4786989), please dial: (866) 679-4032 or +1 (409) 217-8315. An audio replay of the call will be available through December 10, 2019 by dialing (855) 859-2056 or +1 (404) 537-3406 and entering access code 4786989. 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
         
    September 30,   December 31,
(In thousands of Brazilian reais)   2019   2018
    (unaudited)    
Assets        
Current assets        
Cash and cash equivalents   2,568   12,301
Financial investments   894,938   806,789
Trade receivables   87,461   136,611
Inventories   25,175   15,131
Recoverable taxes   28,471   11,227
Financial instruments from acquisition of interests   2,004   -
Loans to related parties   1,282   -
Other assets   9,228   6,091
Total current assets   1,051,127   988,150
Non-current assets        
Financial instruments from acquisition of interests   21,374   26,630
Deferred income tax   178,163   99,460
Recoverable taxes   946   1,033
Financial investments   4,579   4,370
Loans to related parties   14,613   1,226
Other assets   8,466   1,060
Investments and interests in other entities   58,505   11,862
Property and equipment   16,726   13,347
Right-of-use assets   19,684   -
Intangible assets   157,467   187,740
Total non-current assets   480,523   346,728
         
Total assets   1,531,650   1,334,878
         


Liabilities        
Current liabilities        
Trade payables   21,824     14,845  
Labor and social obligations   52,183     15,888  
Advances from customers   3,171     5,997  
Lease liabilities   5,453     -  
Loans and financing   157     -  
Taxes and contributions payable   2,018     2,555  
Income taxes payable   29,891     17,294  
Financial instruments from acquisition of interests   22,576     51  
Accounts payable to selling shareholders   112,548     830  
Other liabilities   125     428  
Total current liabilities   249,946     57,888  
         
Non-current liabilities        
Labor and social obligations   5,535     -  
Lease liabilities   18,131     -  
Loans and financing   353     -  
Financial instruments from acquisition of interests   54,861     25,046  
Accounts payable to selling shareholders   175,220     180,551  
Provision for legal proceedings   231     131  
Deferred income tax   871     1,378  
Other liabilities   122     -  
Total non-current liabilities   255,324     207,106  
         
Equity        
Share capital   10     10  
Capital reserve   1,066,710     1,089,505  
Share-based compensation reserve   99,781     67,350  
Accumulated losses   (140,121 )   (86,687 )
Equity attributable to equity holders of the parent   1,026,380     1,070,178  
Non-controlling interests   -     (294 )
Total equity   1,026,380     1,069,884  
         
Total liabilities and equity   1,531,650     1,334,878  



Arco Platform Limited
Unaudited Interim Condensed Consolidated Statements of Income
               
  Three-month period ended September 30,   Nine-month period ended September 30,
(In thousands of Brazilian reais, except earnings per share) 2019    2018    2019    2018 
  (unaudited)   (unaudited)   (unaudited)   (unaudited)
Net revenue 70,572     64,902     325,193     259,972  
Cost of sales (14,188 )   (14,126 )   (61,884 )   (56,828 )
Gross profit 56,384     50,776     263,309     203,144  
Operating expenses:              
Selling expenses (47,639 )   (29,683 )   (123,089 )   (78,069 )
General and administrative expenses (69,515 )   (77,016 )   (135,273 )   (107,744 )
Other (expense) income, net (471 )   2,342     2,451     4,514  
Operating (loss) profit (61,241 )   (53,581 )   7,398     21,845  
Finance income 16,187     6,492     47,104     13,783  
Finance costs (104,968 )   (8,241 )   (133,823 )   (16,006 )
Finance result (88,781 )   (1,749 )   (86,719 )   (2,223 )
Share of loss of equity-accounted investees (794 )   (255 )   (1,953 )   (549 )
               
(Loss) profit before income taxes (150,816 )   (55,585 )   (81,274 )   19,073  
Income taxes - income (expense)              
Current (3,103 )   (2,370 )   (32,254 )   (23,249 )
Deferred 45,433     (2,379 )   61,582     (1,851 )
Total income taxes – income (expense) 42,330     (4,749 )   29,328     (25,100 )
Loss for the period (108,486 )   (60,334 )   (51,946 )   (6,027 )
Equity holders of the parent (108,486 )   (60,243 )   (51,946 )   (5,561 )
Non-controlling interests -     (91 )   -     (466 )
               
Basic earnings per share – in Brazilian reais              
Class A (2.11 )   (1.20 )   (1.02 )   (0.11 )
Class B (2.11 )   (1.20 )   (1.02 )   (0.11 )
Diluted earnings per share – in Brazilian reais              
Class A (2.11 )   (1.20 )   (1.02 )   (0.11 )
Class B (2.11 )   (1.20 )   (1.02 )   (0.11 )
               
Weighted-average shares used to compute net income per share:              
Basic 51,352     50,261     50,790     50,261  
Diluted 51,352     50,261     50,790     50,261  

                                                                                          

Arco Platform Limited
Unaudited Interim Condensed Consolidated Statements of Cash Flows
               
  Three-month period ended September 30,   Nine-month period ended September 30, 
(In thousands of Brazilian reais) 2019    2018    2019    2018
  (unaudited)   (unaudited)   (unaudited)   (unaudited)
Operating activities              
(Loss) profit before income taxes for the period (150,816 )   (55,585 )   (81,274 )   19,073  
Adjustments to reconcile (loss) profit before income taxes              
Depreciation and amortization 8,106     4,957     24,449     13,859  
Inventory reserves 643     (865 )   4,203     2,377  
Allowance for doubtful accounts 7,286     2,576     9,489     5,713  
Residual value of property and equipment and intangible assets disposed 462     -     593     138  
Changes in fair value of derivative instruments 8,483     (928 )   10,349     (2,902 )
Changes in accounts payable to selling shareholders 81,781     -     81,781     -  
Share of loss of equity-accounted investees 795     255     1,953     549  
Share-based compensation plan 136     59,472     412     60,159  
Restricted stock units 17,861     -     32,019     -  
Provision for payroll taxes (restricted stock units) 16,881     -     23,399     -  
Accrued interest 10,270     2,274     24,710     6,326  
Interest in lease liabilities 449     -     1,231     -  
Provision for legal proceedings (111 )   65     100     141  
Foreign exchange results, net (532 )   -     (16 )   -  
Alienation of investment 34     -     (3,252 )   -  
Other financial cost/revenue, net (279 )   -     (1,481 )   -  
  1,449     12,221     128,665     105,433  
Changes in assets and liabilities              
Trade receivables 48,195     23,333     39,786     26,420  
Inventories (8,937 )   (4,092 )   (10,968 )   (5,039 )
Recoverable taxes (2,177 )   1,172     (7,550 )   (18 )
Other assets 1,167     5,833     (6,659 )   (2,723 )
Trade payables 7,833     3,262     8,492     4,836  
Labor and social obligations 6,986     1,572     18,340     5,329  
Taxes and contributions payable 507     (201 )   (540 )   438  
Advances from customers (17,335 )   (9,574 )   (2,337 )   (1,929 )
Other liabilities (26 )   (4,253 )   (380 )   (5,164 )
Cash generated from operations 37,662     29,273     166,849     127,583  
Income taxes paid (5,430 )   (4,434 )   (28,640 )   (25,465 )
Interest paid on lease liabilities (177 )   -     (397 )   -  
Net cash flows from operating activities 32,055     24,839     137,812     102,118  
               
Investing activities              
Acquisition of property and equipment (1,780 )   (1,889 )   (7,609 )   (4,047 )
Payment of investments and interests in other entities (1,218 )   (2,000 )   (5,418 )   (2,000 )
Acquisition of subsidiaries, net of cash acquired -     -     (16,137 )   (13,820 )
Acquisition of intangible assets (7,982 )   (4,937 )   (26,361 )   (9,848 )
Financial investments (25,903 )   (4,948 )   (88,432 )   28,522  
Loans to related parties -     -     (14,000 )   -  
Net cash flows used in investing activities (36,883 )   (13,774 )   (157,957 )   (1,193 )
               
Financing activities              
Capital increase -     3,091     13,829     3,091  
Proceeds from initial public offering -     895,182     -     895,182  
Share issuance costs -     (65,577 )   (673 )   (65,577 )
Payment of lease liabilities (1,629 )   -     (2,709 )   -  
Payment of loans and financing (38 )   -     (52 )   (85,000 )
Dividends paid -     50     -     -  
Net cash flows from (used in) financing activities (1,667 )   832,746     10,395     747,696  
               
Foreign exchange effects on cash and cash equivalents 533     -     17     -  
               
Increase (decrease) in cash and cash equivalents (5,962 )   843,811     (9,733 )   848,621  
Cash and cash equivalents at the beginning of the period -     5,644     12,301     834  
Cash and cash equivalents at the end of the period (5,962 )   849,455     2,568     849,455  
Increase (decrease) in cash and cash equivalents (5,962 )   843,811     (9,733 )   848,621  


Arco Platform Limited
Reconciliation of Non-GAAP Measures
                 
    Three-month period ended September 30,   Nine-month period ended September 30,
(In thousands of Brazilian reais)   2019    2018    2019    2018
Adjusted EBITDA Reconciliation   (unaudited)   (unaudited)   (unaudited)   (unaudited)
Loss for the period   (108,486 )   (60,334 )   (51,946 )   (6,027 )
(+) Income taxes   (42,330 )   4,749     (29,328 )   25,100  
(+/-) Finance result   88,781     1,749     86,719     2,223  
(+) Depreciation and amortization   8,106     4,957     24,449     13,859  
(+) Share of loss of equity-accounted investees   794     255     1,953     549  
EBITDA   (53,135 )   (48,624 )   31,847     35,704  
(+) Share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units),   34,878     59,472     55,830     60,159  
(+) M&A expenses   8,486     -     12,909     -  
(+) Others    2,467     -     2,467     -  
Adjusted EBITDA   (7,304 )   10,848     103,053     95,863  
                 
Net Revenue   70,572     64,902     325,193     259,972  
EBITDA Margin   -75.3 %   -74.9 %   9.8 %   13.7 %
Adjusted EBITDA Margin   -10.3 %   16.7 %   31.7 %   36.9 %
                 
    Three-month period ended   Nine-month period ended
    September 30,   September 30,
(In thousands of Brazilian reais)   2019    2018    2019    2018
Adjusted Net Income Reconciliation   (unaudited)   (unaudited)   (unaudited)   (unaudited)
Loss for the period   (108,486 )   (60,334 )   (51,946 )   (6,027 )
(+) Share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units),   34,878     59,472     55,830     60,159  
(+) Amortization of intangible assets from business combinations   3,623     2,977     9,688     8,808  
(+/-) Changes in fair value of derivative instruments   8,483     (928 )   10,349     (2,902 )
(+/-) Changes in accounts payable to selling shareholders   81,781     -     81,781     -  
(+) Share of loss of equity-accounted investees   794     255     1,953     549  
(-) Tax effects   (40,733 )   2,104     (54,457 )   1,272  
(+) Foreign exchange on cash and cash equivalents   (532 )   -     (16 )   -  
(+) Interest expenses (income), net   10,008     2,538     23,889     7,362  
(+) M&A expenses   8,486     -     12,909     -  
(+) Other services   2,467     -     2,467     -  
Adjusted Net Income   769     6,084     92,447     69,221  
                 
Net Revenue   70,572     64,902     325,193     259,972  
Adjusted Net Income Margin   1.1 %   9.4 %   28.4 %   26.6 %
                 
    Three-month period ended September 30,   Nine-month period ended September 30,
(In thousands of Brazilian reais)   2019    2018    2019    2018
Free Cash Flow Reconciliation   (unaudited)   (unaudited)   (unaudited)   (unaudited)
Cash generated from operations   37,662     29,273     166,849     127,583  
(-) Income tax paid   (5,430 )   (4,434 )   (28,640 )   (25,465 )
(-) Interest paid on lease liabilities   (177 )   -     (397 )   -  
Cash Flow from Operating Activities   32,055     24,839     137,812     102,118  
(-) Acquisition of property and equipment   (1,780 )   (1,889 )   (7,609 )   (4,047 )
(-) Acquisition of intangible assets   (7,982 )   (4,937 )   (26,361 )   (9,848 )
Free Cash Flow   22,293     18,013     103,842     88,223  

 

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Source: Arco Platform Ltd.

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