Vasta Platform Limited (NASDAQ:VSTA) Q4 2021 Earnings Conference Call March 24, 2022 5:00 PM ET
Company Participants
Bruno Giardino – CFO
Mário Ghio – CEO
Guilherme Mélega – COO
Conference Call Participants
Vitor Tomita – Goldman Sachs
Marcelo Santos – JPMorgan
Vinicius Figueiredo – Itau
Andres Coello – Scotiabank
Operator
Good day and thank you for standing by and welcome to the Vasta Platform Fourth Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Bruno Giardino, Chief Financial Officer. Please go ahead.
Bruno Giardino
Good evening, everyone and thank you for joining me in this conference call to discuss Vasta Platform’s fourth quarter 2021 results. With me on the call today, we have Mário Ghio, Vasta’s CEO; and Guilherme Melega, Vasta’s COO.
During today’s presentation, our executives will make forward-looking statements. Forward-looking statements generally relate to future events or future financial or operating performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those contemplated by these forward-looking statements.
Forward-looking statements in this presentation include, but are not limited to, statements related to our business and financial performance, expectations for future periods, our expectations regarding our strategic product initiatives and their related benefits 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. These risks include those set forth in the press release that we issued today as well as those more fully described in our filings with the Securities and Exchange Commission.
The forward-looking statements in this presentation are based on the information available to us as of the date hereof. You should not rely on them as predictions of the future events and we disclaim any obligation to update any forward-looking statements, except as required by law.
In addition, management may reference non-IFRS financial measures on this call. The non-IFRS financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with IFRS.
Let me now give the call over to Ghio to make his opening statements.
Mário Ghio
Hello everybody. Thank you, Bruno. So, moving to this slide number three, the first quarter of 2021 is the beginning of the 2022 cycle, a new chapter in Vasta’s history because we will share the company in its growth trajectory.
As we comment in the previous calls, 2021 was perhaps the most difficult period in the Brazilian K to 12 sector and in the [indiscernible]. But 2022 school year began in line with our expectations with schools fully reopen, a scenario that enables Vasta to fully convert the 2022 ACV into revenues.
In this fourth quarter, we also begin the integration with Eleva, the second largest learning system in Brazil and the biggest acquisition in the history of our — in the history of our company. We are quite happy to have Eleva with us and we are excited with all the opportunities we see with its combination with Vasta.
talking about the ACV, as we announced last month, we collected a total of R$1 billion in subscription quarter, which represents a growth of 20 — 35% over the subscription revenue for the 2021 cycle.
Excluding Eleva, the ACV increased 22% only by organic means. As we will dictate you in this presentation, the composition of the ACV is richer than before with a great performance of our premium brands.
In this fourth quarter, the first of ACV 2022 recognition, total net revenues increased 16% year-on-year with a subscription products up 22%. Excluding PAR, subscription revenue increased 34%, which demonstrates that we continue to migrate our textbooks based revenue to learning systems or digital platforms.
Adjusted EBITDA grew 10% following the growth in the net revenue and partially hit by temporary cost pressures, Eleva acquisition and integration expenses here included.
Adjusted net profit fell 17% on the higher financial leverage due to the acquisition of Eleva and on higher income rates in Brazil. For the first time, we are releasing revenue guidance for the next quarter. So, we expect to have R$307 million of total revenues in the first quarter of 2022, being R$320 million realizing subscription revenues and more R$50 million in non-subscription revenues. This implies a growth of 32% in total revenues, reiterating our belief that 2022 will be — in 2022, we’ll be able to collect 100% of the ACV, but also to stabilize the sales of the non-subscription segments.
Now, open the floor to our COO, Guilherme Mélega.
Guilherme Mélega
Thank you, Ghio. Now, moving to slide number four. Let’s talk a little bit about our ACV. Our 2022 ACV totaled R$1 billion, a 35% growth versus the subscription revenue collected in 2021 cycle. Organically, it means a 22% growth.
Complimentary solution is once again had the highest growth rate among the business segments with a 47% increase. If anything that Vasta has captured the strong cross-selling potential space.
Traditional learning systems, including new launcher Textbooks-as-a-Service platform and excluding Eleva grew 31% compared to 2021 subscription revenue. Traditional learning systems ex-Eleva and complimentary products together grew 32%. Finally, Eleva delivered ACV of R$98 million contributed 13 percentage points to consolidated 2022 ACV growth.
Now, moving to slide number five, we detailed the composition of our ACV growth. I would like to emphasize in this slide realize that the quality of these ACV we managed to grow faster in our premium brands, Anglo and pH. And to initiate the migration from paper-based products to digital subscription products, Textbooks-as-a-Service platform in line with our strategy.
As you can see in this slide, new clients and the combination of cross upsell and price readjustments continued to be the main drivers of ACV growth. Each one contributed with 50%.
In the cycle, our churn was slightly above 8%, which we attributed to the tougher macroeconomic conditions. While the churn rate of our premium brands remained remarkably low, there was an upward pressure in the churn rate in the mainstream segments and PAR clients. Approximately 35% of partner schools that left our base were delinquent as of December 31st.
Move to slide number six, we give you more information on how our ACV will be distributed over the year. The 2022 ACV is less concentrated in the first two quarters than the previous years. Due to the differences in energy of our products, such as Eleva, Mackenzie and Textbooks-as-a-Service platform, as well as lower PAR revenue r recognizing Q4 and Q1.
That means that although the first two quarters will continue registered the largest part of ACV revenue, there will be less revenue to be captured in the first half of the sales cycle when compared with previous years and the opposite will happen in the second half. To illustrate, in the fourth quarter, we collected 34.7% of 2022 ACV, whereas we had collected 38.3% of subscription revenue of the 2021 cycle in the fourth quarter of 2020.
In order to facilitate this understanding, we are providing a guidance for the first quarter of 2022, the second quarter of 2022 ACV recognition. So, we expect to have R$320 million in subscription revenue in Q1 2022, 32% of the ACV implying a 31% year-on-year growth in this line.
As for non-subscription revenue, our forecast is R$50 million, implying a 33% year-on-year growth. Combined it, Vasta about delivered 32% year-on-year growth in the first quarter of 2022 to R$370 million, confirming the recovery trend that is rejected by our ACV. In the remaining quarters, as we have more ACV to be recognized, we may expect sound growth rates to continue throughout the year.
I will now turn the floor to our CFO, Bruno Giardino, who will talk about the financial results of the quarter.
Bruno Giardino
Thank you, Mélega. In slide number seven, we show the composition of fastest net revenue in the fourth quarter. Total net revenue included 16% or 9%, excluding a level, which contributed with R$25 million since its integration in late October.
The revenue from subscription revenue jumped at 22% year-on-year and continue to gain relevance in our sales mix. As you can see on the right, which 87% of total, when we exclude far or subscription revenue increases 34% or 22%, excluding Eleva, the pink bar on the right hand side.
Non-subscription revenue declined 14% in the fourth quarter, reflecting the two thirds dynamics in the textbook model. As previously discussing, revenue growth is set to accelerate in the coming quarters.
Now, in the slide eight, we see adjusted EBITDA and net income. Adjusted EBITDA increased 10% in the quarter following the growth in net revenue. The margin declined 230 basis points, however, due to temporary cost pressures, it included expenses related with Eleva integration. These more than offset the efficiency in commercial expense and the slightly lower provision for doubtful accounts we had in this quarter.
When we look forward, we see a recovery trend for EBITDA margin on a yearly basis as one revenue growth we accelerate; two, we restructured our workforce in December, which benefit the habit from January; and third, synergies from Eleva acquisition.
In the fourth quarter, adjusted net profit declined 70% year-over-year to $98 million. Despite the growth in operating profit, the increase in net financial expense due to the increased financial leverage and the higher level of interest rates, our leverage is up because of this Eleva acquisition that was consolidated in late October.
Next, I’ll give more details on the provision and accounts receivables on slide nine. As you know, over the last quarters, we have recognized higher provision for doubtful accounts PDA, due to the challenging business environment for our school partners.
Since the beginning of the pandemic, our approach to credit issues has been to extend payment terms instead of renting the outcomes, which resulted in a nation of our receivable portfolio and higher provision needs.
In this fourth quarter, however, as a percentage of revenue, the PDA declined 0.9 percentage points, nd we expect a gradual reduction going forward towards the normalization in the payment cycle.
Finally, the days of accounts receivable, when we adjust for the fact of Eleva acquisition, has been in line on a yearly basis and following the regular seasonality of the business.
With that being said, I pass the board back to Mário Ghio.
Mário Ghio
Thanks Bruno. Let’s move to slide number 10 please. While we are already discussing 2022, it’s important to give a step back and look at how much things we did in 2021 that are pretty sure — we are pretty sure will be the future of us.
In this slide you can see all the developments we made since our IPO. Starting in the left, we reinforced our core business with the acquisition of Eleva, the creation of Fibonacci learning system, and also the distribution agreement with Mackenzie. We also launched the Textbook-as-a-Service platform.
Moving up in the model clockwise, we enter in the light pink area, we expanded our complementary solutions, reach with the open of Plurall store which offers a series of solutions in partnership with education companies from all over the world. Then we enter in the B2B2C segment through the launch of Plurall MyTeacher, our private classes platform, and Plurall Adapta, adaptive learning platform. We’ll talk more about these two initiatives what lies ahead.
In the bottom of the digital services are the acquisition of SEL, EMME, and Phidelis will enable us to build a portfolio of administrative services that we will address the needs of our partner schools, freeing a time for them to focus on what they know best, which is to educate.
Now, I will invite you to focus again on the light pink area. This is everything we’ve built or acquired since our IPO in one and a half year, we assess new revenue pockets and we build products that may be the future of our company.
Moving to slide number 10, let’s comment on why being a platform is so important for us. We believe that Plurall is a true platform and the only super app of K to 12 education in Brazil. It all started with the full integration of Vasta’s multi-brand portfolio which has led to the capture of operating and financial benefits with an inside go-to-market and technological backbone.
As a second stage, the platform relevance in terms of the number of students, teachers, and traffic share attracted important partnerships with 30 parts like Mackenzie, Fibonacci, and all that added tax we included into those store.
The third stage that we are now is the offering of new disruptive products at a marginal cost began with our interests in the B2B2C segment and we will continue with the development of new problems that tap all the relevant addressable markets with expected launch in the beginning of this year.
On the slide 12, I will comment on the B2B2C [ph] segment. As we talked in the last conference call in October, we celebrated the debut of the B2B2C platform, which was a great achievement of our Plurall team. Plurall MyTeacher and Plurall Adapta recorded the first sales in the first quarter of this year and in this quarter, the fourth quarter of 2021, and the awareness of this product has been increasing lately day-by-day.
We see a strong long-term potential for the B2B2C see services and this potential could materialize exponentially once the product is better known by our community. As you can see in this slide in the bottom, we have focusing on the dissemination of these products among our partners, schools, and students.
Let’s talk about ESG on slide 13, by the end of April, we are going to launch — we are going to issue our first sustainability report elaborated according to the highest standards available. We hope this report will help the investor community to understand how serious we are about ESG standards at Vasta.
Moving on to slide 14, we anticipate some of the — of our achievements related to ESG. On the environmental fields, 89% — almost 90% of the energy consumed comes from renewable sources being 100% in our largest distribution center in São José dos Campos. 100% of our suppliers are FSC certified.
In the social fields, more than half of our — all of our leaderships are women. 94% of women who took maternity leave, remained in the post-return employment. On the governance side, our Board of Directors has 28.6% female members, 42% independent members, and 14% — and has the participation of 14% in terms of the Elgin LGBT group. Female participation in the Board of Directors greater the women on board this year.
Having said that, I finish our presentation and now open the Q&A session. Thank you very much.
Question-and-Answer Session
Operator
[Operator Instructions]
Our first question will come from the line of Vitor Tomita from Goldman Sachs. You may begin.
Vitor Tomita
Good evening Ghio. Good evening, Giardino. Thanks for taking our questions. Two questions from our side. The first one is on PAR. If we look at the reduction in PAR ACV, could you give us a sense of how much of that reduction is driven by book reutilization or churn? And how much is instead driven by migrations to other learning systems you offer?
And a second question from us thinking about the potential of Plurall as a platform for third-party offerings, which is something you touched on in the presentation, could you give us a sense of how relevant Mackenzie, Fibonacci, and third-party apps in Plurall Store has been as a part of 2022 ACV growth? Thank you.
Guilherme Mélega
Hi, Peter, this is Mélega. I will take your first question and then I’ll turn to Ghio for the second one. Giving you a little bit more details about PAR, the reduction in PAR revenues is mainly due to the migration to learning systems into the implementation of the PAR platform as a service, which will only be recognized in Q2 — from Q2 through Q4 this year, because it’s a service and we only recognize it when — once the services has been delivered. So this — those two are the main drivers.
We did not see an increase in reutilization of books and what we are performing is our strategy to migrate to Platform-as-a-Service and learning systems.
Mário Ghio
Hi Vitor, this is Ghio. Regarding to Mackenzie and Fibonacci because of the commercial agreement with that — we have with Mackenzie, we can be so experts — we can be very specific in terms of numbers, right? But what I can tell you is that Mackenzie is representing just a few percentage points of our ACV, right?
And Fibonacci is really in the beginning of the trajectory with us, right? We just launched with Fibonacci the material focusing on the prep course for universities, right. So, for vestibular and this is very small, the revenues we saw from Fibonacci, but the potential of Fibonacci is huge because as we like to say Fibonacci is the best school in the country, if we consider the results in learning. Okay Vitor.
Vitor Tomita
Very clear. Thank you both.
Operator
[Operator Instructions]
Our next question will come from the line of Marcelo Santos from JPMorgan. You may begin.
Marcelo Santos
Hi, good evening. Ghio, Mélega, Giardino, thanks for taking the question. Would you please explore a bit the higher churn from the angle of the competitive environment? I know you mentioned the macro, but what can you say about competitive environment?
And the second question that I would like to ask is, you mentioned that you would have like new launches on the B2B2C market, is it something — could you discuss a bit what else do you have in store there that we could see during 2022? I think that’s what I understood from the release, you’d come with new things? Thank you.
Guilherme Mélega
Thank you, Marcelo. Let me take your first question. We see the competitive environment pretty much as usual. It’s a very competitive market and we see pretty much the same competitors, driving innovation, driving good products, where we keep moving forward also. We don’t see any change if that what you are implying in the competitive environment. So far, we had a very good start, not also in the sales campaign, but also delivery, the contracts and the revenue side.
Mário Ghio
Marcelo this Ghio, taking your second question. So, let’s first give a step back and I would like to reinforce the importance to have a true platform. We are in the stage of our platform that sometimes the client, it’s also a provider, right? The real concept of a platform, you become a platform when you have a client, for instance, our teachers, they are our clients because they are consuming our products and services. But through Plurall MyTeacher, they are at the same time providers of new services, new content to our ecosystem, right and we are doing the same with schools and many other stakeholders in our ecosystem.
Regarding to your question what we are planning to launch in the beginning of this year is we got into therapy, right? The same technology we developed for Plurall MyTeacher, we can use for therapies, right? And we are seeing a huge demand — I mean families, they are — after two years of pandemic, they are really concerned if their kids need some kind of professional therapy and we are planning to launch in just a few weeks.
We are — at this moment, we are testing a kind of a better version of our Plurall MyTherapy, and this is the innovation I mentioned in the presentation, but it’s important to understand that the true platform means that sometimes our clients are also our providers. We are — we have some ideas to transform even our students in providers of services for other students, okay?
Marcelo Santos
Perfect. Thank you very much. Just a follow-up on Mélega’s answer. So, the increasing churn, as your understanding has nothing to do with an increase in competition, just to be very clear, that was your answer?
Guilherme Mélega
Marcelo in the traditional learning systems, the main — especially in the mainstream, we did see more competition, very aggressive commercial features to our customers. And we did see a higher churn due to that, but also due to the weakness in terms of financial terms of our customers that needed to switch to another provider to have better commercial terms, which we did not retain. So, — but that’s pretty much it.
In the premium segments, we didn’t see that trend and we definitely are very confident about the quality and our brands to maintain competition away from them.
Mário Ghio
Yes. And as the ending on that, Marcelo. it’s important to comment that 35% of the schools that churned were delinquent payers by the end of last year, right — by the end of the year, and we decided to not renew the credit for this year, right. So, there is more competition, especially in the commercial schools, in the middle ends of the market, but we also decided to not renew the credit with delinquent school and this specific part of the churn is representing 35% of the churn.
Marcelo Santos
Perfect. Very, very clear, Mélega and Ghio. Thank you.
Operator
The next question will come from the line of Vinicius Figueiredo from Itau. You may begin.
Vinicius Figueiredo
Good day everyone. Thanks for taking my question. I do have follow-up to one of your previous answers. You commented that you noted weakening of some of your competitors. [indiscernible] strength together with for macro scenario, does it increase the number of opportunities for market consolidation through acquisition? Thanks.
Mário Ghio
Yes, Vinicius I guess I can start and Mélega can complement me if he wants. Yes, there is always opportunity for more acquisitions for the consolidation of the market, right. But for now, we are super focusing on integration of Eleva, right, we have a lot to do in the Eleva integration side. We are starting to collect all the synergies which we can collect with Eleva and we are also now focusing on integrate the new products we also bought into last year.
So, for instance, [indiscernible] it’s in the beginning of its cycle inside Plurall, we are expecting to offer sell as the front end of schools with families and they recently acquired Phidelis which is a complete ERP. We are now integrating these kinds of back office services into Plurall, right And with that integration done, we can start for instance to offer financial services to schools as well, right.
So, we are not, to be super clear with you, we had some opportunities. We are talking to some learning systems, but for us, first the Eleva integration; second, the integration of all the technologies we bought last year in Plurall. And from these new technologies, we start to offer new services, such as — as I mentioned to Marcelo services as MyTherapy, Plurall MyTeacher is just in the beginning of the journey with our students. So, there are opportunities, but it’s not our focus, at least, in the first half of this year.
Vinicius Figueiredo
Thanks. Very clear.
Operator
Our next question comes from the line of Andres Coello from Scotiabank. You may begin.
Andres Coello
Thank you. Thank you for taking my question. You mentioned in the release that in the fourth quarter, there was a little bit of cost pressure from the Eleva integration. So, I’m wondering if you can just provide a little bit of color regarding how much the costs of the integration during the fourth quarter? Perhaps just detail if those costs were already included in recurring expenses in your release or if those were not included there?
And just a little bit of an idea of your margins of integration, if you want to call it that way? Thank you.
Bruno Giardino
Hi, Andres, thank you for the question. These expenses related with Eleva integration are the usual expenses that we have been any kind of M&A lawyers consultancy that that type of stuff, right? This is a — this was a relatively sizable amount. We’re not given disclosure, but we can tell you that this is not included in non-recurring expenses.
What do you see in non-recurring expenses are expenses related to restructuring of our workforce that we did in December, right, results are yet to come. So, these expenses related with the Eleva for sure, will — our — were kind of a pressure in our results and they are temporary, okay.
When we look forward to 2022, we clearly see a recovery trend for our EBITDA margin, right, we are talking here in margin going back to the level of 2020, or even more, and we are pretty confident that Eleva can have margins even greater than ours, right, because think that Eleva is a pure subscription product. So, it naturally has higher margins than Vasta. So, the integration plus time for synergies is also another factor that makes us confident that margins are on an upward trend in 2022, okay?
Andres Coello
Okay, that’s great. Thank you.
Mário Ghio
Andres if I may add to just to give you more color about the — what we are calling here, the restructurization — restructure of our company, right, because of the integration of Eleva, but not only, we saw opportunities to be more efficient in any areas, we cut 20% of our payroll, right. So, it’s — it was a power for restructuring, right. And as Bruno said, the results are yet to come. We are we expecting to see this — the impact of this reorganization in our margins in the first quarter of now 2022.
Andres Coello
Okay, that’s very clear, and very impressive. Thank you.
Operator
[Operator Instructions]
Our next question will come — actually be a follow-up from Marcelo Santos from JPMorgan. Your line is open.
Marcelo Santos
Hi. Thanks for the follow-up. It’s a quick one. Just wanted to check Mário Ghio’s comment on the prepared remarks. Do you expect to be able to collect 100% of ACV in this commercial cycle? That’s the question.
Mário Ghio
That’s — Marcelo, you are correct. We are expecting given that we have a good start in this year, right, so schools are open. If students are going to the schools, we are — yes, we are expecting to convert 100% of the ACV into revenues this cycle, yes.
Marcelo Santos
Perfect. Thank you very much.
Operator
Thank you. And I’m actually not showing any further questions in the queue. I’d like to turn the call over to Bruno for any closing remarks.
Bruno Giardino
Thank you. Thank you, everyone for attending our call. We are always available to follow-up questions, right. Thank you and take care.
Operator
And this concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
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