Arco delivers healthy operating results in 1Q21, with net revenue 27% higher YoY, and adjusted EBITDA margin of 35.7%

Arco Platform Limited, or Arco or Company (Nasdaq: ARCE), today reported financial and operating results for the first quarter ended March 31, 2021.

“We delivered solid operating results in the first quarter of 2021 and we are encouraged by the early results from our sales cycle for the 2022 school year, as we once again benefit from industry-leading results from our partner schools at the national exam (ENEM) and continue to improve our platform and innovate. We are also excited with the initial results from our redesigned cross-sell initiative, which will help further accelerate the sale of supplemental products and leverage the scale of our Core segment. We note, however, that the COVID-19 pandemic is not yet fully behind us. We see risk of revenue recognition in 2021 to be slightly below the initially contracted values, as schools faced lower-than-expected enrollments, mostly concentrated in pre-K and kindergarten. We are hopeful that the environment for the education sector will improve, mostly from 2H21 onwards, as vaccination progresses in the country. As we look ahead, we are more than ever focused and excited with the outlook for our business and the value we can generate to our clients through our solutions. We are accelerating our product development pipeline, which may soon expand our revenue capture possibilities, particularly with our recent entry into the B2C segment in Brazil, which is an important step in that direction,” said Ari de Sá Neto, CEO and founder of Arco.

First Quarter 2021 Results

• Net revenue of R$331.7 million;
• Gross profit of R$244.5 million;
• Adjusted EBITDA of R$118.4 million;
• Adjusted net income of R$61.1 million;

Key Messages

• Net revenues for the quarter increased 27% year-over-year to R$331.7 million, representing a strong 28.5% revenue recognition versus ACV bookings. Core solutions presented a 20% organic growth year-over-year to R$264.6 million, while Supplemental solutions increased 64% year-over-year to R$67.1 million, impacted by the acquisition of Escola da Inteligência concluded in December 2020.

• Gross profit increased 26% year-over-year to R$244.5 million, with a 73.7% margin. Excluding depreciation and amortization, cash gross margin increased 160 bps to 78.7%.

• Selling expenses excluding depreciation and amortization increased 35% year-over-year, representing 36% of revenues versus 34% in 1Q20, mainly impacted by the increase in sales personnel resulting from the restructuring of the commercial teams from recently acquired companies. General and administrative expenses excluding depreciation and amortization, on the other hand, increased only 7%, representing 22% of revenues, from 26% in 1Q20, as a result of a decrease in travel expenses. As a result, adjusted EBITDA reached R$118.4 million, 22% above 1Q20, with a 35.7% margin.

• On Cash Flow, we expect cash generation from operations to accelerate going forward as receivables are paid and CAPEX and effective tax rate decline.

• As partner schools faced challenges due to the COVID-19 pandemic, some payment terms were extended to provide financial aid to schools, resulting in an increase in trade receivables and temporarily affecting the working capital. This strategy is aligned with our commitment to preserving our prices and capturing and renewing contracts on healthy economic terms. Most receivables from the 2021 school year are still concentrated in 2021 (mostly between Q2 and Q4), with only 2% slipping to 2022, but we acknowledge this scenario might change depending on the evolution of the pandemic along the year. For example, 9% of receivables from the 2020 school year slipped to 2021, with 1/3 having already been collected through March 31, 2021. This commercial strategy led to a 23% sequential increase in trade receivables, reflecting 34% increase in neither past due nor impaired receivables and an 8% decline in past due or impaired receivables. As the profile of trade receivables improve, allowance for doubtful accounts starts to return to pre-pandemic levels, at around 1% of revenues.

• Investments in product offering continue to be an important pillar for future growth. In the quarter Arco invested in content development and technological improvements, especially at Positivo, acquired in 2019, and SAS, as it focuses on further differentiating its offering in the beginning of the sale cycle for the 2022 school year. Consequently, CAPEX reached 10.8% of revenues, but is expected to decrease in upcoming quarters.

• Arco is undergoing a corporate restructuring that will soon allow for capture additional cash tax benefits from business combinations. Some subsidiaries of SAS are expected to be incorporated by the end of 2021, leading to estimated tax savings of R$30 million. Other businesses should be incorporated along the years, generating relevant additional savings. Arco currently benefits from the incorporation of only three entities (Positivo, SAE and part of SAS), contributing to approximately R$60 million in current tax benefits. Arco’s effective tax rate has already decreased to 20.3% of taxable income (further details on the reconciliation of the taxable income below), from 32.3% in 1Q20, and should further reduce as we incorporate other acquired businesses in the coming years.

• Arco’s cash and cash equivalent position of R$1,018 million is robust to meet short term obligations of R$756 million in debt and accounts payable to selling shareholders. Arco has firm proposals from banks for a credit line between R$600 and R$700 million to further strengthen its balance sheet.
• Looking ahead, Arco is paving the way to further accelerate growth by
  • Reinforcing the Core segment with top-of-mind brands. COC and Dom Bosco acquisition, which is still pending anti-trust approval, was strategic for Arco. First, it was financially accretive as price paid is equivalent to 14.4x 2020 EBITDA and is expected to generate tax benefit NPV of approximately R$214 mm when the businesses are incorporated. COC and Dom Bosco complement Arco’s current portfolio, both from a price and geographic point of view. They are top-of-mind brands and according to a study conducted by EY Parthenon in 2019, COC is among learning system brands with best awareness among parents and principals. COC and Dom Bosco have a proven track record of student admissions, with 48% of COC schools and 28% of Dom Bosco schools are in the top 3 in the national exam (ENEM) ranking for their municipalities. Arco has an extensive M&A track record of “acquire and improve” and will accelerate growth of the acquired solutions by applying its winning factors of high-quality content, relevant technology, reliable customer service and effective distribution. Finally, the acquisition includes a commercial agreement to distribute selected supplemental solutions from Pearson, which complement its current offering, boosting cross-sell opportunities.
  • Successfully launching cross-sell initiatives. Arco has invested in more incentives, bundle benefits and training. As a result, 72% of 2022 YTD new school intake for supplemental solutions comes from cross-sell initiatives.
  • Leveraging our superior value proposition. As a result of the focus on continuously evolving our products through differentiated technology, content and pedagogical services, Arco has increased in 15% the NPS for its legacy brands SAS and SAE to 88, and 13% for Positivo to 75 in 2020. Arco has helped its partner schools achieve strong academic results and is the leader in admissions in public universities through the national exam (ENEM), well ahead of the second player with respect to students admitted in 1^st to 10^th place.
  • Entering the huge and promising B2C market. Arco has already started investing in team and marketing, while focusing on increasing the share of premium offerings such as medicine test-prep courses to accelerate Me Salva!’s growth. As a result, Me Salva!’s sales are expected to nearly double in 2021. By leveraging on Me Salva!’s high-quality test-prep offering, Arco expects to launch a B2B test-prep solution for partner schools as early as the second half of this year.
• On the ESG front, Arco has concluded its first materiality assessment, indicating stakeholders’ priority themes related to impact on education and team as an asset, in line with Arco’s strategy and goals. As a result, the Company will initially pursue better disclosure and improvement in these topics.

Conference Call Information

Arco will discuss its first quarter 2021 results today, May 24, 2021, via a conference call at 6 p.m. Eastern Time (7 p.m. Brasilia Time). To access the call, please dial: +1 (412) 717-9627, +1 (844) 204-8942 or +55 (11) 3181-8565. An audio replay of the call will be available through May 31, 2021 by dialing +55 (11) 3193-1012 and entering access code 1608874#. A live and archived webcast of the call will be available on the Investor Relations section of the Company’s website at https://investor.arcoplatform.com/.

Information related to COVID-19 pandemic

As of March 31, 2021, there was a total net impact of R$447 thousand on the Company's condensed consolidated financial statements related to the COVID-19 pandemic mainly related to: (i) additional expenses of R$ 579 thousand related to health care in food and emotional health programs to the Company’s employees, and (iv) savings on rent concessions, regarding leased buildings, that occurred as a direct consequence of the COVID-19 pandemic, amounting R$132 thousand.

The Company assessed the existence of potential impairment indicators and the possible impacts on the key assumptions and projections caused by the pandemic on the recoverability of long-lived assets and concluded that there are no indications that demonstrate the need to recognize a provision for impairment of long-lived assets in the consolidated financial statements.

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.

For full disclosure regarding the COVID-19 discussion, please refer to the March 31, 2021 condensed consolidated financial statements submitted to the Securities and Exchange Commission on Form 6-K.

About Arco Platform Limited (Nasdaq: ARCE)

Arco has empowered hundreds of thousands of students to rewrite their futures through education. Our data-driven learning methodology, proprietary adaptable curriculum, interactive hybrid content, and high-quality pedagogical services allow students to personalize their learning experience while enabling schools to thrive.

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 condensed 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 Taxable Income Reconciliation which are non-GAAP financial measures.

We calculate Adjusted EBITDA as profit (loss) for the year (or period) plus/minus income taxes, plus/minus finance result, plus depreciation and amortization, plus/minus share of (profit) loss of equity-accounted investees, plus share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units), 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 (loss) for the year (or period), plus share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units), 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 (vi) software and (vii) educational platform resulting from acquisitions), plus/minus 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/minus changes in accounts payable to selling shareholders plus share of (profit) loss of equity-accounted investees, 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 interest expenses, net, 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 Taxable Income Reconciliation as profit (loss) for the period adjusted for permanent and temporary additions and exclusions (for example, adjustments to provisions and amortizations in the period) and for all tax benefits that Arco is entitled to (for example, goodwill). The effective tax rate will be the current taxes for the period divided by the taxable income. In Brazil, taxes are charged based on the taxable income, not the accounting income, which means companies can have an accounting loss and a taxable profit. Additionally, Arco owns several companies and taxes are calculated individually.

We understand that, although Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, Adjusted Net Income Margin, Free Cash Flow and Taxable Income Reconciliation 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 Taxable Income Reconciliation 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.

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