Vasta Platform Limited (NASDAQ:VSTA) Q1 2024 Earnings Call Transcript

Vasta Platform Limited (NASDAQ:VSTA) Q1 2024 Earnings Call Transcript May 11, 2024

Operator: Ladies and gentlemen, thank you for standing by. My name is Desiree [ph] and I will be your conference operator today. At this time, I would like to welcome everyone to the Vasta Platform First Quarter 2024 Financial Results. Before we begin, I would like to read a forward-looking statement. 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. This will increase those set forth in the press release that we are issuing 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 today. You should not rely on them as predictions of future events, and we disclaim any obligations to update any forward-looking statements except as required by law. In addition, management may reference non-IFRS financial measures on this call.

Non-IFRS financial measures are not intended to be considered in isolation or as substitute for results prepared in accordance with IFRS. Thank you. I would now like to turn the conference over to Marcelo Werneck, Vasta’s Investor Relations. Please go ahead.

Marcelo Werneck: Good evening, everyone. Thanks for joining us in this conference call to discuss Vasta Platform’s first quarter of 2024 results. I Marcelo Werneck, Vasta’s Investor Relations. And today, we have the presence of Guilherme Melega, Vasta’s CEO and Cesar Silva, Vasta’s CFO, who’ll be joining me on the call. Let me now hand over the floor to Guilherme Melega, our CEO, to make his opening statement.

Guilherme Melega: Thank you, Marcelo. Thank you all for participating in our earnings release call. I’d like to cover slide number three with some highlights of our 2024 cycle to date. This first quarter also represents halfway through the 2024 commercial cycle, which goes from October 2023 to September 2024 and we have delivered strong economic and financial results. Vasta concluded the 2024 cycle to date with a 12% net revenue growth over the same period last year, mostly due to the conversion of ACV into revenue and to the performance of the B2G business unit. Vasta subscription revenue has reached R$872 million, a 9% increase compared to 2023. Complementary solutions continued to present the highest growth rate among our business segments, with a 21% expansion in the cycle to date compared to the same period last year.

And thus, as announced in our last earnings release, we have already renewed our first B2G contract for 2024, and we have generated R$69 million from the B2G sector in the first quarter of 2024. Moving to the company’s profitability in 2024 cycle to date, our adjusted EBITDA experienced a growth of 21%, reaching R$402 million, while increasing an adjusted EBITDA margin to 39.6%. This increase was mainly driven by improved gross margin, benefiting from better product, reducing impact of product cost and operating efficiencies. Finally, we continue to see significant improvement in our cash flow. In the 2024 cycle to date, free cash flow totaled R$52 million, a R$59 million increase from negative R$7 million in 2023. And the last 12 months, free cash flow to adjusted EBITDA conversion rate improved from 31% to 43%.

As a result of Vasta’s growth and implementation of efficiency measures. I will now move to slide number four to discuss 2024 ACV. In line with our commitment to total transparency, we have adjusted our ACV bookings for 2024 sales cycle. It’s important to note that our previous ACV booking has been revised downward by 3.7% to R$1,350 million due to the effective number of students at our partner schools after complementary orders in Q1. New ACV bookings represent an organic growth of 12% comparing to 2023 sales cycle. Our top performers continue to be premium brands and our complementary solutions. On slide number five, as previously mentioned, Vasta subscription revenue 2024 cycle to date has reached R$872 million, a 9% increase compared to the same period last year.

It’s noteworthy that the distribution of subscription revenue throughout 2024 deferred slightly from the previous year, with less concentration in the first two quarters. The 2024 cycle to date accounts for 64.5% of the total ACV compared to 66.4% in the previous cycle, mainly due to product deliveries migrate to third commercial quarter and different seasonality of new contracts. I will now turn back to Marcelo Werneck, who will talk about the financial results of the quarter in 2024 cycle to date.

Marcelo Werneck: Thank you, Melega. In this slide, we present the composition of Vasta’s net revenue. On the left side, you can observe the organic year-on-year growth in total net revenue for the first quarter, which increased by 14%, reaching R$461 million. Total subscription revenue was flat in the quarter with R$357 million on revenues, mainly due to the effects mentioned before by Guilherme. Non-subscription, which now represents only 7% of the total revenue dropped 24% to R$35 million. And with the B2G sector, we generated R$69 million in revenue in the first quarter of ’24 due to the contract renew with the state of Para. Moving to the right side, we analyze the net revenue for 2024 sales cycle to date. We achieved an organic net revenue growth of 12% amounting to R$1,015 million.

Subscription revenue had an increase of 9% from R$872 million and continues the major contributor to our total revenue representing 86% of the revenue share. Non-subscription revenue, as expected dropped 31% to R$74 million, and the B2G contributed so 7% of our overall revenue in the ’24 cycle to date. Moving to slide number seven. In this quarter, our adjusted EBITDA amounted to R$162 million and with a margin of 35.2%, a relevant increase of 24% from the R$131 million in the first quarter of ’23. On the right side, we see that adjusted EBITDA in 2024 sales cycle increased by 21% and reached R$402 million with a margin of 39.6% or 3.1 percentage points above the 2023 cycles to date. Let’s move to the next slide and explain the breakdown of adjusted EBITDA margins.

On slide number eight, we can observe that EBITDA margin improved 3.1 percentage points from 36.5% in the 2023 sales cycle to 39.6% in the 2024 sales cycle to date. Firstly, our gross margin increased 3 percentage points and the increase in gross margin benefited from better product mix and reduced the impact of product costs as ’23 was the year that the industry faced higher inventory costs caused by global inflation on paper and production costs. Provision for doubtful accounts, PDA, was stable between the years in line with our revised the credit landscape. As a percentage of net revenue, our commercial expenses increased by 2.7 percentage points, driven by higher expenses related to business expansion and marketing investments. And adjusted cash G&A expenses improved by 2.6 percentage points, mainly driven by workforce optimization and budgetary discipline measures.

Moving to slide number nine. We show the adjusted net profits. In the first quarter of 2014, adjusted net profit totaled R$50 million, a 97% increase compared to adjusted net profits of R$26 million in the first quarter of ’23. In 2024 sales cycle to date, adjusted net profit reached R$146 million, a 49% increase from the adjusted net profit of R$98 million in the 2023 sales cycle. Moving to slide number 10. We show the free cash flow evolution. In the first quarter of ’24, the free cash flow totaled R$52 million, representing an increase of 44% compared to R$36 million in the fourth quarter of ’23. On the right side, in the 2024 sales cycle to date, our free cash flow reached R$52 million, a solid R$59 million increase from the negative R$5 million in 2023 cycle.

On another important metric, our last 12-month free cash flow to adjusted EBITDA conversion rate improved from 31% to 43%, reinforcing the message that cash generation continues to be a key focus area of our business. Moving to slide 11. We show the provision for doubtful accounts. Total expenses with PDA in the first quarter of 2024 totaled R$13 million, representing 2.9% of total net revenue compared to an expenses of R$10 million in the comparable quarter. Moving to the right side of the slide, we can observe that PDA for 2024 sale cycle shows a slight improvement, although still impacted by the credit landscape review. It’s dropping to 0.21 percentage points to 4.2 percentage of the net revenue. Moving to the next slide. We observed that the average payment terms of Vasta’s accounts receivable portfolio was 180 days in the first quarter of ’24, which is 19 days lower than comparable quarter and in line with the seasonality of our business.

Moving now to slide number 13. Let’s take a closer look on the net debt movements. As of the first quarter of ’24, Vasta had a net debt position of R$1,069 million, a R$5 million increase compared to the last quarter, mainly due to the impacts of financial interest costs in the second repurchase program, which were fully completed during this quarter. In comparison to the third quarter of ’23, the beginning of the ’24 sales cycle, the net debt position increased R$71 million from R$998 million, driven also by the financial interest costs in the second repurchase program, which were partially offset by the positive cash flow of R$52 million in the period. I will conclude my part of this presentation with slide number 14, where we can observe that as of the first quarter of ’24, the net debt to last 12-month adjusted EBITDA ratio continues to improve for the fourth consecutive quarter and now stands at 2.22 times, which marks an improvement of 0.14 times compared through the fourth quarter of ’23 and an improvement of 0.63 times when compared to the first quarter of ’23.

With that being said, I’ll pass the word to our CEO, Guilherme Melega.

Guilherme Melega: Thank you, Marcelo. On slide 15, let me provide you with an exciting update on a significant avenue of growth of Vasta. As mentioned last quarter, the launch of the Start Anglo franchise, combined by new wins with academic excellence continues to ramp up and signifies a strategic expansion in our new revenue streams. Both of our two fully operational units in 2024 are exceeding expectation. And our first franchising Alphaville is now operating with over 190 students, surpassing our target of 420 students. We have signed five new contracts, and we now have 20 contracts. Security distributed across 10 states in Brazil and over 200 prospects in negotiation. This broad geographic presence and strong pipeline underscore the robust potential for future growth and market penetration of Start Anglo.

Moving to slide 16. Finally, I would like to introduce our latest breakthrough [indiscernible] last month, which has been met with tremendous success, the teacher and student intelligent assistant, our Plurall AI platform. In summary, we gathered all of our excellence content from our basic education systems that we want to enable and put AI itself. It divides classifies and prepares the content, creating several knowledge bases separate by brand and materials, which each iteration throughout AI understands your request, searches, all related knowledge and decides its best response, building on its preparation generative, AI enables teachers to create supplementary lessons, plans, generate images, scripts for presentation, question list and help students develops study guidelines.

This innovation aims to empower teachers in the teaching process and enhance students’ learning. This groundbreaking tool, this reshaping how educators and learners engage offering a more dynamic and efficient educational experience. With the Plurall AI platform, we are transforming education, providing a smarter and more inspiring learning environment and we can’t wait to see how it will further enhance teaching and learning nationwide. Having said that, I finish our presentation and invite you all to the Q&A session.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Mirela Oliveira with Bank of America. Your line is open.

Mirela Oliveira: Good evening, everyone. Thank you for the time for making questions. I have two on my side. First on the ACV contract. Could you comment a little bit on the recognition seasonality if this is a new seasonality, or is it more of a one-off from the 2024 cycle. And secondly, on the B2G contract, we previously understood that these contracts are more expected from the second quarter onwards due to the seasonality of government contract. So, could you comment a bit on the specifics of this revenue recognition in the first Q? Is this related to SAEB [ph], or is it under contract? Thank you.

Guilherme Melega: Thank you, Mirela, for your questions. I will start with the ACV and the seasonality. Every year we have a slightly different seasonality. This year, we have more contracts, more new contracts that we are serving twice a year. So, concentrates a little bit the recognition on Q2 in Q3. So, that’s why we expect more recognition of ACV, as mentioned on the presentation, on Q2 and Q3 related to last year to the same period last year. And for now, you can expect this seasonality because that’s the landscape that we have from our contracts. And related to the ACV bookings — to the reduction of ACV bookings, we are seeing a soft market in terms of enrolling students at our partner schools, and we do expect it to be a one-off this year.

Regarding B2G, we recognize that the orders that we received so far from the same contract that we had last year from the Government of Para. So, we already secured R$69 million from that contract, and we can have more orders coming in Q2 and also more services being provided in Q2. We don’t secure the orders yet, but we definitely expect more to come regarding this contract. And yes, this contract is related to the SAEB enhancement product that we are serving Para.

Mirela Oliveira: Thank you.

Operator: Our next question comes from the line of Marcelo Santos with JPMorgan. Your line is open.

Marcelo Santos: Hi. Good evening, Melega and Marc, thanks for taking my questions. I wanted to go a little bit deeper on this B2G product side enhancements. What would be the extra orders you could get like — just trying to understand the mechanics. I mean, you didn’t service all the students in the first quarter or if they would be buying for — just wanted to get a little bit dynamics. And I would I wanted to ask a second question, how do you see the margin outlook for 2024 when compared to 2023? I mean, you had a very good start in the beginning of the year. So, is this something that we should expect for the following quarters to remain in place? Thank you very much.

Guilherme Melega: Hi, Marcelo. Thanks for your questions. Let me give you more details about the B2G contract. This year, we are serving not exactly the same grades that we served last year. This year, we are serving fourth, eighth and second grade in high school, which represents a different number of students. But there are more products that were not shipped in Q1, such as teacher training materials and assessments that we can provide in Q2. That’s pretty much it from this contract. We do not expect that much more to be recognized, but there is room to improvement in the same contract. Regarding the margin outlook for the remaining of the year, we had a great start. This good start is related to a better mix. We are focusing on premium products.

We have stated that our strategy is grow from premium products, obviously with better margins and this is already reflected on Q1 margin. And we have a huge recognition of B2G that dilutes our fixed costs. So, we’re looking to — and we don’t have the same costs, the same pressure that we have in production costs as we had last year. So, when we look to the remaining of the year, we expect a better margin, but it relied on more volume of B2G. With fewer volume of B2G, we should convert a little bit above the historical margin.

Marcelo Santos: Thank you very much.

Operator: Next question comes from the line of Mauricio Cepeda with Morgan Stanley. Your line is open.

Mauricio Cepeda: Thank you. Thank you for the opportunity. I have two questions. First one, if you could detail a little bit more about the revision of the ACV, exactly the mechanism in which it happens. So, as far as I understand, there was kind of a tolerance in the contracts for — by the students. And if you saw that there would be less students this year than it was foreseen regionally in the country. So, if you can explain a little bit the mechanism that allows this variation and how it translates to the future. Is there — we should expect kind of a variance in the ACV versus revenue recognition throughout the years? And my second question is about the mix. If you could comment a little bit on your strategy in terms of mix. How do you want to play in the private markets in terms of products, their positioning and how it could help you in the gross margin and EBITDA, et cetera? Thank you.

Guilherme Melega: Thank you very much, Mauricio, for your questions. Let me give you more details about the ACV mechanism. ACV, when we share our ACV bookings, we are sharing our contracts, the number of students that we have on our contracts with the new price and discounts that we have secured in the contract with each of our customers. There is some room in the contract for the schools to further fewer students. Normally, it doesn’t happen. We see normally a breakeven in the contracts, in the overall contracts or slightly above. This year during the complementary orders, because in Q4 we fulfilled the majority of the contracts to the schools. And in Q1, we receive complimentary orders depending on the pace of enrollments.

What we observed during this quarter is that we received fewer complementary orders than expected in the contracts, and the schools are reporting fewer students than then initially contracted. So, our decision was to respect that number of students and do not push products to the chain. And we are sharing with you this impact of 3.7% slightly above the ACV bookings previously reported, but the mechanics is pretty much the same. What we have this year is, in our opinion, a soft market, that impacts much more the mainstream schools and the premium schools are always more protected, and that’s obviously why our strategy is on premium schools. That allows me to comment on mix. Our strategy is to pursue a better market share for our premium brands.

I’m talking about Anglo, PH, Fibonacci and Amplia. And we are moving fast. We have a very good start in Q1 sales campaign for 2025, where we are investing our campaign in enhancing product, as I mentioned Plurall AI that goes pretty much focusing on the premium brands and we are enhancing product, enhancing sales campaign for the premium schools. In the first quarter of our 2025 sales campaign, let us very optimistic that we are in the right track. But what we are pursuing is to grow on premium and cross-sell complementary products to those schools.

Operator: There are no further questions at this time. Mr. Guilherme Melega, I turn the call back over to you.

End of Q&A:

Guilherme Melega: Thank you very much to participate in Vasta’s Q1 conference call. I would like to make some comments. We just launched our sales campaign for 2025, and we had a very strong first quarter. We already sign at three times more contracts than we had on the same period last year. Obviously, it’s not yet very significant of amount in terms of total of the campaign, but a very good start, is very important to make us confident that we are on the right track. We have a very robust pipeline on B2G. We expect to have more contracts soon sign this quarter. On Start Anglo Bilingual school, we already reached 20 contracts. It’s already ahead of our forecast sales and we have a huge demand for each, and we are very confident that in a few years, this will be a very important segment for us.

And lastly, but very important, we implementing a big breakthrough technology in our Plurall platform with the implementation of AI that will allow our teachers to save time and to be much more efficient, producing materials for their classes and their students. And by doing so, we really believe that we are strong in our relationship with our schools and our network of teachers. Having said that, we are very optimistic for the remaining of the year, and I look forward to talk with you in Q2 earnings call. Thank you very much.

Operator: Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.