Arco Reports Fourth Quarter and Full Year 2020 Financial Results

Rhea-AI Summary

Arco Platform Limited (Nasdaq: ARCE) reported FY 2020 results highlighting net revenue of R$1,001.7 million, adjusted EBITDA of R$381.0 million, and adjusted net income of R$220.3 million, exceeding guidance. The Q4 2020 performance also showed robust results with net revenue of R$296.5 million and a margin of 38.0%. For 2021, Arco forecasts an annual contract value of R$1,163 million, representing 21% growth, despite a COVID-related revenue impact of ~R$96 million. The company emphasizes a focus on growth, digitalization, and ESG initiatives moving forward.

Positive

• FY 2020 net revenue of R$1,001.7 million exceeded guidance.
• Adjusted EBITDA margin of 38.0% for FY 2020.
• Projected 21% growth in ACV for 2021, totaling R$1,163 million.
• Recent acquisitions enhancing core portfolio and market leadership.

Negative

• COVID-19 pandemic impact of R$14.6 million on financials.
• Increased allowance for doubtful accounts by R$7.0 million due to expected defaults.

Arco Platform Limited, or Arco (Nasdaq: ARCE), today reported financial and operating results for the fourth quarter and full year ended December 31, 2020.

“While the year of 2020 presented an unprecedented global challenge, the Brazilian K-12 education sector has undergone an important technological transformation that will benefit Arco for a long time. While taking care of our team and being financially responsible, we were able to quickly evolve our solutions and go-to-market to better serve existing clients and attract new prospects. In 2021, we will continue evolving our winning factors of brand reputation, superior solutions and distribution capability to pursue our mission of delivering high-quality education at scale,” said Ari de Sá Neto, CEO and founder of Arco.

Full Year 2020 Results

• Net Revenue of R$1,001.7 million;
• Adjusted EBITDA of R$381.0 million;
• Adjusted Net Income of R$220.3 million;

Fourth Quarter 2020 Results

• Net Revenue of R$296.5 million;
• Adjusted EBITDA of R$125.9 million;
• Adjusted Net Income of R$67.4 million;

Key Messages

2020 results: solid FY Revenues with high EBITDA margin

• FY20 Net Revenue of R$1,001.7 million
• Above guidance FY20 adjusted EBITDA margin of 38.0%

2021: ACV of R$1,163 million with sustained high margin

• 2021 ACV of R$1,163 million, 21% growth versus 2020
• Recovery of COVID related revenue impact of ~R$96 million not considered in 2021 ACV
• FY21 adjusted EBITDA margin guidance of 35.5% to 37.5%

Recent acquisitions progressing as planned

• COC and Dom Bosco complement Core portfolio and reinforce Arco’s leadership
• Arco enters the supplemental test prep vertical with the acquisition of Me Salva!
• Escola da Inteligência, national leader in social-emotional, close to full integration

Priorities for 2021: growth, digital and ESG

• Leverage stronger winning factors to continue growing on large & untapped market
• Drive K-12 digitalization
• Disclose and further pursue ESG impact

Conference Call Information

Arco will discuss its fourth quarter and full year 2020 results today, March 31, 2021, via a conference call at 6:00 p.m. Eastern Time. To access the call, please dial: +1 412 717-9627, +1 844 204-8942, +55 11 3181-8565 or +55 11 4118-4632. An audio replay of the call will be available through April 6, 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 December 31, 2020, there was a total impact of R$14.6 million on the Company's condensed consolidated financial statements related to the COVID-19 pandemic mainly related to: (i) revision of the expected credit losses considering estimated increases in financial defaults, arising from renegotiations with customers and in unemployment rates in Brazil for the foreseeable future due COVID-19, which resulted in an increase of R$ 7.0 million in allowance for doubtful accounts as of December 31, 2020, (ii) additional expenses of R$ 7.7 million during the year ended December 31, 2020 related to IT, network infrastructure and an integrated teaching platform, as well as expenses to maintain protective measures such as cleaning and disinfecting the installations, distribution of protective masks and alcohol to employees and delivery of chairs, computers and work kits, (iii) increase in inventory reserves to accurately reflect the expected realization of inventories, which resulted in an incremental charge of R$287 thousand, and (iv) rent concessions, regarding leased buildings, that occurred as a direct consequence of the COVID-19 pandemic, amounting R$350 thousand.

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 December 31, 2020 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 Adjusted Free Cash Flow 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 Adjusted Free Cash Flow as free cash flow for the year (or period) plus (i) interest change in financial investments, (ii) M&A expenses, and (iii) non-recurring expenses.

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

 

Arco Platform Limited
Consolidated Statements of Financial Position
		December 30,			December 31,
(In thousands of Brazilian reais)		2020			2019
Assets
Current assets
Cash and cash equivalents		424,410			48,900
Financial investments		712,645			574,804
Trade receivables		415,282			329,428
Inventories		74,076			40,106
Recoverable taxes		19,304			15,612
Financial instruments from acquisition of interest		-			3,794
Related parties		9,970			1,298
Other assets		24,073			14,630
Total current assets		1,679,760			1,028,572
Non-current assets
Financial instruments from acquisition of interest		-			32,152
Deferred income tax		236,903			156,748
Recoverable taxes		1,121			6,613
Financial investments		10,349			4,690
Related parties		10,508			14,813
Other assets		22,239			14,399
Investments and interests in other entities		9,654			48,574
Property and equipment		26,087			21,328
Right-of-use assets		30,022			21,631
Intangible assets		2,549,637			1,811,903
Total non-current assets		2,896,520			2,132,851
Total assets		4,576,280			3,161,423
		December 30,			December 31,
(In thousands of Brazilian reais)		2020			2019
Liabilities
Current liabilities
Trade payables		40,925			34,521
Labor and social obligations		85,069			68,511
Taxes and contributions payable		9,676			7,508
Income taxes payable		44,731			52,038
Advances from customers		23,080			25,626
Lease liabilities		12,742			6,845
Loans and financing		107,706			98,561
Accounts payable to selling shareholders		656,014			117,959
Other liabilities		331			607
Total current liabilities		980,274			412,176
Non-current liabilities
Labor and social obligations		36,570			2,801
Lease liabilities		22,478			19,012
Loans and financing		203,413			-
Financial instruments from acquisition of interest		-			33,940
Provision for legal proceedings		1,366			251
Accounts payable to selling shareholders		1,130,501			1,098,273
Other liabilities		794			160
Total non-current liabilities		1,395,122			1,154,437
Equity
Share capital		11			11
Capital reserve		2,200,645			1,607,622
Share-based compensation reserve		80,817			84,546
Accumulated losses		(80,589	)		(97,369	)
Total equity		2,200,884			1,594,810
Total liabilities and equity		4,576,280			3,161,423

Arco Platform Limited
Consolidated Statements of Income
	Three months ended December 31,						Twelve months ended December 31,
(In thousands of Brazilian reais, except earnings per share)	2020			2019			2020			2019
Net revenue	296,537			247,644			1,001,710			572,837
Cost of sales	(66,305	)		(55,374	)		(221,130	)		(117,258	)
Gross profit	230,232			192,270			780,580			455,579
Operating expenses:
Selling expenses	(97,687	)		(76,691	)		(372,269	)		(199,780	)
General and administrative expenses	(71,528	)		(56,165	)		(270,558	)		(191,438	)
Other income (expense), net	(6,251	)		(8,738	)		(2,258	)		(6,287	)
Operating profit	54,766			50,676			135,495			58,074
Finance income	9,614			24,943			45,211			72,047
Finance costs	(28,110	)		(37,032	)		(142,013	)		(170,855	)
Finance result	(18,496	)		(12,089	)		(96,802	)		(98,808	)
Share of profit (loss) of equity-accounted investees	8,450			153			409			(1,800	)
Profit before income taxes	44,720			38,740			39,102			(42,534	)
Income taxes - income (expense)
Current	(18,538	)		(14,596	)		(87,379	)		(46,850	)
Deferred	(1,979	)		18,371			65,057			79,953
Total income taxes – income (expense)	(20,517	)		3,775			(22,322	)		33,103
Profit (loss) for the period	24,203			42,515			16,780			(9,431	)
Basic earnings per share – in Brazilian reais
Class A	0.42			0.79			0.30			(0.18	)
Class B	0.42			0.79			0.30			(0.18	)
Diluted earnings per share – in Brazilian reais
Class A	0.42			0.78			0.30			(0.18	)
Class B	0.42			0.78			0.30			(0.18	)
Weighted-average shares used to compute net income per share:
Basic	57,588			53,812			55,758			51,552
Diluted	57,749			54,149			55,919			51,552

Arco Platform Limited
Consolidated Statements of Cash Flows
	Three months ended December 31,						Twelve months ended December 31,
(In thousands of Brazilian reais)	2020			2019			2020			2019
Operating activities
Profit (loss) before income taxes for the period	44,720			38,740			39,102			(42,534	)
Adjustments to reconcile profit (loss) before income taxes
Depreciation and amortization	37,692			23,865			127,455			48,314
Inventory reserves	4,114			4,273			7,453			8,476
Allowance for doubtful accounts	6,451			7,903			34,684			17,392
Loss on sale/disposal of property and equipment and intangible assets disposed	2,753			2,906			4,277			3,499
Fair value change in financial instruments from acquisition interests	(124	)		(10,822	)		(562	)		(473	)
Changes in accounts payable to selling shareholders	458			7,622			20,330			89,403
Share of (profit) loss of equity-accounted investees	(8,450	)		(153	)		(409	)		1,800
Share-based compensation plan	21,024			612			36,333			33,043
Accrued interest on loans and financing	3,810			1,002			19,862			1,002
Interest accretion on acquisition liability	18,389			17,496			68,379			42,206
Income from non-cash equivalents	(3,532	)		(45,797	)		(13,388	)		(45,797	)
Interest on lease liabilities	976			258			3,036			1,489
Provision for legal proceedings	(7	)		20			587			120
Provision for payroll taxes (restricted stock units)	(1,831	)		(15,066	)		(2,997	)		8,333
Foreign exchange income (loss)	183			571			(188	)		555
Changes in fair value of step acquisitions	3,555			(3,708	)		307			(3,708	)
Gain on sale of investment	-			(34	)		-			(3,286	)
Other financial cost/revenue, net	(466	)		(881	)		(2,315	)		(2,362	)
	129,715			28,807			341,946			157,472
Changes in assets and liabilities
Trade receivables	(148,908	)		(176,193	)		(108,087	)		(136,407	)
Inventories	(10,109	)		(3,669	)		(18,161	)		(14,637	)
Recoverable taxes	7,970			(944	)		3,152			(8,494	)
Other assets	(6,768	)		(9,376	)		(14,087	)		(16,035	)
Trade payables	7,677			(37	)		3,886			8,455
Labor and social obligations	(37,593	)		(2,390	)		7,239			15,950
Taxes and contributions payable	(8,650	)		2,491			1,147			1,951
Advances from customers	17,292			22,334			(2,981	)		19,997
Other liabilities	(533	)		112			(1,420	)		(268	)
Cash (used in) generated from operations	(49,907	)		(138,865	)		212,634			27,984
Income taxes paid	(4,641	)		(6,107	)		(95,053	)		(34,747	)
Interest paid on lease liabilities	(914	)		(455	)		(2,100	)		(852	)
Interest paid on accounts payable to selling shareholders	(140	)		-			(187	)		-
Interest paid on loans and financing	(3,556	)		-			(13,423	)		-

FAQ

What were Arco's net revenues for FY 2020?

Arco reported net revenues of R$1,001.7 million for FY 2020.

What is Arco's adjusted EBITDA margin for FY 2020?

The adjusted EBITDA margin for FY 2020 was 38.0%.

What is the projected annual contract value for Arco in 2021?

Arco projects an annual contract value of R$1,163 million for 2021.

What impact did COVID-19 have on Arco's financials?

The COVID-19 pandemic had a total impact of R$14.6 million on Arco's financial statements.

How did Arco's fourth quarter results perform?

In Q4 2020, Arco achieved net revenues of R$296.5 million.