Arco Reports Second Quarter 2023 Results

Rhea-AI Summary

Arco Platform Limited (Nasdaq: ARCE) reported financial and operating results for Q2 2023. Net revenue increased by 14.3% YoY to R$471.0 million, with Core solutions at R$371.9 million (+1.2% YoY) and Supplemental solutions at R$23.8 million (-46.9% YoY). Financial & Management Solutions (F&M) posted a significant 104.3% YoY growth with R$75.3 million. Adjusted EBITDA was R$83.5 million (-24.6% YoY), and adjusted net income was R$78.1 million. Cash from operations reached R$365.5 million in 1H23, and free cash flow to firm was R$252.7 million. The company maintained its 2023 guidance for EBITDA margin between 36.5% and 38.5%.

Positive

• Net revenue increased by 14.3% YoY to R$471.0 million
• Financial & Management Solutions (F&M) posted a significant 104.3% YoY growth with R$75.3 million
• Cash from operations reached R$365.5 million in 1H23
• Free cash flow to firm was R$252.7 million
• The company maintained its 2023 guidance for EBITDA margin between 36.5% and 38.5%

Negative

• None.

Healthy cash generation trend continues in the 2023 cycle

Financial & Management Solutions post strong growth with margin gains

SÃO PAULO--(BUSINESS WIRE)-- Arco Platform Limited, or Arco or the Company (Nasdaq: ARCE), today reported financial and operating results for the second quarter ended June 30, 2023.

2Q23

1H23

Consolidated

Consolidated

Net revenue

Cash gross profit

Net revenue

Cash gross profit

R$471.0M

R$330.4M

R$1,005.9M

R$700.6M

+14.3% YoY

+5.8% YoY

+19.4% YoY

+7.5% YoY

Adj. EBITDA

Adj. net income

Adj. EBITDA

Adj. net income

R$83.5M

R$78.1M

R$194.2M

R$36.1M

-24.6% YoY

n/a

-24.6% YoY

347.3%

2Q23

CTD23

Pedagogical business

Pedagogical business

Net revenue

Net revenue

R$395.7M

R$1,532.6M

-4.0% YoY

+18.0% YoY

Adj. EBITDA

Adj. EBITDA

R$85.3M

R$556.7M

-22.9% YoY

+16.3% YoY

Consolidated 2Q23 and 1H23 figures include full results of isaac, our most recent acquisition, that is reported within financial & management segment. Therefore, for an accurate comparison year over year we recommend investors to reach pedagogical business figures (core & supplemental solutions).

Note: Please see adjusted EBITDA reconciliation and adjusted Net Income reconciliation on page 15.

2Q23 & 1H23 Highlights

• Net revenue for the second quarter was R$471.0 million, a 14.3% YoY increase, with Core solutions totaling R$371.9 million (+1.2% YoY), Supplemental solutions totaling R$23.8 million (-46.9% YoY due to a different distribution of the ACV recognition per quarter relative to last year) and financial & management solutions (F&M) posting a significant 104.3% YoY growth (versus 2Q22 pro-forma figures, prior to isaac’s acquisition by Arco) with R$ 75.3 million.
  
  Net revenue for pedagogical business (Core and Supplemental solutions) decreased 4.0% YoY in the second quarter due to deliveries’ seasonality (20.5% ACV recognition in 2Q23 vs. 26.4% in 2Q22) and part of June deliveries deferred to July, impacting 2Q23 ACV recognition in approximately R$ 36 million. Cycle-to-date figures (October through June) reaffirm the solid ACV growth expected for the 2023 cycle, with Core totaling R$1,210.9 million (+17.0% YoY) and Supplemental totaling R$331.6 million (+23.6% YoY).
  
  In June 2023, Arco reached 79.4% of its 2023 ACV recognized cycle-to-date vs. 83.2% in June 2022. We recommend that investors analyze our P&L performance on a cycle-to-date basis, for a more accurate assessment of the business underlying profitability trends.
  

• Cash gross margin (gross margin excluding depreciation and amortization) on a consolidated basis was 70.2% in 2Q23 (versus 75.8% in 2Q22) and 69.7%, in 1H23 (versus 77.4% in 1H22).
  
  Pedagogical business cash gross margin was 74.9% in 2Q23 (versus 75.8% in 2Q22) and 74.7% in CTD23 (versus 79.3% in CTD22). 1H23 printing costs were affected by the previously discussed price increases in the paper supply chain in the end of 2022 (consequence of pulp and paper commodity prices hike), as printing contracts are negotiated in advance of the collections. We continue to roll out cost reduction initiatives, such as the centralization of our supply operations to capture scale gains, which we expected to offset and outpace such recent and punctual external cost pressures and expect positive outcomes on 2H23 and, specially, in the 2024 cycle.
  

• In 2Q23, consolidated selling expenses excluding depreciation and amortization totaled R$177.3 million (+20.3% YoY). For 1H23, consolidated selling expenses excluding depreciation and amortization totaled R$338.6 (+18.7 YoY).
  
  Pedagogical business posted R$160.0 million in selling expenses in 2Q23 (+8.6% YoY). Cycle-to-date selling expenses for the pedagogical business reached R$465.9 million, up 15.9% YoY and representing 30.4% of revenues in the cycle, vs 31.0% in the same period 2022.
  

• General and administrative expenses (G&A) figures excluding depreciation and amortization totaled R$115.7 million in 2Q23 (+75.4% YoY), an increase driven by the consolidation of isaac structure. For the first six months of 2023, G&A expenses excluding depreciation and amortization were R$267.1 (+92.7% YoY) mostly related to isaac operations (teams & tech).
  
  Pedagogical business G&A expenses excluding depreciation and amortization reached R$92.1 million (+39.6% YoY versus 2Q22). Cycle-to-date G&A for the pedagogical business increased 17.7% YoY, representing 16.0% of revenues in the 2023 cycle, vs 16.1% in the same period 2022.
  

• Consolidated adjusted EBITDA was R$83.5 million in 2Q23 (-24.6% YoY), with an adjusted EBITDA margin of 17.7%. In 1H23, consolidated adjusted EBITDA was R$194.2 (-24.6% YoY), with an adjusted EBITDA margin of 19.3% (vs. 30.6% for the same period in 2022).
  
  Pedagogical business delivered an adjusted EBITDA of R$85.3 million (-22.9% YoY) with an adjusted EBITDA margin of 21.6% versus 26.9% in 2Q23, pressured by the lower revenue recognition seasonality. In the 2023 cycle-to-date, adjusted EBITDA margin was 36.3% for the pedagogical business versus 36.8% CTD 22. As previously mentioned, atypical deliveries deferring to July not only impacted revenue recognition but also Adjusted EBITDA cycle to date. For a better comparable analysis cycle to date, we have included July results. In the period between October and July, 2023 cycle posted a 23% adjusted EBITDA growth, delivering 36.3% Adjusted EBITDA margin, versus 34.8% margin in the 2022 cycle until July. We reiterate our 2023 guidance for EBITDA margin between 36.5% and 38.5%.
  
  F&M vertical posted an adjusted EBITDA of R$(1.8) million in 2Q23, versus a pro-forma R$(32.5) million in 2Q22 (prior to the acquisition by Arco), representing an EBITDA margin improvement of 85.8 p.p., from (88.3)% in 2Q22 to (2.4%) in 2Q23. In 1H23, F&M posted an Adjusted EBITDA margin of (12.2)% versus a pro forma (92.4)% margin in the first half of 2022.
  

• Consolidated adjusted net income (loss) in 2Q23 was R$78.1 million, with an adjusted net margin of 16.6% (versus -5.6% in 2Q22). For 1H23, consolidated adjusted net income totalized R$36.1 million, with an adjusted net margin of 3.6 % (versus 1.0% in 1H22).
  

• Consolidated cash from operations in the 1H23 reached R$365.5 million (up from R$294.3 million in 1H22). For the first half of the year, free cash flow to firm (managerial) was R$252.7 million, a R$96.1 million improvement compared to the R$156.6 million free cash flow to firm of 1H22. After interest payment, Arco generated R$ 47.7 million of free cash flow (representing 4.7% of net revenues) in the first half of 2023 (vs. R$85.4 million in 1H22, representing 10.1% of net revenues).

Free cash flow to firm (managerial) Consolidated	1H23		1H22		% of net revenue 1H23		% of net revenue 1H22		YoY (% of net revenues)
Adjusted EBITDA	194.2		257.3		19.3	%	30.6	%	-11.3 p.p
(+/-) Non-cash adjustments	60.1		(15.6	)	6.0	%	-1.9	%	+7.8 p.p
(+/-) Working capital	111.2		52.6		11.1	%	6.2	%	+4.8 p.p
(-) Income taxes paid	(33.4	)	(47.5	)	-3.3	%	-5.6	%	+2.3p.p
(-) CAPEX¹	(79.4	)	(90.2	)	-7.9	%	-10.7	%	+2.8p.p
Free cash flow to firm (managerial)	252.7		156.6		25.1	%	18.6	%	+6.5p.p
1) Excludes R$14.2 million related to M&A payments (PGS’ and Mentes’ acquisition).

Pedagogical business free cash flow to firm keeps the pace from previous quarter, delivering significant improvement year over year. Free cash flow to firm (managerial) cycle-to-date was R$205.2 million, R$285.9.0 million above the R$(80.7) million free cash flow to firm of CTD 2022, showing important improvements across cash flow drivers, including working capital, capex and taxes.

Free cash flow to firm (managerial) Pedagogical	CTD23		CTD22		% of net revenue CTD23		% of net revenue CTD22		YoY (% of net revenues)
Adjusted EBITDA	556.7		478.5		36.3	%	36.8	%	(0.5) p.p.
(+/-) Non-cash adjustments	71.0		(3.6	)	4.6	%	-0.3	%	+4.9 p.p.
(+/-) Working capital	(283.2	)	(318.9	)	-18.5	%	-24.6	%	+6.1 p.p.
(-) Income taxes paid	(36.0	)	(49.4	)	-2.3	%	-3.8	%	+1.5 p.p
(-) CAPEX¹	(103.3	)	(187.4	)	-6.7	%	-14.4	%	+7.7 p.p.
Free cash flow to firm (managerial)	205.2		(80.7	)	13.4	%	-6.2	%	+19.6 p.p.
1) Excludes R$14.2 million related to M&A payments (PGS’ and Mentes’ acquisition)

To obtain better price conditions for the 2024 cycle, we anticipated the paper acquisition in 2Q23 versus previous years (R$58M as of June), increasing inventory levels earlier in the cycle. To maintain comparability between quarters, we have disclosed a pro-forma days of inventory, adjusted by the paper acquisition.

• Pedagogical solutions days of sales outstanding (DSO) in 2Q23 was 142 days vs 141 days in the 2Q22. Delinquency figures for pedagogical business continue posting YoY improvement and ended 2Q23 at 4.6% from 5.6% in 2Q22 and 5.3% in 1Q23, driven by our collection initiatives.

Provision for expected credit losses Pedagogical business (R$M)	2Q23		2Q22		YoY		1Q23		QoQ
Allowance for doubtful accounts	2.1		0.4		425.0	%	5.5		-61.8	%
% of net revenue	0.4	%	0.1	%	0.3 p.p.		1.2	%	-0.8 p.p.

Days of sales outstanding	June. 30, 2023		June. 30, 2022		YoY		June.30 2023 (pedagogical)		June 30, 2022		YoY
Trade receivables (R$M)	983.1		687.6		43.0	%	794.4		687.6		15.5	%
(-) Allowance for doubtful accounts	(151.7	)	(79.7	)	90.2	%	(91.8	)	(79.7	)	15.1	%
Trade receivables, net (R$M)	831.4		607.8		36.8	%	702.6		607.8		15.6	%
Net revenue LTM pro-forma¹	1,939.1		1,568.9		23.6	%	1,801.3		1,568.9		14.8	%
Adjusted DSO	156		141		10.6	%	142		141		0.7	%
1) Calculated as net revenues for the last twelve months (for 2022 added to the pro forma revenues from businesses acquired in the period to accurately reflect the Company’s operations).

CAPEX in 2Q23 was R$42.4 million, or 9.0% of net revenue (versus 10.5% of net revenue in 2Q22, when excluding R$ 8.7 million from PGS and Mentes acquisition). Pedagogical business CAPEX was R$ 30.1 million, or 7.6% of net revenue (versus 10.5% of net revenue in 2Q22). In the 2023 cycle to date, CAPEX reached 6.7% of revenues vs 14.4% in the 2022 cycle so far and has contributed to significant expansion on the Adj. EBITDA minus CAPEX metric that reached 29.6% cycle to date in June, 2023, versus 22.4% cycle to date 2022.

CAPEX (R$M) - Consolidated	2Q23		2Q22	YoY		1Q23	QoQ
Acquisition of intangible assets¹	39.2		41.5	-6	%	35.4	11	%
Educational platform - content development	(0.3	)	4.5	-126	%	0.3	-485	%
Educational platform - platforms & tech	14.4		17.9	-20	%	17.6	-18	%
Software	21.7		16.5	32	%	15.7	38	%
Copyrights and others	3.3		2.6	61	%	1.8	133	%
Acquisition of PP&E	3.2		1.7	89	%	1.6	101	%
TOTAL¹	42.4		43.2	-2	%	37.0	15	%
1) For 2022 excludes R$14.2 million related to M&A payments (PGS’ and Mentes’ acquisition).

• Arco’s corporate restructuring is ongoing and progressing as planned. Future incorporation processes include Escola da Inteligência (2023), Pleno (2023) and SAE Digital (2024). As we keep incorporating other businesses into CBE, we expect to capture additional tax benefits and therefore further reduce our effective tax rate, currently at 8.4% in 1H23 (versus 10.3% in 1H22).

Intangible assets - net balances (R$M)	June 30, 2023	June 30, 2022	YoY		Mar. 31, 2023	QoQ
Business Combination	3,523.4	2,949.9	19.4	%	3,522.4	0.0	%
Trademarks	476.5	488.8	-2.5	%	486.7	-2.1	%
Customer relationships	226.4	255.8	-11.5	%	236.6	-4.2	%
Educational system	188.3	224.6	-16.2	%	198.0	-4.9	%
Softwares	3.5	8.6	-59.3	%	14.3	-75.5	%
Educational platform	5.4	4.4	22.7	%	5.1	5.9	%
Others¹	13.7	16.8	-18.5	%	17.1	19.9	%
Goodwill	2,609.6	1,950.9	33.8	%	2,564,9	1.7	%
Operational	340.1	288.1	18.0	%	329.6	3.2	%
Educational platform²	166.9	200.1	-16.6	%	179.4	-7.0	%
Softwares	143.5	77.1	86.1	%	124.2	15.5	%
Copyrights	27.3	10.8	152.8	%	26.0	5.0	%
Customer relationships	-	0.1	-100.0	%	-	n/a
Others¹	2.4	-	n/a		-	n/a
TOTAL	3,863.5	3,253.9	19.3	%	3,852.0	0.3	%
1) Non-compete agreements and rights on contracts. 2) Includes content development in progress.

Amortization of intangible assets (R$M)	2Q23		2Q22		YoY		1Q23		QoQ
Business Combination	(110.0	)	(73.5	)	49.7	%	(80.5	)	36.7	%
Trademarks	(16.8	)	(8.0	)	110.0	%	(7.9	)	112.7.%
Customer relationships	(19.3	)	(9.4	)	105.3	%	(10.8	)	78.7	%
Educational system	(17.6	)	(9.4	)	87.2	%	(8.8	)	100.0	%
Softwares	(2.6	)	(0.7	)	271.4	%	(1.2	)	116.0	%
Educational platform	(0.5	)	(0.2	)	150.0	%	(0.2	)	150.0	%
Others¹	(3.1	)	(1.5	)	106.7	%	(1.5	)	106.7	%
Goodwill	(50.1	)	(44.3	)	-100.0	%	(50.1	)	-0.1	%
Operational	(73.1	)	(29.1	)	151..2%		(35.7	)	104.7	%
Educational platform²	(50.1	)	(21.7	)	131.0	%	(27.4	)	82.9	%
Softwares	(17.8	)	(5.4	)	229.7	%	(6.2	)	187.1	%
Copyrights	(4.3	)	(1.8	)	140.9	%	(2.1	)	106.5	%
Customer relationships	-		(0.2	)	-85.5	%	-		n/a
Others¹	0.8		-		n/a		-		n/a
TOTAL	(183.1	)	(102.5	)	78.7	%	(116.2	)	57.6	%
1) Non-compete agreements and rights on contracts. 2) Includes content development in progress.

Amortization of intangible assets (R$M)	Impacts P&L	Originates tax benefit	Amortization with tax benefit in 2Q23²
			Amortization		Tax benefit	Impact on net income
Business Combination			(103.6	)	19.9	(83.7	)
Trademarks	Yes	Yes²	(8.9	)	0.8	(8.1	)
Customer relationships	Yes	Yes²	(9.4	)	1.0	(8.4	)
Educational system	Yes	Yes²	(8.9	)	0.9	(7.9	)
Educational platform	Yes	Yes²	(25.1	)	-	(25.1	)
Others¹	Yes	Yes²	(1.2	)	0.1	(1.1	)
Goodwill	No	Yes²	(50.1	)	17.1	(33.1	)
Operational	Yes	Yes	(73.1	)	24.8	(48.2	)
TOTAL			(176.7	)	44.7	(131.9	)
1) Non-compete agreements and rights on contracts. 2) Amortizations are tax deductible only after the incorporation of the acquired business.

Amortization of intangible assets from business combination that generate tax benefit – breakdown by type (R$M)	Businesses with current tax benefit					Undefined²
	2023	2024	2025	2026+
Trademarks	27	27	27	318		65
Customer relationships	25	25	25	59		111
Educational system	27	27	27	106		32
Software license	-	-	-	-		10
Rights on contracts	1	1	1	2		1
Others	2	2	1	1		8
Goodwill	237	231	227	761		343
Total	319	313	308	1.247		571
Maximum tax benefit	108	106	105	424		194

Amortization of intangible assets from business combination that generate tax benefit – breakdown by solutions (R$M)	Businesses with current tax benefit					Undefined²
	2023	2024	2025	2026+
Geekie	42	42	42	279		-
NAVE	9	9	9	11		-
P2D	89	89	89	364		-
Positivo, Conquista, PES English	170	170	168	593		-
Other Companies	9	3	-	-		-
Acquired companies not yet incorporated	N/A	N/A	N/A	N/A		571
Total	319	313	308	1.247		571
Maximum tax benefit	108	106	105	424		194

• Arco’s cash and cash equivalents plus financial investments position as of June 30^th, 2023 was R$549.9 million, while financial debt¹ and accounts payable to selling shareholders were R$2,451.9 million, resulting in a net debt of R$1,902.0 million.
  
  1) Excludes Convertible notes: considers the conversion into equity of the convertible senior notes with no future disbursement of principal (US$150 M) issued on Nov 30, 2021. These notes mature in 7 years, on Nov 15, 2028, and bear interest at 8% per year fixed in Brazilian reais (R$66 M per year). 2) Cash position refers to cash and cash equivalents plus financial investments (short and long term) plus the New Debentures and FIDIC (issued in 3Q23). 3) Amount subject to an arbitration process. Please reference the Financial Statements as of June 30th, 2023, for additional details..
  

• In July, Arco concluded the issuance of 550,000 non-convertible debentures, each at a par value of R$1,000 (the “Debentures”), totaling R$550 million (approximately US$115 million), for public distribution in Brazil with restricted placement efforts to institutional investors (the “Offering”). The Offering is part of Arco’s balance sheet management strategy to strengthen its cash position, and to extend its debt maturity profile. The Debentures mature on July 12, 2028, with the principal to be amortized in three equal instalments payable on July 12, 2026, July 12, 2027, and July 12, 2028. The Debentures bear interest at 100% of the CDI interest rate (the average of interbank overnight rates in Brazil, based on 252 business days) plus 2.60% per annum, payable semi-annually on January 12 and July 12, and are guaranteed by Arco Educação S.A.
  

• In August, isaac announced the first K-12 dedicated FIDC (Receivables-backed investment fund). The raised amount totaled R$112 million with amortization in 2025. This allows isaac to raise capital from third parties to fund its revenue guarantee product working capital. The fundraising was oversubscribed, despite the lack of track-record, which we expect to reduce cost of capital significantly as the operation matures.
  

• In August 10, Arco announced that entered into agreement to go private. Please refer to press-release from August 10 and 6K filled on August 11 for more details (available at https://investor.arcoplatform.com/).

Conference Call Information

Arco will discuss its first quarter 2023 results today, August 31, 2023, via a conference call at 5 p.m. Eastern Time (6 p.m. Brasilia Time). To access the call, please dial: +1 (412) 717-9627, +1 (844) 204-8942 or +55 (11) 4090-1621. For enhanced audio connection investors may connect through Web Phone (access code: 7636515).

An audio replay of the call will be available through September 6th, 2023, by dialing +55 (11) 4118-5151 and entering access code 219191#. 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/.

About Arco Platform Limited (Nasdaq: ARCE)

Arco has empowered millions 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-GAAP financial measures including Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income (Loss), Adjusted Net Income (Loss) Margin, Taxable Income Reconciliation and Managerial 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 press release 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 - Pedagogical

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.

Key Business Metrics – Financial & Management (“revenue guarantee” solution)

Contracted schools are the primary operating metric and represent the total number of schools with active contracts with isaac. Schools sign contracts for 1 year (or longer) with isaac to guarantee tuition from all of the enrolled students. After signing and onboarding a partner school, services can be initiated at any month of the year.

Total payment value (TPV) indicates the full amount to be transacted by isaac to contracted schools. It is calculated by the total tuition fee owed by parents to their schools.

Take rate is the primary revenue driver and is a percentage of TPV agreed upon contract signing. It is priced upon school sign-up based on school historical delinquency rate, risk profile and operating costs. It may be renegotiated or adjusted based on the contract’s performance.

Annual recurring revenue (ARR) is the contracted annualized revenue for a given month. Annual contracts and recurring nature make ARR a good proxy for growth, given isaac’s high growth profile, mitigating seasonal and onboarding effects.

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, Managerial Free Cash Flow and Reconciliation of Taxable Income and 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 and restricted stock units, plus provision for payroll taxes (restricted stock units), plus/minus M&A expenses (expenses related to acquisitions, and legal services mainly due to International School arbitration), minus other changes to equity accounted on investees (which refers to gains related to capital contribution from others on investees leading to an increase in equity of the investee) and plus non-recurring expenses (expenses related to our organizational restructuring in such as consulting services expenses and workforce reduction expenses). We calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by Net Revenue.

We calculate Adjusted Net Income (Loss) as profit (loss) for the year (or period), plus share-based compensation plan, restricted stock units and related payroll taxes (restricted stock units), plus M&A expenses (expenses related to acquisitions, and legal services mainly due to International School arbitration), minus other changes to equity accounted on investees (which refers to gains related to capital contribution from others on investees leading to an increase in equity of the investee), plus non-recurring expenses (expenses related to our organizational restructuring in such as consulting services expenses and workforce reduction expenses), plus amortization of intangible assets from business combinations (which refers to the amortization of the following intangible assets from business combinations: (i) trademarks, (ii) customer relationships, (iii) educational system, (iv) software resulting from acquisitions, (v) educational platform, (vi) non-compete agreement and (vii) rights on contracts), plus/minus changes in accounts payable to selling shareholders (which refers to changes in fair value of contingent consideration and accounts payable to selling shareholders—finance costs), plus interest expenses, net (which refers to interest expenses related to accounts payable to selling shareholders from business combinations adjusted by fair value), plus/minus non-cash adjustments related to derivatives and convertible notes (which Refers to changes in fair value of derivative instruments from put option to convert senior notes) and plus/minus changes in current and deferred tax recognized in statements of income applied to all adjustments to net income (loss), which refers to tax effects of changes in deferred tax assets and liabilities recognized in profit or loss corresponding to financial instruments from acquisition of interests, tax benefit from tax deductible goodwill, share-based compensation and amortization of intangible assets).

We calculate Managerial Free Cash Flow as Net Cash Flows from Operating activities, less acquisition of property and equipment, less acquisition of intangible assets, adjusted by M&A-related payments that may be classified as CAPEX or as payment of contingent consideration. 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 year (or 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 (Loss), Adjusted Net Income (Loss) Margin and Managerial 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 (Loss), Adjusted Net Income (Loss) Margin, Managerial 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.

Arco Platform Limited
Interim condensed consolidated statements of financial position
		June 30,			December 31,
(In thousands of Brazilian reais)		2023			2022
Assets		(unaudited)
Current assets
Cash and cash equivalents		400,326			216,360
Financial investments		117,131			391,785
Trade receivables		831,428			856,887
Inventories		283,723			254,060
Recoverable taxes		71,173			67,166
Related parties		-			3,956
Other assets		136,376			82,515
Total current assets		1,840,157			1,872,729
Non-current assets
Financial investments		32,441			30,861
Recoverable taxes		9,189			11,108
Deferred income tax		484,919			337,267
Other assets		75,315			78,038
Investments and interests in other entities		22,820			111,631
Property and equipment		53,362			59,031
Right-of-use assets		60,152			68,696
Intangible assets		3,863,557			3,184,047
Total non-current assets		4,601,755			3,880,679
Total assets		6,441,912			5,753,408
Liabilities
Current liabilities
Trade payables		236,346			182,748
Labor and social obligations		138,718			89,044
Lease liabilities		33,584			34,329
Loans and financing		99,809			102,873
Derivative financial instruments		6,946			3,693
Taxes and contributions payable		10,393			9,488
Income taxes payable		11,946			28,576
Advances from customers		111,768			16,079
Accounts payable to selling shareholders		808,331			1,060,746
Other liabilities		6,989			6,013
Total current liabilities		1,464,830			1,533,589
Non-current liabilities
Labor and social obligations		4,652			1,451
Lease liabilities		35,836			42,576
Loans and financing		1,788,802			1,833,956
Derivative financial instruments		63,590			110,154
Provision for legal proceedings		2,369			3,174
Accounts payable to selling shareholders		349,696			330,457
Other liabilities		217			621
Total non-current liabilities		2,245,162			2,322,389
Equity
Share capital		14			11
Capital reserve		2,763,402			2,009,799
Treasury shares		-			(8,205	)
Share-based compensation reserve		151,101			95,008
Accumulated losses		(182,597	)		(199,183	)
Total equity		2,731,920			1,897,430
Total liabilities and equity		6,441,912			5,753,408

Arco Platform Limited
Interim condensed consolidated statements of income
	Three-month period ended June 30,						Six-month period ended June 30,
(In thousands of Brazilian reais, except earnings per share)	2023			2022			2023			2022
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenue	470,962			412,137			1,005,868			842,174
Cost of sales	(178,973	)		(133,054	)		(394,707	)		(249,632	)
Gross profit	291,989			279,083			611,161			592,542
Operating expenses:
Selling expenses	(206,332	)		(174,439	)		(397,503	)		(338,792	)
General and administrative expenses	(129,029	)		(80,037	)		(292,711	)		(166,137	)
Other (expense) income, net	3,766			1,676			159,953			19,070
Operating (loss) profit	(39,606	)		26,283			80,900			106,683
Finance income	78,221			214,382			181,152			373,615
Finance costs	(147,622	)		(238,485	)		(309,524	)		(363,586	)
Finance result	(69,401	)		(24,103	)		(128,372	)		10,029
Share of loss of equity-accounted investees	(591	)		(14,294	)		(1,443	)		(19,936	)
(Loss) profit before income taxes	(109,598	)		(12,114	)		(48,915	)		96,776
Income taxes - income (expense)
Current	416			8,038			(14,669	)		(13,809	)
Deferred	35,146			(9,265	)		80,170			6,351
Total income taxes – income (expense)	35,562			(1,227	)		65,501			(7,458	)
Net (loss) profit for the period	(74,036	)		(13,341	)		16,586			89,318
Basic (loss) earnings per share – in Brazilian reais
Class A	(1.12	)		(0.24	)		0.25			1.59
Class B	(1.12	)		(0.24	)		0.25			1.59
Diluted (loss) earnings per share – in Brazilian reais
Class A	(1.19	)		(0.24	)		(0.91	)		(1.45	)
Class B	(1.12	)		(0.24	)		0.25			1.59
Weighted-average shares used to compute net (loss) profit per share:
Basic	66,242			55,917			66,012			56,008
Diluted	71,888			61,089			71,678			61,680

Arco Platform Limited
Interim condensed consolidated statements of cash flows
	Three-month period ended June 30,						Six-month period ended June 30,
(In thousands of Brazilian reais)	2023			2022			2023				2022
	(unaudited)			(unaudited)			(unaudited)				(unaudited)
Operating activities
(Loss) profit before income taxes	(109,598	)		(12,114	)		(48,915		)		96,776
Adjustments to reconcile (loss) profit before income taxes to cash from operations
Depreciation and amortization	80,779			74,302			173,955				140,083
Inventory allowances	14,521			10,940			23,885				13,339
Provision (reversal) for expected credit losses	36,351			(372	)		66,428				(6,603	)
Loss (profit) on sale/disposal of property and equipment and intangible	502			(114	)		1,044				(192	)
Fair value change in derivative financial instruments	2,920			(84,320	)		(40,874		)		(95,973	)
Fair value adjustment in accounts payable to selling shareholders	8,695			(33,348	)		26,296				(26,320	)
Share of loss of equity-accounted investees	591			14,294			1,443				19,936
Share-based compensation plan	20,306			2,851			41,130				9,046
Accrued interest on loans and financing	67,262			56,774			137,124				105,544
Interest accretion on accounts payable to selling shareholders	39,700			45,744			82,522				89,674
Interest from financial investments	(2,076	)		(17,793	)		(3,406		)		(38,353	)
Interest on lease liabilities	2,309			1,126			5,233				2,287
(Reversal) provision for legal proceedings	22			11			(821		)		106
Provision for payroll taxes (restricted stock units)	5,560			177			2,427				(3,083	)
Foreign exchange effects, net	(32,310	)		61,644			(48,501		)		(43,662	)
Fair value of previously held interest in associate	(13,863	)		-			(170,277		)		-
Gain on changes of interest of investment	-			(1,345	)		-				(17,758	)
Loss on sale of investment	7,439			-			7,439				-
Other financial expense (income), net	(536	)		(2,205	)		(1,760		)		(3,128	)
	128,574			116,252			254,372				241,719
Changes in assets and liabilities
Trade receivables	148,292			202,582			60,511				(4,344	)
Inventories	(75,779	)		(29,786	)		(60,460		)		(27,671	)
Recoverable taxes	1,812			5,266			8,153				8,448
Other assets	(10,508	)		(27,067	)		(39,756		)		(35,077	)
Trade payables	18,296			22,182			42,909				51,637
Labor and social obligations	1,683			11,630			25,265				25,745
Taxes and contributions payable	(8,938	)		228			(1,584		)		(978	)
Advances from customers	(128,437	)		(109,529	)		78,783				25,641
Other liabilities	14,720			(196	)		(2,654		)		9,228
Cash from operations	89,715			191,562			365,539				294,348
Income taxes paid	(2,222	)		(4,792	)		(33,387		)		(47,474	)
Interest paid on lease liabilities	(1,859	)		(1,039	)		(4,223		)		(2,346	)
Interest paid on accounts payable to selling shareholders	(73,341	)		(36,536	)		(73,568		)		(36,914	)
Interest paid on loans and financing	(16,646	)		(16,412	)		(127,239		)		(31,992	)
Payments for contingent consideration	(19,620	)		(70,541	)		(37,221		)		(70,541	)
Payment for stock options	-			(75,578	)		-				(75,578	)
Net cash flows (used in) from operating activities	(23,973	)		(13,336	)		89,901				29,503
Investing activities
Acquisition of property and equipment	(3,174	)		(1,726	)		(4,818		)		(8,398	)
Payment of investments and interests in other entities	-			-			(20		)		(18	)
Cash attributed from acquisition of subsidiaries	-			-			164,252				-
Sale of interest in subsidiary, net of cash sold	452			-			452				-
Acquisition of intangible assets	(39,200	)		(50,241	)		(74,596		)		(96,053	)
Purchase of financial investments	(74,674	)		(362,091	)		(184,466		)		(529,891	)
Redemption of financial investments	69,334			729,613			451,639				1,152,356
Interest received from financial investments	1,641			14,666			9,307				18,428
Loans to related parties	-			(4,812	)		-				(4,812	)
Net cash flows (used in) from investing activities	(45,621	)		325,409			361,750				531,612

Financing activities
Purchase of treasury shares	-			(16,893	)		-			(51,616	)
Payment of lease liabilities	(8,896	)		(5,712	)		(18,900	)		(12,005	)
Payment of accounts payable to selling shareholders	(209,316	)		(119,293	)		(236,474	)		(121,270	)
Loans and financing payments	(5,899	)		(5,469	)		(11,854	)		(211,329	)
Net cash flows used in financing activities	(224,111	)		(147,367	)		(267,228	)		(396,220	)
Foreign exchange effects on cash and cash equivalents	123			1,743			(457	)		(285	)
(Decrease) increase in cash and cash equivalents	(293,582	)		166,449			183,966			164,610
Cash and cash equivalents
At the beginning of the period	693,908			209,304			216,360			211,143
At the end of the period	400,326			375,753			400,326			375,753
(Decrease) increase in cash and cash equivalents	(293,582	)		166,449			183,966			164,610

Arco Platform Limited
Reconciliation of Non-GAAP Measures
Reconciliation of Adjusted EBITDA
		Three-month period ended June 30,						Six-month period ended June 30,
(In thousands of Brazilian reais)		2023			2022			2023			2022
		(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net (loss) profit for the period		(74,036	)		(13,341	)		16,586			89,318
(+/-) Income taxes		(35,562	)		1,227			(65,501	)		7,458
(+/-) Finance result		69,401			24,103			128,372			(10,029	)
(+) Depreciation and amortization		80,779			74,302			173,955			140,083
(+) Share of loss of equity-accounted investees		591			14,294			1,443			19,936
EBITDA		41,173			100,585			254,855			246,766
(+) Share-based compensation plan		22,944			3,726			59,924			19,149
(+) Share-based compensation plan and restricted stock units		20,306			1,810			41,130			9,830
(+) Provision for payroll taxes (restricted stock units)		2,638			1,916			18,794			9,319
(+) M&A expenses		14,307			7,714			17,396			9,186
(-) Other changes to equity accounted investees		(13,863	)		(1,345	)		(170,277	)		(17,758	)
(+) Non-recurring expenses		18,907			-			32,255			-
Adjusted EBITDA		83,468			110,680			194,153			257,343
Revenue		470,962			412,137			1,005,868			842,174
EBITDA Margin		8.7	%		24.4	%		25.3	%		29.3	%
Adjusted EBITDA Margin		17.7	%		26.9	%		19.3	%		30.6	%

Reconciliation of Adjusted Net Income (Loss)
		Three-month period ended June 30,						Six-month period ended June 30,
(In thousands of Brazilian reais)		2023			2022			2023			2022
		(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net profit (loss) for the period		(74,036	)		(13,341	)		16,586			89,318
(+) Share-based compensation plan		22,944			3,726			59,924			19,149
(+) Share-based compensation plan and restricted stock units		20,306			1,810			41,130			9,830
(+) Provision for payroll taxes (restricted stock units)		2,638			1,916			18,794			9,319
(+) M&A expenses		14,307			7,714			17,396			9,186
(-) Other changes to equity accounted investees		(13,863	)		(1,345	)		(170,277	)		(17,758	)
(+) Non-recurring expenses		18,907			-			32,255			-
(+/-) Adjustments related to business combination		43,187			8,134			100,182			58,037
(+) Amortization of intangible assets from business combinations		29,554			29,142			59,917			57,599
(+/-) Changes in accounts payable to selling shareholders		8,695			(33,348	)		26,296			(26,320	)
(+) Interest expenses, net (adjusted by fair value)		4,938			12,340			13,969			26,758
(+/-) Non-cash adjustments related to derivative instruments and convertible notes		(24,244	)		(19,571	)		(79,227	)		(125,220	)
(+/-) Tax effects		90,933			(8,500	)		59,271			(24,640	)
Adjusted Net Income (Loss)		78,135			(23,183	)		36,110			8,072
Net Revenue		470,962			412,137			1,005,868			842,174
Adjusted Net Income Margin		16.6	%		-5.6	%		3.6	%		1.0	%
Weighted average shares		66,242			55,917			66,012			56,008
Adjusted EPS		1.18			(0.41	)		0.55			0.14

Reconciliation of Free Cash Flow
		Three-month period ended June 30,				Six-month period ended June 30,
(In thousands of Brazilian reais)		2023		2022		2023		2022
		(unaudited)		(unaudited)		(unaudited)		(unaudited)
(Loss) profit before income taxes		(109,598)		(12,114)		(48,915)		96,776
(+/-) Non-cash adjustments to reconcile Adj, EBITDA to cash from operations		238,172		128,366		303,287		144,943
(+/-) Working capital (Changes in assets and liabilities)		(38,859)		75,310		111,167		52,629
Cash from operations		89,715		191,562		365,539		294,348
(-) Income tax paid		(2,222)		(4,792)		(33,387)		(47,474)
(-) CAPEX		(42,374)		(51,967)		(79,414)		(104,451)
Free cash flow to firm		45,119		134,803		252,738		142,423
(-) Interest paid on loans and financings & lease liabilities		(18,505)		(17,451)		(131,462)		(34,338)
(-) Interest paid on accounts payable to selling shareholders		(73,341)		(36,536)		(73,568)		(36,914)
(-) Payments for contingent consideration2		(19,620)		(70,541)		(37,221)		(70,541)
(-) Payments of stock options3		-		(75,578)		-		(75,578)
Free cash flow		(66,347)		(65,303)		10,487		(74,948)
(-) M&A classified as payments for contingent consideration2		19,620		70,541		37,221		70,541
(-) M&A classified as payments of stock options3		-		75,578		-		75,578
(-) M&A classified as intangible assets acquisition (CAPEX1)		-		8,701		-		14,208
Free cash flow (managerial)		(46,727)		89,517		47,708		85,379

1)		For 2022, is related to M&A payments (PGS’ and Mentes’ acquisition, being R$5.5 million in 1Q22 and R$8.7 million in 2Q22), from the accounting CAPEX of R$42.4 million in 1Q22 and R$37.0 million in 2Q22
2)		Related to M&A payment (difference between amount in the PPA and the final transaction amount calculated by the earn-out multiple related to the acquisition of subsidiaries).
3)		Related to M&A payment (Geekie employees’ SOP).

		Three-month period ended June 30,				Six-month period ended June 30,
(In thousands of Brazilian reais)		2023		2022		2023		2022
		(unaudited)		(unaudited)		(unaudited)		(unaudited)
Free cash flow to firm		45,119		134,803		252,738		142,423
(+) M&A classified as CAPEX¹		-		8,701		-		14,208
Free cash flow to firm (managerial)		45,119		143,504		252,738		156,631

1)		For 2022, is related to M&A payments (PGS’ and Mentes’ acquisition, being R$5.5 million in 1Q22 and R$8.7 million in 2Q22), from the accounting CAPEX of R$42.4 million in 1Q22 and R$37.0 million in 2Q22.

Reconciliation of Taxable Income
		Three-month period ended June 30,								Six-month period ended June 30,
(In thousands of Brazilian reais)		2023				2022				2023			2022
		(unaudited)				(unaudited)				(unaudited)			(unaudited)
(Loss) profit before income taxes		(109,598		)		(12,114		)		(48,915	)		96,776
(+) Share-based compensation plan, RSU and provision for payroll taxes¹		18,778				(16,582		)		43,907			(18,814		)
(+) Amortization of intangible assets from business combinations before incorporation¹		4,087				6,094				8,268			13,846
(+/-) Changes in accounts payable to selling shareholders¹		(49,413		)		(6,269		)		(58,639	)		23,604
(+/-) Share of loss of equity‑accounted investees		591				14,294				1,443			19,936
(+) Net income from Arco Platform (Cayman)		(14,102		)		5,007				(191,544	)		(104,508		)
(+) Fiscal loss without deferred		12,257				6,695				14,187			11,846
(+/-) Provisions booked in the period			33,923			12,834				137,279			44,119
(+) Tax loss carryforward			195,478			7,344				265,365			37,023
(+) Others			2,840			5,092				3,368			10,172
Taxable income			94,841			22,395				174,719			134,000
Current income tax under actual profit method			(32,245	)		(7,614		)		(59,404	)		(45,560		)
% Tax rate under actual profit method			34.0	%		34.0		%		34.0	%		34.0		%
Effective current income tax			(32,245	)		(7,614		)		(59,404	)		(45,560		)
% Effective tax rate			34.0	%		34.0		%		34.0	%		34.0		%
(+) Recognition of tax-deductible amortization of goodwill and added value²			20,694			15,546				41,387			26,868
(+/-) Other additions (exclusions)			11,967			106				3,348			4,883
Effective current income tax accounted for goodwill benefit			416			8,038				(14,669	)		(13,809		)
% Effective tax rate accounting for goodwill benefit			-0.4	%		-35.9		%		8.4	%		10.3		%

1)		Temporary differences between the carrying amount of an asset or liability in the balance sheet and its tax base that will yield amounts that can be deducted in the future when determining taxable profit or loss.
2)		Added value refers to the fair value of intangible assets from business combinations.

 

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Investor Relations Contact

Arco Platform Limited

IR@arcoeducacao.com.br

https://investor.arcoplatform.com/

Source: Arco Platform Limited

FAQ

What is the stock symbol for Arco Platform Limited?

The stock symbol for Arco Platform Limited is ARCE.

What was the YoY growth in net revenue for Q2 2023?

The YoY growth in net revenue for Q2 2023 was 14.3%.

What was the adjusted EBITDA for Q2 2023?

The adjusted EBITDA for Q2 2023 was R$83.5 million.

What was the adjusted net income for Q2 2023?

The adjusted net income for Q2 2023 was R$78.1 million.

What was the cash from operations in 1H23?

The cash from operations in 1H23 was R$365.5 million.

What was the free cash flow to firm in 1H23?

The free cash flow to firm in 1H23 was R$252.7 million.

What is Arco's guidance for the EBITDA margin in 2023?

Arco's guidance for the EBITDA margin in 2023 is between 36.5% and 38.5%.