Arco Reports Third Quarter 2021 Results

Rhea-AI Summary

Arco Platform Limited (Nasdaq: ARCE) reported its Q3 2021 results, showing a net revenue of R$183.3 million, a 12% year-over-year decrease. Despite this, the company's core solutions are recovering to pre-pandemic levels, with strong retention rates and price increases above inflation. The consolidated annual contract value (ACV) is projected to grow by 27%-29% organically in 2022, and Arco aims for increased operational efficiency and a 36.5%-38.5% adjusted EBITDA margin. A US$150 million investment from Dragoneer and General Atlantic is expected to bolster growth strategies, including cross-selling and acquisitions.

Positive

• Projected ACV growth of 27%-29% organically for 2022.
• Retention rates remain high, indicating client loyalty.
• Price increases are slightly above inflation, supporting revenue stability.
• Strong NPS of 84 for core solutions, reflecting positive customer sentiment.
• US$150 million capital raise from Dragoneer and General Atlantic will enhance growth strategies.

Negative

• Net revenue decreased by 12% YoY, impacted by COVID-19 dropouts.
• Adjusted EBITDA of R$15.8 million represents a 73% decline YoY.
• Gross profit margin decreased from 79% in Q3 2020 to 76% in Q3 2021.

Quarterly operating results still reflecting dropouts caused by COVID-19, as expected, while efficiency initiatives start to show positive results and commercial cycle for 2022 points to a strong growth recovery

SÃO PAULO--(BUSINESS WIRE)-- Arco Platform Limited, or Arco or Company (Nasdaq: ARCE), today reported financial and operating results for the third quarter ended September 30, 2021.

“Operating results for the 3Q21 conclude the 2021 commercial cycle and we leave behind a challenging period not only for us, but for our partner schools, teachers, parents and students. As we look ahead, we are excited about the positive results achieved for the 2022 commercial cycle as schools normalize their operations, students go back to school, and we evolve our product for all stakeholders to have the best learning experience. The organic growth for our Core solutions for the 2022 commercial cycle returned to pre-pandemic levels, while average retention remained at high levels and average price increase was slightly above expected inflation for 2022. We are confident this strong recovery was possible because of our client-centric culture, and we are proud to have that reflected in the 2021 NPS for our Core brands, which increased to 84 (from 82 in 2020), with a particular focus on the Positivo brands. Supplemental solutions also experienced a strong acceleration from 2020 levels as schools became increasingly more interested in complementing the learning journey beyond the cognitive. As a result, we expect our consolidated ACV to grow between 27% and 29% organically, or 38% to 42% including M&A, and we are confident we will recognize Revenues in line with, or above, pre-pandemic levels ACV in 2022, as we see potential upside to our ACV guidance as partner schools gradually see their operations return to full capacity. Arco is also undergoing an important transformation as we begin to integrate our processes, reduce operational complexity, and improve profitability, which in turn will allow us to free up cash to reinvest in growth, quality, and our people. We believe 2022 will be a year of strong growth and increased efficiency, placing Arco’s rule of 40 (the idea that a software/SaaS company's combined growth rate and profit margin should be greater than 40%) above the 60% level.” said Ari de Sá Neto, CEO and founder of Arco.

Third Quarter 2021 Results

• Net revenue of R$183.3 million;
• Gross profit of R$138.5 million;
• Adjusted EBITDA of R$15.8 million; and
• Adjusted net loss of R$-12.0 million.

Nine-months ended September 30 2021 Results

• Net Revenue of R$771.2 million;
• Gross Profit of R$571.2 million;
• Adjusted EBITDA of R$206.5 million; and
• Adjusted Net Income of R$85.5 million.

Key Messages

• Net revenues for the quarter were R$183.3 million, a 12% decrease year-over-year, representing a 16% revenue recognition of ACV bookings, impacted by historically weaker seasonality for the 3Q and dropouts caused by the COVID-19 pandemic in the 2021 school year. Core solutions totaled R$150.0 million (-7% YoY versus 3Q20), while Supplemental solutions were R$33.3 million (-31% YoY versus 3Q20). For the 9 months of 2021, net revenues were 9% higher year-over-year, at R$771.2 million, with Core solutions totaling R$614.7 million and Supplemental solutions increasing 73% to R$156.5 million. Arco concluded the 2021 cycle with net revenues of R$1,062 million, or R$1,057 million excluding businesses acquired in 2021, representing a 9% shortfall from the R$1,163 million ACV Bookings provided at the beginning of the year.

• As a result of a top line impacted by the COVID-19 pandemic and consequent higher discard of undelivered and/or books in the quarter, gross margin was 76% in 3Q21 (versus 79% in 3Q20), resulting in a 9M21 gross margin of 74% (versus 78% for 9M20).

• Our cost and expenses base were impacted by new businesses acquired over the last twelve months and therefore not consolidated into our financial statements for the same period last year (Escola da Inteligência, WPensar, Geekie, Studos, Me Salva!, Eduqo, Edupass).

• Higher 3Q and 9M G&A reflect (i) expenses related to the new businesses (Escola da Inteligência, WPensar, Geekie, Studos, Me Salva!, Eduqo, Edupass), (ii) non-recurring third-party services related to these new businesses and mainly COC/Dom Bosco, and (iii) a fair value update related to Geekie’s SOP (management’s stock option plan). Excluding the impact of new these businesses, G&A contracted 21% YoY in 3Q and 17% YoY in 9M21. Excluding RSU expenses, G&A contracted 19% YoY in 3Q and 10% YoY in 9M, reflecting initial efforts towards increased efficiency.

• Higher 3Q and 9M Selling expenses reflect (i) expenses related to the new businesses, and (ii) the resumption of traveling and marketing events, which are key to our commercial strategy. Reduction in allowance for doubtful accounts reflects improved cash collection performance. Excluding the impact of new businesses, Selling expenses contracted 3% YoY in 3Q and increased 9% YoY in 9M21. Excluding allowance for doubtful accounts, Selling expenses increased 11% YoY in 3Q and 17% YoY in 9M to support Arco’s strong 2022 commercial cycle.

• The quality of Arco’s receivables' profile and strong credit and collection process reduced the allowance for doubtful accounts back to historical levels in 3Q21. Throughout the COVID-19 pandemic outbreak, Arco supported its partner schools through the extension of payment terms. Delinquency also dropped, to 6.1% in 9M21 from 8.4% in 9M20 and coverage index increased to 20% from 18%, or to 25% from 19%, excluding receivables from transactions with no credit risk such as direct sales to parents using credit cards.

Allowance for doubtful accounts (R$ MM)	3Q21	3Q20	YoY	2Q21	QoQ
Allowance for doubtful accounts	(6.0)	(15.7)	-61.8%	(6.7)	-10.2%
% of Revenues	-3.3%	-7.5%	4.2 p.p.	-2.6%	-0.7 p.p.
Allowance for doubtful accounts adjusted for COVID impact¹	(6.0)	(14.8)	-59.4%	(6.7)	-10.0%
% of Revenues	-3.3%	-7.1%	3.8 p.p.	-2.6%	-0.7 p.p.
1) Calculated excluding COVID-19 impact on allowance for doubtful accounts to better reflect a normalized level of this line.

• Adjusted EBITDA was R$15.8 million in 3Q21, 73% lower versus 3Q20 when Arco presented an atypically high ACV recognition due to the COVID-related shift in the school year and, therefore, in the recognition of revenue, and significantly lower travelling expenses leading to higher than usual margins for the 3Q in 2020. In addition, our commercial activities in 2020 were predominantly held remotely, while in the 2H21 our sales force has intensified its visits to schools and commercial events, which had a direct impact to selling expenses. A lower revenue recognition due to the impact of the second wave of COVID-19, together with investments in product evolution and in sales & marketing, led to an adjusted EBITDA margin of 8.6% in the quarter versus 27.6% in 3Q20. For the 9M21, adjusted EBITDA was R$206.5 million, resulting in a margin of 26.8% versus 36.2% for 9M20. Excluding M&As concluded this year, which are therefore not included in the margin guidance, margin was 27.3% for 9M21.

• As we approach the end of the year and gain more visibility in our P&L for the following months, we reinforce our adjusted EBITDA margin guidance for 2021 fiscal year of 35.5% to 37.5% and expect it to be closer to the bottom of the range, between 35.5% and 36.0%. Historically, Q4 is the best performing quarter for revenue recognition, delivering higher Adj. EBITDA margins. Additionally, 4Q21 will further benefit from initiatives that will deliver: (i) reduction in printing, freight & shipping costs as the new integrated logistics structure led to better terms negotiated with suppliers; (ii) revaluation of third-party services in an integrated manner to increase synergies, and (iii) reduction in corporate personnel expenses as we start integrating some corporate areas of our solutions.

• Free cash flow presented an 20% year-over-year increase to R$ 8.3 million in 3Q21, a significant improvement versus 3Q20, mainly due to the collection of trade receivables generated in previous quarters when we opted to assist our partner schools by extending payment terms. QoQ reduction follows historical seasonality, and the third quarter is historically the low point in cash collection from partner schools.

Free cash flow (R$ MM)	3Q21	3Q20	YoY	2Q21	QoQ
Cash generated from operations	74,137	68,934	8%	113,157	-34%
(-) Income tax paid	(19,167)	(26,392)	-27%	(4,529)	323%
(-) Interest paid on lease liabilities	(918)	(476)	93%	(743)	24%
(-) Interest paid on investment acquisition	(1,031)	(47)	n/a	(70)	n/a
(-) Interest paid on loans and financing	(5,461)	(9,867)	-45%	(4,378)	25%
(-) Payments for contingent consideration	-	-	n/a	(332)	n/a
Cash Flow from Operating Activities	47,560	32,152	48%	103,105	-146%
(-) Acquisition of property, plant and equipment	(4,010)	(1,621)	147%	(2,534)	58%
(-) Acquisition of intangible assets	(35,190)	(23,589)	49%	(36,842)	-4%
Free cash flow	8,360	6,942	20%	63,729	-87%

• The 20% sequential reduction in trade receivables reflects Arco’s business resilience and its capacity to collect from partner schools to whom we provided support through more flexible payment terms during the pandemic.

Trade Receivables - Aging (R$ MM)	3Q21	3Q20	YoY	2Q21	QoQ
Neither past due nor impaired	246.7	191.7	29%	357.2	-31%
1 to 60 days	34.8	42.7	-19%	36.9	-6%
61 to 90 days	13.0	17.9	-28%	9.3	39%
91 to 120 days	10.7	14.0	-23%	7.1	52%
121 to 180 days	14.5	18.5	-22%	7.9	84%
More than 180 days	62.7	33.6	87%	59.3	6%
Trade receivables	382.3	318.3	20%	477.7	-20%

Days of sales outstanding	3Q21	3Q20	YoY	2Q21	QoQ
Trade receivables (R$ MM)	382.3	318.3	20%	477.7	-20%
(-) Allowance for doubtful accounts	(77.1)	(57.8)	34%	(71.3)	8%
Trade receivables, net (R$ MM)	305.1	260.6	17%	406.4	-25%
Net revenue LTM pro-forma¹	1,073.2	1,078.5	-1%	1,122.7	-4%
Adjusted DSO	104	88	18%	132	-22%
1) Calculated as net revenues for the last twelve months added to the pro forma revenues from businesses acquired in the period to accurately reflect the Company’s operations.

• The CAPEX observed in the 3Q21, reaching R$39.0 million, was mainly due to the increase of our content development capex, due to the final sprint to conclude 2022 content as deliveries begin in 4Q. Year-to-date, CAPEX represents 14.8% of net revenues, slightly above historical levels.

CAPEX (R$ MM)¹	3Q21	3Q20	YoY	2Q21	QoQ
Acquisition of intangible assets	35.0	23.6	48%	36.8	-5%
Educational platform - content development	13.4	11.2	20%	8.1	66%
Educational platform - platforms and educational technology	8.5	4.5	91%	13.0	-34%
Software	10.5	5.4	96%	13.7	-23%
Copyrights and others	2.5	2.6	-2%	2.1	21%
Acquisition of property, plant and equipment	4.0	1.6	147%	2.53	58%
TOTAL	39.0	25.2	55%	39.4	-1%
1) Excluding the effect of business combinations.

• Arco’s corporate restructuring is ongoing. On October 1^st, we concluded the incorporation of Nave a Vela. We expect to incorporate the recently acquired COC/Dom Bosco (2022), followed by Escola em Movimento (2022), Pleno (2022) and Studos (2022). As we keep incorporating other businesses into CBE (Companhia Brasileira de Educação e Sistemas de Ensino, our wholly owned entity incorporating acquired businesses) we will be able to capture additional tax benefits and therefore further reduce our effective tax rate, currently at 17.3% for 9M21 (versus 27.6% for 9M20).

Intangible assets - net balances (R$ MM)	3Q21	3Q20	YoY	2Q21	QoQ
Business Combination	2,334.6	1,708.9	214%	2,374.1	0%
Trademarks	437.3	333.1	31%	443.0	-1%
Customer relationships	261.4	176.1	48%	266.8	-2%
Educational system	209.6	214.9	-3%	216.4	-4%
Softwares	11.4	6.8	51%	7.3	42%
Educational platform	5.7	13.2	-47%	6.0	18%
Others¹	16.4	15.9	-4%	15.9	-4%
Goodwill	1,392.8	948.9	47%	1,418.7	2%
Operational	206.5	122.1	69%	193.0	7%
Educational platform²	141.7	86.2	64%	136.0	4%
Softwares	53.0	25.2	110%	45.3	17%
Copyrights	11.8	10.5	13%	11.7	1%
Customer relationships	0.1	0.2	-38%	0.1	-14%
TOTAL	2,541.2	1,831.0	39%	2,567.1	0%

Amortization of intangible assets (R$ MM)	3Q21	3Q20	YoY	2Q21	QoQ
Business Combination	(55.7)	(18.5)	202%	(55.0)	1%
Trademarks	(6.5)	(4.6)	39%	(6.4)	1%
Customer relationships	(8.6)	(6.1)	40%	(8.5)	1%
Educational system	(8.1)	(6.6)	21%	(8.1)	0%
Softwares	(0.9)	(0.5)	81%	(0.6)	42%
Educational platform	(0.3)	(0.2)	104%	(0.2)	74%
Others¹	(1.3)	(0.4)	216%	(1.2)	18%
Goodwill	(30.1)	0.0	n/a	(30.1)	0%
Operational	(22.8)	(12.0)	90%	(20.6)	23%
Educational platform²	(16.3)	(8.7)	87%	(15.2)	19%
Softwares	(4.5)	(1.5)	194%	(3.4)	54%
Copyrights	(2.0)	(1.7)	17%	(2.1)	0%
Customer relationships	(0.0)	(0.0)	100%	(0.0)	100%
TOTAL	(78.5)	(30.4)	158%	(75.7)	7%
1) Non-compete agreements and rights on contracts.
2) Includes content development in progress.

Amortization of intangible assets (R$ MM)	Impacts P&L	Originates tax benefit	Amortizations with tax benefit in 3Q21²
			Amortization	Tax benefit	Impact on net income
Business Combination			(45.7)	15.5	(30.1)
Trademarks	Yes	Yes²	(4.2)	1.4	(2.7)
Customer relationships	Yes	Yes²	(5.3)	1.8	(3.5)
Educational system	Yes	Yes²	(5.4)	1.8	(3.5)
Educational platform	Yes	Yes²	(0.2)	0.1	(0.1)
Others¹	Yes	Yes²	(0.5)	0.2	(0.3)
Goodwill	No	Yes²	(30.1)	10.2	(19.9)
Operational	Yes	Yes	(22.8)	7.8	(15.1)
TOTAL			(68.5)	23.3	(45.2)
1) Non-compete agreements and rights on contracts.
2) Amortizations are tax deductible only after the incorporation of the acquired business. In 3Q21, 28% of the balance of the intangible assets from business combinations generates tax benefits.

Amortization of intangible assets from business combination that generate tax benefit - schedule (R$ MM)	Businesses with current tax benefit (already incorporated)					Undefined¹
	2021	2022	2023	2024	2025 +
Trademarks	6.5	26.0	26.0	25.9	350.1	15.6
Customer relationships	8.6	33.2	32.9	32.8	153.9	26.6
Educational system	8.3	33.2	30.8	30.2	108.1	21.2
Software	1.7	6.8	5.7	4.3	6.9	16.9
Others	1.0	4.6	4.6	4.3	0.9	1.9
Goodwill	30.1	120.5	120.5	114.6	341.2	513.6
Total	56.2	223.2	220.6	212.0	961.2	595.8
Maximum tax benefit	19.1	75.9	75.0	72.1	326.8	202.6
1) Businesses with future tax benefit (to be incorporated).

• Arco raised R$900 million through the issuance of Debentures in August, with a 2-year term and bearing interest per annum at the CDI rate +1.7%. Arco’s cash and cash equivalent plus financial investments position of R$1,656 million is adequate to meet the obligations for the year of R$763 million in debt and accounts payable to selling shareholders.

• We had a positive commercial cycle outcome for the 2022 school year, with a clear acceleration in the pace of organic growth versus 2020, because of the significant improvement in the COVID-19 pandemic scenario in Brazil. We are providing a 2022 ACV guidance range of R$1,475 million to R$1,515 million, which represents 38%-42% growth versus 2021 pro forma net revenues of R$1,069 million (2021 cycle net revenues of R$1,057 million plus annualized revenues of businesses acquired in 2021 of R$12 million), or 27%-29% organic growth. We are confident we will recognize Revenues in line with, or above, pre-pandemic levels ACV in 2022, as we see potential upside to our ACV guidance as partner schools gradually see their operations return to full capacity. This ACV guidance reflects (i) new student intake and upsell for Core and Supplemental solutions show strong growth YoY; (ii) Strong first year of structured cross-sell initiatives, increasing by 31% the number of schools in our core base that use at least one Supplemental solution; (iii) retention rates consistent with historical trends; (iv) once again healthy average price increase dynamics despite the macro; and (v) continuous focus on client satisfaction, translating into best-in-class NPS for our Core solutions (84 in 2021 versus 82 in 2020 and 71 in 2019), with a specific focus on the strong improvement of the Positivo brands.

• We are also providing an adjusted EBITDA margin range guidance for 2022 fiscal year of 36.5% to 38.5%, above the range provided for the past 3 years, reflecting Arco’s integration initiatives and corporate restructuring in place as Arco paves the way to become a portfolio hub of education solutions and a more efficient company in the years to come. Margin expansion drivers include (i) strategic sourcing, (ii) supply chain: printing costs & freight, (iii) IT systems optimization, (iv) corporate reorganization, (v) supplemental synergies, (vi) sales & operations planning, (vii) increased cooperation among core units, and (viii) technology integration. Our guidance includes all recently acquired businesses to date. When excluding operations still in their early cycle of maturation, such as Me Salva!, Eduqo, Edupass, which carry negative margins but higher growth (~260% YoY), our Adj. EBITDA margin for 2022 would be ~180bps higher.

• Arco announced on November 18^th, 2021, an US$150 million investment from Dragoneer and General Atlantic, through the purchase of convertible senior notes, subject to customary closing conditions (for transaction details please access https://investor.arcoplatform.com/press_releases/arco-announces-a-us150-million-investment-from-dragoneer-and-general-atlantic/). We believe this announcement reinforces Arco’s strategic growth plan for the coming years. In October, Arco finalized the acquisition of COC and Dom Bosco from Pearson, brands which serve over 800 partner schools and 210 thousand students. COC and Dom Bosco complement Arco’s existing portfolio in geography and price-point and expand their market leading position in K-12 core learning systems. Arco intends to use the proceeds from Dragoneer’s and General Atlantic’s investments to fund its growth strategy, including an emphasis on cross-selling portfolio brands and making accretive acquisitions in existing and new verticals.

Conference Call Information

Arco will discuss its third quarter 2021 results today, November 29, 2021, via a conference call at 5 p.m. Eastern Time (7 p.m. Brasilia Time). To access the call, please dial: +1 (412) 717-9627, +1 (844) 204-8942, +55 (11) 4090-1621 or +55 (11) 4210-1803. An audio replay of the call will be available through December 5, 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 September 30, 2021, there was a total net impact of R$1,419 thousand on the Company's condensed consolidated financial statements related to the COVID-19 pandemic mainly related to: (i) additional expenses of R$1,646 thousand related to health care in food and emotional health programs provided to the Company’s employees, and (ii) savings on rent concessions, in connection with leased buildings, as a direct consequence of the COVID-19 pandemic, amounting to R$217 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 September 30, 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 (Loss), Adjusted Net Income (Loss) Margin, Taxable Income Reconciliation and 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/minus 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 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, 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.

Arco Platform Limited
Consolidated Statements of Financial Position
		September 30,		December 31,
(In thousands of Brazilian reais)		2021		2020
Assets		(unaudited)
Current assets
Cash and cash equivalents		1,322,334		424,410
Financial investments		333,166		712,645
Trade receivables		305,149		415,282
Inventories		99,692		74,076
Recoverable taxes		44,591		19,304
Related parties		4,481		9,970
Other assets		35,622		24,073
Total current assets		2,145,035		1,679,760
Non-current assets
Deferred income tax		322,305		236,903
Recoverable taxes		1,122		1,121
Financial investments		38,434		10,349
Related parties		6,733		10,508
Other assets		41,365		22,239
Investments and interests in other entities		128,202		9,654
Property and equipment		27,335		26,087
Right-of-use assets		36,748		30,022
Intangible assets		2,541,254		2,549,637
Total non-current assets		3,143,498		2,896,520
Total assets		5,288,533		4,576,280

		September 30,		December 31,
(In thousands of Brazilian reais)		2021		2020
Liabilities		(unaudited)
Current liabilities
Trade payables		70,674		40,925
Labor and social obligations		167,783		85,069
Taxes and contributions payable		3,974		9,676
Income taxes payable		33,274		44,731
Advances from customers		6,850		23,080
Lease liabilities		16,052		12,742
Loans and financing		305,305		107,706
Accounts payable to selling shareholders		775,464		656,014
Other liabilities		4,363		331
Total current liabilities		1,383,739		980,274
Non-current liabilities
Labor and social obligations		346		36,570
Lease liabilities		27,502		22,478
Loans and financing		900,902		203,413
Provision for legal proceedings		2,066		1,366
Accounts payable to selling shareholders		1,033,318		1,130,501
Other liabilities		1,134		794
Total non-current liabilities		1,965,268		1,395,122
Equity
Share capital		11		11
Capital reserve		2,203,167		2,200,645
Treasury shares		(132,929)		-
Share-based compensation reserve		102,134		80,817
Accumulated losses		(232,857)		(80,589)
Total equity		1,939,526		2,200,884
Total liabilities and equity		5,288,533		4,576,280

Arco Platform Limited
Interim Condensed Consolidated Statements of Income
	Three months period ended September 30,				Nine months period ended September 30,
(In thousands of Brazilian reais, except earnings per share)	2021		2020		2021		2020
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Net revenue	183,267		208,730		771,240		705,173
Cost of sales	(44,766)		(44,485)		(199,994)		(154,825)
Gross profit	138,501		164,245		571,246		550,348
Operating expenses:
Selling expenses	(114,982)		(98,612)		(353,367)		(274,582)
General and administrative expenses	(109,867)		(72,108)		(246,161)		(199,030)
Other income (expenses), net	413		3,234		2,913		3,993
Operating profit (loss)	(85,935)		(3,241)		(25,369)		80,729
Finance income	20,353		13,418		42,407		35,597
Finance costs	(124,947)		(44,812)		(209,239)		(113,903)
Finance result	(104,594)		(31,394)		(166,832)		(78,306)
Share of loss of equity-accounted investees	(5,575)		(4,042)		(8,326)		(8,041)
Loss before income taxes	(196,104)		(38,677)		(200,527)		(5,618)
Income taxes - income (expense)
Current	(1,246)		(14,218)		(37,143)		(68,841)
Deferred	53,290		25,407		85,402		67,036
Total income taxes – income (expense)	52,044		11,189		48,259		(1,805)
Loss for the period	(144,060)		(27,488)		(152,268)		(7,423)
Basic earnings per share – in Brazilian reais
Class A	(2.53)		(0.49)		(2.67)		(0.13)
Class B	(2.53)		(0.49)		(2.67)		(0.13)
Diluted earnings per share – in Brazilian reais
Class A	(2.53)		(0.49)		(2.67)		(0.13)
Class B	(2.53)		(0.49)		(2.67)		(0.13)
Weighted-average shares used to compute net (loss) profit per share:
Basic	56,902		55,545		57,109		55,144
Diluted	57,122		55,737		57,329		55,336

Arco Platform Limited
Interim Condensed Consolidated Statements of Cash Flows
	Three months period ended September 30,				Nine months period ended September 30,
(In thousands of Brazilian reais)	2021		2020		2021		2020
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Operating activities
Loss before income taxes	(196,104)		(38,677)		(200,527)		(5,618)
Adjustments to reconcile loss before income taxes
Depreciation and amortization	42,605		29,715		136,080		89,763
Inventory reserves	5,579		(305)		12,965		3,339
Allowance for doubtful accounts	5,987		15,679		16,486		28,233
Loss on sale/disposal of property and equipment and intangible assets disposed	87		72		222		1,524
Fair value change in financial instruments from acquisition interests	-		421		-		(438)
Changes in accounts payable to selling shareholders	74,664		12,978		75,153		19,872
Share of loss of equity-accounted investees	5,575		4,042		8,326		8,041
Share-based compensation plan	41,760		(2,339)		57,315		15,309
Accrued interest	11,705		9,077		20,610		16,052
Interest accretion on acquisition liability	30,802		13,013		84,826		49,990
Income non-cash equivalents	(6,421)		(4,200)		(14,916)		(9,856)
Interest on lease liabilities	1,204		641		3,361		2,060
Provision for legal proceedings	248		-		37		594
Provision for payroll taxes (restricted stock units)	1,259		(10,212)		2,686		(1,166)
Foreign exchange income	(1,945)		(551)		2,147		(371)
Changes in fair value of step acquisitions	-		(3,248)		-		(3,248)
Other financial cost/revenue, net	1,792		(811)		(706)		(1,849)
	18,797		25,295		204,065		212,231
Changes in assets and liabilities
Trade receivables	95,594		22,354		95,979		40,821
Inventories	(6,372)		(489)		(18,339)		(8,052)
Recoverable taxes	(5,463)		(514)		(2,996)		(4,818)
Other assets	(12,776)		11,582		(21,231)		(7,319)
Trade payables	21,809		(76)		29,034		(3,791)
Labor and social obligations	1,069		29,210		11,325		44,832
Taxes and contributions payable	(1,388)		12,576		(6,471)		9,797
Advances from customers	(36,559)		(31,099)		(16,574)		(20,273)
Other liabilities	(574)		95		1,730		(887)
Cash generated from operations	74,137		68,934		276,522		262,541
Income taxes paid	(19,167)		(26,392)		(70,684)		(90,412)
Interest paid on lease liabilities	(918)		(476)		(2,521)		(1,186)
Interest paid on accounts payable to selling shareholders	(1,031)		(47)		(5,254)		(47)
Interest paid on loans and financing	(5,461)		(9,867)		(13,406)		(9,867)
Payments for contingent consideration	-		-		(332)		(3,696)
Net cash flows from operating activities	47,560		32,152		184,325		157,333
Investing activities
Acquisition of property and equipment	(4,010)		(1,621)		(9,542)		(5,663)
Investments in unconsolidated entities	(53,538)		(19,953)		(126,760)		(32,628)
Acquisition of subsidiaries, net of cash acquired	(15,839)		(22,002)		(31,056)		(22,002)
Payment of accounts payable to selling shareholders	(8,449)		-		(101,285)		-
Acquisition of intangible assets	(35,190)		(23,589)		(104,733)		(63,069)
Sale (purchase) of financial investments	213,374		(199,739)		366,309		(322,141)
Net cash flows used in investing activities	96,348		(266,904)		(7,067)		(445,503)

Financing activities
Purchase of treasury shares	(25,069)		-		(134,806)		-
Capital increase proceeds from public offering	-		591,898		-		591,898
Share issuance costs	-		(17,531)		-		(17,531)
Payment of lease liabilities	(4,245)		(1,949)		(10,599)		(5,728)
Long term payments of accounts payable to selling shareholders	(13)		47		(19,455)		(954)
Loans and financing	899,666		198,611		896,223		198,611
Loans and financing transaction costs	(8,550)		(198,925)		(8,550)		(553)
Net cash flows from financing activities	861,789		572,151		722,813		765,743
Foreign exchange effects on cash and cash equivalents	1,945		551		(2,147)		371
Increase in cash and cash equivalents	1,007,642		337,950		897,924		477,944
Cash and cash equivalents at the beginning of the period	314,692		188,894		424,410		48,900
Cash and cash equivalents at the end of the period	1,322,334		526,844		1,322,334		526,844
Increase in cash and cash equivalents	1,007,642		337,950		897,924		477,944

Arco Platform Limited
Reconciliation of Non-GAAP Measures
	Three months period ended September 30,				Nine months period ended September 30,
(In thousands of Brazilian reais)	2021		2020		2021		2020
Adjusted EBITDA Reconciliation	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Loss for the period	(144,060)		(27,488)		(152,268)		(7,423)
(+/-) Income taxes	(52,044)		(11,189)		(48,259)		1,805
(+/-) Finance result	104,594		31,394		166,832		78,306
(+) Depreciation and amortization	42,605		29,715		136,080		89,763
(+) Share of loss of equity-accounted investees	5,575		4,042		8,326		8,041
EBITDA	(43,330)		26,474		110,711		170,492
(+) Share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units).	42,993		19,840		64,041		51,280
(+) M&A expenses	14,353		1,697		22,203		5,688
(+) Non-recurring expenses	1,242		6,694		7,800		16,752
(+) Effects related to Covid-19 pandemic	544		2,922		1,696		10,915
Adjusted EBITDA	15,802		57,627		206,451		255,127
Net Revenue	183,267		208,730		771,240		705,173
EBITDA Margin	-23.6%		12.7%		14.4%		24.2%
Adjusted EBITDA Margin	8.6%		27.6%		26.8%		36.2%
	Three months period ended September 30,				Nine months period ended September 30,
(In thousands of Brazilian reais)	2021		2020		2021		2020
Adjusted Net Income (Loss) Reconciliation	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Loss for the period	(144,060)		(27,488)		(152,268)		(7,423)
(+) Share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units).	42,993		19,840		64,041		51,280
(+) Amortization of intangible assets from business combinations	25,598		18,483		75,350		54,718
(+/-) Changes in fair value of derivative instruments	-		421		-		(438)
(+/-) Changes in accounts payable to selling shareholders	74,664		12,978		75,153		19,872
(+/-) Share of loss of equity-accounted investees	5,575		4,042		8,326		8,041
(+/-) Tax effects	(61,738)		(12,768)		(103,793)		(55,192)
(+/-) Foreign exchange on cash and cash equivalents	(1,945)		(551)		2,147		(371)
(+) Interest on acquisition of investments, net (linked to a fixed rate)¹	16,395		4,507		30,847		20,763
(+) Interest on acquisition of investments, net (adjusted by fair value)²	14,407		8,006		53,979		28,246
(+) M&A expenses	14,353		1,697		22,203		5,688
(+) Non-recurring expenses	1,242		6,694		7,800		16,752
(+) Effects related to Covid-19 pandemic	544		2,922		1,696		10,915
Adjusted Net Income (Loss)	(11,972)		38,783		85,481		152,851
Net Revenue	183,267		208,730		771,240		705,173
Adjusted Net Income (Loss) Margin	-6.5%		18.6%		11.1%		21.7%
1) Refer to interest expenses on liabilities related to business combinations and investments in associates that are linked to a fixed rate (CDI or SELIC).
2) Refer to interest expense on liabilities related to business combinations and investments in associates that are adjusted by the fair value of the acquired business.

	Three months period ended September 30,				Nine months period ended September 30,
(In thousands of Brazilian reais)	2021		2020		2021		2020
Free Cash Flow Reconciliation	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Cash generated from operations	74,137		68,934		276,522		262,541
(-) Income tax paid	(19,167)		(26,392)		(70,684)		(90,412)
(-) Interest paid on lease liabilities	(918)		(476)		(2,521)		(1,186)
(-) Interest paid on investment acquisition	(1,031)		(47)		(5,254)		(47)
(-) Interest paid on loans and financing	(5,461)		(9,867)		(13,406)		(9,867)
(-) Payments for contingent consideration	-		-		(332)		(3,696)
Cash Flow from Operating Activities	47,560		32,152		184,325		157,333
(-) Acquisition of property and equipment	(4,010)		(1,621)		(9,542)		(5,663)
(-) Acquisition of intangible assets	(35,190)		(23,589)		(104,733)		(63,069)
Free Cash Flow	8,360		6,942		70,050		88,601

	Three months period ended September 30,				Nine months period ended September 30,
(In thousands of Brazilian reais)	2021		2020		2021		2020
Taxable Income Reconciliation	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Loss before income taxes	(196,104)		(38,677)		(200,527)		(5,618)
(+) Share-based compensation plan, RSU and provision for payroll taxes¹	44,929		(3,897)		53,965		21,879
(+) Amortization of intangible assets from business combinations before incorporation¹	725		(5,344)		10,485		34,205
(+/-) Changes in accounts payable to selling shareholders¹	92,173		21,297		131,584		54,180
(+/-) Share of loss of equity‑accounted investees	(1,896)		(1,374)		(2,831)		(2,734)
(+) Net income from Arco Platform (Cayman)	2,971		6,839		16,771		12,118
(+) Fiscal loss without deferred	4,168		1,780		8,935		4,243
(+/-) Provisions booked in the period	(3,546)		16,427		9,781		41,025
(+) Tax loss carryforward	77,673		66,396		169,039		83,672
(+) Others	9,349		(1,405)		17,868		6,426
Taxable income	30,442		62,042		215,070		249,396
Current income tax under actual profit method	(10,350)		(21,094)		(73,123)		(84,794)
% Tax rate under actual profit method	34.0%		34.0%		34.0%		34.0%
(+) Effect of presumed profit benefit	-		(254)		3,266		4,675
Effective current income tax	(10,350)		(21,348)		(69,857)		(80,119)
% Effective tax rate	34.0%		34.4%		32.5%		32.1%
(+) Recognition of tax-deductible amortization of goodwill and added value²	10,867		7,434		32,802		9,279
(+/-) Other additions (exclusions)	(1,763)		(304)		(88)		1,999
Effective current income tax accounted for goodwill benefit	(1,246)		(14,218)		(37,143)		(68,841)
% Effective tax rate accounting for goodwill benefit	4.1%		22.9%		17.3%		27.6%
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,

 

View source version on businesswire.com: https://www.businesswire.com/news/home/20211129005726/en/

Investor Relations Contact:

Arco Platform Limited

IR@arcoeducacao.com.br

Carina Carreira

carinacarreira@arcoeducacao.com.br

Source: Arco Platform Limited

FAQ

What were Arco Platform's Q3 2021 financial results?

Arco reported a net revenue of R$183.3 million in Q3 2021, a 12% decrease year-over-year.

What is the projected ACV growth for Arco in 2022?

Arco expects consolidated ACV to grow between 27% and 29% organically in 2022.

How did Arco's adjusted EBITDA perform in Q3 2021?

The adjusted EBITDA for Q3 2021 was R$15.8 million, a 73% decline compared to the same quarter in 2020.

What is Arco's current customer satisfaction rating?

Arco's Net Promoter Score (NPS) for core solutions improved to 84 in 2021.

What strategic investment did Arco announce?

On November 18, 2021, Arco announced a US$150 million investment from Dragoneer and General Atlantic.