Arco Reports Fourth Quarter and Full Year 2020 Financial Results

Arco delivers R$1,002B revenues and 38% adjusted EBITDA for FY2020 and confirms 2021 ACV of R$1,163 million

SÃO PAULO--(BUSINESS WIRE)--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: [phone], [phone], [phone] or [phone]. An audio replay of the call will be available through April 6, 2021, by dialing [phone] 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	)	-
Payments for contingent consideration	(9,520	)	-		(9,520	)	-
Net cash flows (used in) generated from operating activities	(68,678	)	(145,427	)	92,351		(7,615	)
Investing activities
Acquisition of property and equipment	(5,159	)	(3,382	)	(10,822	)	(10,991	)
Payment of investments and interests in other entities	-		(36,435	)	(32,628	)	(41,853	)
Acquisition of subsidiaries, net of cash acquired	(182,284	)	(782,748	)	(204,286	)	(798,885	)
Payment of accounts payables to selling shareholders	-		-		-		-
Acquisition of intangible assets	(33,758	)	(16,741	)	(96,827	)	(43,102	)
Net sales (purchases) of financial investments	192,028		365,821		(130,113	)	277,389
Loans to related parties	(5,000	)	-		(5,000	)	(14,000	)
Net cash flows used in investing activities	(34,173	)	(473,485	)	(479,676	)	(631,442	)
Financing activities
Capital increase - exercised stock options	-		1		-		13,830
Capital increase - proceeds from public offering	-		589,602		591,898		589,602
Share issuance costs	1,240		(18,224	)	(16,291	)	(18,897	)
Payment of lease liabilities	(2,782	)	(1,698	)	(8,510	)	(4,407	)
Payment of loans and financing	(837	)	(511	)	(301,151	)	(563	)
Payment to owners to acquire entity’s shares	(779	)	(928	)	(1,733	)	(928	)
Loans and financing	62		97,574		498,434		97,574
Dividends paid by subsidiaries	3,696		-		-		-
Net cash flows generated from financing activities	600		665,816		762,647		676,211
Foreign exchange effects on cash and cash equivalents	(183	)	(572	)	188		(555	)
(Decrease) increase in cash and cash equivalents	(102,434	)	46,332		375,510		36,599
Cash and cash equivalents at the beginning of the period	526,844		2,568		48,900		12,301
Cash and cash equivalents at the end of the period	424,410		48,900		424,410		48,900
(Decrease) increase in cash and cash equivalents	(102,434	)	46,332		375,510		36,599

Arco Platform Limited
Reconciliation of Non-GAAP Measures
	Three months ended December 31,				Twelve months ended December 31,
(In thousands of Brazilian reais)	2020		2019		2020		2019
Adjusted EBITDA Reconciliation
Profit (loss) for the period	24,203		42,515		16,780		(9,431	)
(+/-) Income taxes	20,517		(3,775	)	22,322		(33,103	)
(+/-) Finance result	18,496		12,089		96,802		98,808
(+) Depreciation and amortization	37,692		23,865		127,455		48,314
(+/-) Share of (profit) loss of equity-accounted investees	(8,450	)	(153	)	(409	)	1,800
EBITDA	92,458		74,541		262,950		106,388
(+) Share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units)	18,566		11,148		69,846		66,978
(+) M&A expenses	8,063		15,939		13,751		28,848
(+) Non-recurring expenses	2,736		4,675		19,488		7,142
(+) Effects related to Covid-19 pandemic	4,075		-		14,990		-
Adjusted EBITDA	125,898		106,303		381,025		209,356
Net Revenue	296,537		247,644		1,001,710		572,837
EBITDA Margin	31.2	%	30.1	%	26.3	%	18.6	%
Adjusted EBITDA Margin	42.5	%	42.9	%	38.0	%	36.5	%
	Three months ended December 31,				Twelve months ended December 31,
(In thousands of Brazilian reais)	2020		2019		2020		2019
Adjusted Net Income Reconciliation
Profit (loss) for the period	24,203		42,515		16,780		(9,431	)
(+) Share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units).	18,566		11,148		69,846		66,978
(+) Amortization of intangible assets from business combinations	21,349		13,485		76,067		23,173
(+/-) Changes in fair value of derivative instruments	(124	)	(10,822	)	(562	)	(473	)
(+/-) Changes in accounts payable to selling shareholders	458		7,622		20,330		89,403
(+) Share of loss (profit) of equity-accounted investees	(8,450	)	(153	)	(409	)	1,800
(+/-) Tax effects	(21,706	)	(25,112	)	(76,898	)	(79,569	)
(+/-) Foreign exchange on cash and cash equivalents	183		571		(188	)	555
(+) Interest expenses, net	18,049		17,153		67,058		41,042
(+) M&A expenses	8,063		15,939		13,751		28,848
(+) Non-recurring expenses	2,736		4,675		19,488		7,142
(+) Effects related to Covid-19 pandemic	4,075		-		14,990		-
Adjusted Net Income	67,402		77,021		220,253		169,468
Net Revenue	296,537		247,644		1,001,710		572,837
Adjusted Net Income Margin	22.7	%	31.1	%	22.0	%	29.6	%
	Three months ended December 31,				Twelve months ended December 31,
(In thousands of Brazilian reais)	2020		2019		2020		2019
Free Cash Flow Reconciliation
Cash generated from operations	(49,907	)	(138,865	)	212,634		27,984
(-) Income tax paid	(4,641	)	(6,107	)	(95,053	)	(34,747	)
(-) Interest paid on lease liabilities	(914	)	(455	)	(2,100	)	(852	)
(-) Interest paid on investment acquisition	(140	)	-		(187	)	-
(-) Interest paid on loans and financing	(3,556	)	-		(13,423	)	-
(-) Payments for contingent consideration	(9,520	)	-		(9,520	)	-
Cash Flow from Operating Activities	(68,678	)	(145,427	)	92,351		(7,615	)
(-) Acquisition of property and equipment	(5,159	)	(3,382	)	(10,822	)	(10,991	)
(-) Acquisition of intangible assets	(33,758	)	(16,741	)	(96,827	)	(43,102	)
Free Cash Flow	(107,595	)	(165,550	)	(15,298	)	(61,708	)
(+) Interest change in financial investments	3,532		45,797		13,388		45,797
(+) Working capital of acquired companies	22,915		55,078		22,915		55,078
(+) Business combinations	-		5,699		22,642		5,699
(+) M&A expenses	8,063		15,939		13,751		28,848
(+) Others	2,736		8,784		15,379		11,251
(+) Labor and social obligations of restricted stock units	13,548		(3,561	)	-		(3,561	)
(+) Working capital and expenses related to Covid-19 pandemic	39,943		-		39,943		-
Adjusted Free Cash Flow	(16,858	)	(37,814	)	112,720		81,404