Arco Platform Limited Reports Second Quarter and First Half 2020 Financial Results

2Q20 Net revenues up 71% Year-Over-Year, reaffirming Arco's resilient business model and high-quality solutions. 

SÃO PAULO, Brazil, Aug. 17, 2020 (GLOBE NEWSWIRE) -- Arco Platform Limited, or Arco (Nasdaq: ARCE), today reported financial and operating results for the second quarter 2020 ended June 30, 2020.

“The superior academic results are possible because we have a customer-oriented culture, attached to our always-evolving proprietary methodology, break-through technology-driven platform and tailored pedagogical consultancy. These pillars are not established overnight. They come from over 50 years of experience in education with a clear focus on quality.”

First Half 2020 Results

• Net Revenue of R$496.4 million;
• Net Profit of R$20.1 million;
• Adjusted Net Income of R$114.1 million; and
• Adjusted EBITDA of R$197.5 million.

Second Quarter 2020 Results

• Net Revenue of R$234.9 million;
• Net Profit of R$16.2 million;
• Adjusted Net Income of R$57.9 million; and
• Adjusted EBITDA of R$100.6 million.

Revenue Recognition and Seasonality

As we report the second quarter 2020 results, it is important to highlight the revenue recognition and seasonality of our business.

We typically deliver our Core Curriculum content four times each year, in March, June, August and December and our Supplemental Solutions content twice each year, in June and December, usually two to three months prior to the start of each school quarter. The amount of revenue recognized is proportional to the amount of content made available, which is not linearly distributed among the quarters, which causes revenue seasonality in our business.

A significant portion of our expenses is also seasonal. Due to the nature of our business cycle, we require significant working capital, typically in September or October of each year, to cover costs related to production and accumulation of inventory, selling and marketing expenses, and delivery of our teaching materials at the end of each fiscal year in preparation for the beginning of each school year. Therefore, such operating expenses are generally incurred in the period between September and December of each year.

Full Year 2020 guidance:

• Adjusted EBITDA Margin is expected to be in the range of 35.5% to 37.5%.

Completion of Positivo’s corporate restructuring:
On July 07, 2020, according to a resolution approved by the Board of Directors and registered at the Board of Trade of Ceará, the corporate name of the subsidiary EAS Educação S.A. was changed to PSD Educação S.A.

On August 01, 2020, continuing the corporate restructuring, PSD Educação S.A. incorporated the Companies Positivo Soluções Didáticas Ltda. and Editora Piá Ltda. When PSD Educação S.A. acquired these entities, goodwill and fair value adjustments recognized in the amount of R$830,028 and R$726,876, respectively, were treated as not deductible. However, after this transaction, PSD Educação S.A has the tax benefit of the deductibility of the goodwill and fair value adjustments of R$529,347. The fair value adjustments should be deductible over the next 5 to 20 years, according to the useful life of the identified asset and the goodwill should be deductible for at least 5 years, under of Brazilian tax laws, depending on the utilization curve established by the Company in the initial use of the benefit.

At the end of each fiscal year, if the tax benefit is greater than the taxable income, the Company will recognize a deferred tax asset from the tax loss, which may be offset in the next fiscal years, limited to 30% of taxable income.

Information related to COVID-19 pandemic:
As discussed in more detail in our June 30, 2020 condensed consolidated financial statements submitted to the Securities and Exchange Commission on Form 6-K, the COVID-19 pandemic has not had a material impact on the Company’s operations, distribution capacity and revenue recognition so far. As of June 30, 2020, there was a total impact of R$7,898 on the Company's condensed consolidated financial statements related to the Covid-19 pandemic mainly related to: (i) revision of the Company’s estimated credit losses from its trade receivables based on expected increases in financial default and in unemployment rates in Brazil for the next months, which resulted in an increase of R$4,028 thousand, (ii) the Company incurred additional expenses of R$3,680 related to  IT, network infrastructure and an integrated teaching platform, as well as expenses to maintain protective measures.

Despite legally mandated school closures, the Company did not suspend its activities and, following health and social distancing guidelines, its workforce continues to work remotely from home, with the exception of teams from the distribution centers that are working on site, however, with several safety rules, in accordance with health and social distancing guidelines. In this scenario, the Company made investments in IT and network infrastructure, had additional expenses for cleaning and disinfecting the installations, bought alcohol and masks, funded COVID-19 tests and H1N1 flu vaccination campaigns with the objective of taking care of employees, reducing the demand for care in health units and to facilitate the diagnosis of COVID-19 in order to safeguard the health and safety of its employees, customers and suppliers. Our content production continues according to the scheduled curriculum calendar and the current educational material has been delivered to the schools according to the planned schedule, enabling the Company to recognize the revenues on these products.

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.

The extent to which the coronavirus (COVID-19) impacts our financial results and operations will depend on future developments, which are uncertain, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the impact of the coronavirus (COVID-19) pandemic. Based on future developments of the coronavirus (COVID-19), it is possible that we may, in the future, be required to take actions or steps in relation to our business that could have a disruptive or a material and adverse effect on our business.

About Arco Platform Limited (Nasdaq: ARCE)

Arco has empowered hundreds of thousands of students to rewrite their futures through education. Our data-driven learning, interactive proprietary content, and scalable curriculum allows students to personalize their learning experience with high-quality solutions while enabling schools to provide a broader approach to education.

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 for the year (or period) plus income taxes, plus/minus finance result, plus depreciation and amortization, plus share of 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 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 and (vi) software 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 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, 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.

Conference Call Information

Arco will discuss its second quarter 2020 results today, August 17, 2020, via a conference call at 4:30 p.m. Eastern Time. To access the call (ID: 2374425), please dial: [phone] or [phone]. An audio replay of the call will be available through August 31, 2020 by dialing [phone] or [phone] and entering access code 2374425. A webcast of the call will be available on the Investor Relations section of the Company’s website at https://arcoeducacao.gcs-web.com/. 

Investor Relations Contact:

Arco Platform Limited
[e-mail] 
Source: Arco Platform Ltd.

Arco Platform Limited
Interim Condensed Consolidated Statements of Financial Position
		June 30,		December 31,
(In thousands of Brazilian reais)		2020		2019
Assets		(unaudited)
Current assets
Cash and cash equivalents		188,894		48,900
Financial investments		702,761		574,804
Trade receivables		298,407		329,428
Inventories		47,175		40,106
Recoverable taxes		29,175		15,612
Financial instruments from acquisition of interest		-		3,794
Related parties		1,321		1,298
Other assets		32,207		14,630
Total current assets		1,299,940		1,028,572
Non-current assets
Financial instruments from acquisition of interest		32,311		32,152
Deferred income tax		198,377		156,748
Recoverable taxes		9,531		6,613
Financial investments		4,791		4,690
Related parties		15,106		14,813
Other assets		16,136		14,399
Investments and interests in other entities		57,250		48,574
Property and equipment		22,082		21,328
Right-of-use assets		19,409		21,631
Intangible assets		1,793,850		1,811,903
Total non-current assets		2,168,843		2,132,851
Total assets		3,468,783		3,161,423

		June 30,			December 31,
(In thousands of Brazilian reais)		2020			2019
Liabilities		(unaudited)
Current liabilities
Trade payables		30,806			34,521
Labor and social obligations		89,645			68,511
Taxes and contributions payable		4,729			7,508
Income taxes payable		54,506			52,038
Advances from customers		36,452			25,626
Lease liabilities		7,639			6,845
Loans and financing		302,682			98,561
Accounts payable to selling shareholders		344,214			117,959
Other liabilities		757			607
Total current liabilities		871,430			412,176
Non-current liabilities
Labor and social obligations		6,335			2,801
Lease liabilities		16,758			19,012
Loans and financing		1,226			-
Financial instruments from acquisition of interest		29,446			33,940
Provision for legal proceedings		845			251
Accounts payable to selling shareholders		911,192			1,098,273
Other liabilities		787			160
Total non-current liabilities		966,589			1,154,437
Equity
Share capital		11			11
Capital reserve		1,608,499			1,607,622
Share-based compensation reserve		99,558			84,546
Accumulated losses		(77,304	)		(97,369	)
Total equity		1,630,764			1,594,810
Total liabilities and equity		3,468,783			3,161,423

Arco Platform Limited
Interim Condensed Consolidated Statements of Income
		Three months period ended June 30,						Six months period ended June 30,
(In thousands of Brazilian reais, except earnings per share)		2020			2019			2020			2019
		(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net revenue		234,864			137,566			496,443			254,621
Cost of sales		(43,120	)		(25,827	)		(110,340	)		(47,696	)
Gross profit		191,744			111,739			386,103			206,925
Operating expenses:
Selling expenses		(88,070	)		(39,315	)		(175,970	)		(75,450	)
General and administrative expenses		(60,139	)		(44,926	)		(126,922	)		(65,758	)
Other income (expense), net		347			(437	)		759			2,922
Operating profit		43,882			27,061			83,970			68,639
Finance income		12,792			13,961			22,179			30,917
Finance costs		(30,752	)		(12,374	)		(69,091	)		(28,855	)
Finance result		(17,960	)		1,587			(46,912	)		2,062
Share of loss of equity-accounted investees		(3,293	)		(667	)		(3,999	)		(1,159	)
Profit before income taxes		22,629			27,981			33,059			69,542
Income taxes - income (expense)
Current		(22,435	)		(10,899	)		(54,623	)		(29,151	)
Deferred		16,050			8,617			41,629			16,149
Total income taxes – income (expense)		(6,385	)		(2,282	)		(12,994	)		(13,002	)
Net profit for the period		16,244			25,699			20,065			56,540
Basic earnings per share – in Brazilian reais
Class A		0.30			0.51			0.37			1.12
Class B		0.30			0.51			0.37			1.12
Diluted earnings per share – in Brazilian reais
Class A		0.29			0.49			0.36			1.09
Class B		0.30			0.50			0.37			1.10
Weighted-average shares used to compute net income per share:
Basic		54,942			50,709			54,941			50,505
Diluted		55,335			51,276			55,334			51,072

Arco Platform Limited
Interim Condensed Consolidated Statements of Cash Flows
		Three months period ended June 30,						Six months period ended June 30,
(In thousands of Brazilian reais)		2020			2019			2020			2019
		(unaudited)			(unaudited)			(unaudited)			(unaudited)
Operating activities
Profit before income taxes for the period		22,629			27,981			33,059			69,542
Adjustments to reconcile profit before income taxes
Depreciation and amortization		31,373			9,103			60,048			16,343
Inventory reserves		1,538			1,332			3,644			3,560
Allowance for doubtful accounts		6,386			550			12,554			2,203
Loss on sale/disposal of property and equipment and intangible assets disposed		780			29			1,452			131
Fair value change in financial instruments from acquisition interests		(913	)		-			(859	)		1,866
Changes in accounts payable to selling shareholders		294			-			6,894			-
Share of loss of equity-accounted investees		3,293			667			3,999			1,159
Share-based compensation plan		8,741			14,296			17,648			14,433
Interest accretion on acquisition liability		16,711			8,498			36,977			14,440
Accrued interest on loans and financing		5,733			-			6,975			-
Income on financial investments		(3,617	)		-			(5,656	)		-
Interest on lease liabilities		687			387			1,419			782
Provision for legal proceedings		561			132			594			211
Provision for payroll taxes (restricted stock units)		3,158			6,518			9,046			6,518
Foreign exchange income		922			592			180			516
Gain on sale of investment		-			2			-			(3,286	)
Other financial cost/revenue, net		(1,038	)		(1,202	)		(1,038	)		(1,202	)
		97,238			68,885			186,936			127,216
Changes in assets and liabilities
Trade receivables		39,179			7,792			18,467			(8,409	)
Inventories		(7,078	)		(2,067	)		(7,563	)		(2,031	)
Recoverable taxes		(2,610	)		(401	)		(4,304	)		(5,373	)
Other assets		(1,865	)		(9,778	)		(18,901	)		(7,826	)
Trade payables		(16,353	)		(27	)		(3,715	)		659
Labor and social obligations		21,164			6,580			15,622			11,354
Taxes and contributions payable		(219	)		(475	)		(2,779	)		(1,047	)
Advances from customers		(38,654	)		(5,830	)		10,826			14,998
Other liabilities		(924	)		(53	)		(982	)		(354	)
Cash generated from operations		89,878			64,626			193,607			129,187
Income taxes paid		(6,477	)		(5,175	)		(64,020	)		(23,210	)
Interest paid on lease liabilities		(285	)		(220	)		(710	)		(220	)
Net cash flows from operating activities		83,116			59,231			128,877			105,757
Investing activities
Acquisition of property and equipment		(1,665	)		(3,036	)		(4,042	)		(5,829	)
Payment of investments and interests in other entities		-			(4,200	)		(12,675	)		(4,200	)
Acquisition of subsidiaries, net of cash acquired		-			(16,137	)		-			(16,137	)
Acquisition of intangible assets		(22,421	)		(6,887	)		(39,480	)		(18,379	)
Purchase of financial investments		60,774			(36,238	)		(122,402	)		(62,529	)
Loans to related parties		-			-			-			(14,000	)
Net cash flows from (used in) investing activities		36,688			(66,498	)		(178,599	)		(121,074	)

Financing activities
Capital increase		-			12,611			-			13,829
Share issuance costs		-			-			-			(673	)
Payment of lease liabilities		(1,425	)		(565	)		(3,779	)		(1,080	)
Payment of loans and financing		-			(14	)		-			(14	)
Payment to owners to acquire entity’s shares		(1,001	)		-			(1,001	)		-
Loans and financing		(553	)		-			198,372			-
Dividends paid by subsidiaries		-			-			(3,696	)		-
Net cash flows (used in) from financing activities		(2,979	)		12,032			189,896			12,062
Foreign exchange effects on cash and cash equivalents		(922	)		(592	)		(180	)		(516	)
Increase (decrease) in cash and cash equivalents		115,903			4,173			139,994			(3,771	)
Cash and cash equivalents at the beginning of the period		72,991			4,357			48,900			12,301
Cash and cash equivalents at the end of the period		188,894			8,530			188,894			8,530
Increase (decrease) in cash and cash equivalents		115,903			4,173			139,994			(3,771	)

Arco Platform Limited
Reconciliation of Non-GAAP Measures
		Three months period ended June 30,						Six months period ended June 30,
(In thousands of Brazilian reais)		2020			2019			2020			2019
Adjusted EBITDA Reconciliation		(unaudited)			(unaudited)			(unaudited)			(unaudited)
Profit for the period		16,244			25,699			20,065			56,540
(+) Income taxes		6,385			2,282			12,994			13,002
(+/-) Finance result		17,960			(1,587	)		46,912			(2,062	)
(+) Depreciation and amortization		31,373			9,103			60,048			16,343
(+) Share of loss of equity-accounted investees		3,293			667			3,999			1,159
EBITDA		75,255			36,164			144,018			84,982
(+) Share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units)		15,480			20,814			31,440			20,951
(+) M&A expenses		2,427			4,423			3,991			4,423
(+) Non-recurring expenses		2,827			-			10,058			-
(+) Effects related to Covid-19 pandemic		4,591			-			7,993			-
Adjusted EBITDA		100,580			61,401			197,500			110,356
Net Revenue		234,864			137,566			496,443			254,621
EBITDA Margin		32.0	%		26.3	%		29.0	%		33.4	%
Adjusted EBITDA Margin		42.8	%		44.6	%		39.8	%		43.3	%
		Three months period ended June 30,						Six months period ended June 30,
(In thousands of Brazilian reais)		2020			2019			2020			2019
Adjusted Net Income Reconciliation		(unaudited)			(unaudited)			(unaudited)			(unaudited)
Profit for the period		16,244			25,699			20,065			56,540
(+) Share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units)		15,480			20,814			31,440			20,951
(+) Amortization of intangible assets from business combinations		18,252			3,085			36,235			6,065
(+/-) Changes in fair value of derivative instruments		(913	)		-			(859	)		1,866
(+/-) Changes in accounts payable to selling shareholders		294			-			6,894			-
(+) Share of loss of equity-accounted investees		3,293			667			3,999			1,159
(-) Tax effects		(21,996	)		(10,732	)		(42,424	)		(13,724	)
(+) Foreign exchange on cash and cash equivalents		922			592			180			516
(+) Interest expenses (income), net		16,478			6,357			36,496			13,881
(+) M&A expenses		2,427			4,423			3,991			4,423
(+) Non-recurring expenses		2,827			-			10,058			-
(+) Effects related to Covid-19 pandemic		4,591			-			7,993			-
Adjusted Net Income		57,899			50,905			114,068			91,677
Net Revenue		234,864			137,566			496,443			254,621
Adjusted Net Income Margin		24.7	%		37.0	%		23.0	%		36.0	%

		Three months period ended June 30,						Six months period ended June 30,
(In thousands of Brazilian reais)		2020			2019			2020			2019
Free Cash Flow Reconciliation		(unaudited)			(unaudited)			(unaudited)			(unaudited)
Cash generated from operations		89,878			64,626			193,607			129,187
(-) Income tax paid		(6,477	)		(5,175	)		(64,020	)		(23,210	)
(-) Interest paid on lease liabilities		(285	)		(220	)		(710	)		(220	)
Cash Flow from Operating Activities		83,116			59,231			128,877			105,757
(-) Acquisition of property and equipment		(1,665	)		(3,036	)		(4,042	)		(5,829	)
(-) Acquisition of intangible assets		(22,421	)		(6,887	)		(39,480	)		(18,379	)
Free Cash Flow		59,030			49,308			85,355			81,549
(+) Interest change in financial investments		3,617			-			5,656			-
(+) M&A expenses		2,427			-			3,991			-
(+) Others		2,827			-			14,408			-
Adjusted Free Cash Flow		67,901			49,308			109,410			81,549