This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Operator
Gentlemen, thank you for standing by and welcome to the VASTA platform 1Q21 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this time, you will need to press star and the number 1 on your telephone keypad. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Bruno Giardino. Please go ahead, sir.
Bruno Giardino
Thank you. Good morning, everyone, and thank you for joining me in this conference call to discuss VASTA Platform's first quarter 2021 results. With me on the call today, we have Mario Guil, VASTA CEO, and Guilherme Medega, VASTA CEO. During today's presentation, our executives will make forward-looking statements. Forward-looking statements generally relate to future events or future financial or operating performance and involve known and unknown risks, uncertainties, and other factors that may cause or actual results to differ materially from those contemplated by these forward-looking statements. Forward-looking statements in this presentation include, but are not limited to, statements related to our business and financial performance, expectations for future periods, our expectations regarding our strategic product initiatives and their related benefits, and our expectations regarding the market. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. These risks include those set forth in the press release that we issued yesterday, as well as those more fully described in our feelings with the Securities and Exchange Commission. Those forward-looking statements in this presentation are based on information available to us as the date hereof. You should not rely on them as predictions of the future events and we disclaim any obligation to update any forward-looking statements except as required by law. In addition, management made reference to non-IFRS financial measures on this call. The non-IFRS financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with the IFRS. Let me give the call over to Mario Gil to give his opening statement.
Mario Guil
Thank you, Bruno. Thank you all for participating in our earnings release. uh i wanna first i wanna i want to welcome bruno jardino in his first call as our new cfo and wish him the best with us in vasta now let's cover the slide number four with some highlights of the quarter starting with the annual contract value the acv for 2021 commercial year that total 853 million reais, which is 23% higher than the amount of subscription revenues recognized in 2020 commercial cycle and was obtained exclusively by organic means. But also let's remember that the ACV is not a guidance of revenues, but shows the total amount of contracts and the duration of the contract signed for the next commercial cycle. As you know, the second wave of COVID in Brazil is harder than the first wave in 2020. This second wave happened exactly in the peak of enrollments to the 2021 school year, adding to an already fragile macroeconomic outlook. This combination has affected our business lines in different manners. Subscription revenues have proven more defensive than the revenues associated with the sales of textbooks, like Power Learning System and the non-subscription revenues. However, in the 2021 commercial year, we added 456 new schools to our client base with an average contract duration of more than 3.5 years. Thus, While we may not be able to fully recognize the revenue implied by the ACV in 2021 commercial year, we are very well positioned to capture incremental revenue once the pandemic effect dissipates. It is also noteworthy that our students had outstanding results in the most competitive universities admission test as well as in the national high school exam as we will detail later in the presentation. And finally, Plural remains as the absolute leader in terms of web traffic and we continue to expand the offer of new features such as Plural Store, Plural My Teacher and digital services which enhances our long-term growth potential. Now I'll pass the floor back to Bruno Jardino, who will comment on the financial highlights of the quarter.
Bruno Giardino
Thank you, Guil. So moving to slide five, in this slide, we'll analyze our revenue performance in the 2021 commercial year-to-date, which consists in the sum of the fourth quarter 20 with the first quarter 21. Our net revenue decline is 17% year-over-year, as you can see in the last chart. However, when we break this information into subscription and non-subscription, we notice that our subscription revenue increases 10% year over year, representing 85% of total revenue from 64% in the same period of last year. Going further into this breakdown to the right side of this slide, We split subscription revenue into traditional learning systems and complementary solutions in the upper right side of the slide. We will call this block as Subscription X-Bar, VAR. This subsegment grew revenue by 20% in the 2021 commercial year to date, slightly below the 23% growth in the ACV we reported. This little gap has to do with the lower enrollment registered at partner schools when compared to their expectations at the SACV formation, when the possibility of a second wave of the pandemic was not being even considered. We note that the number of basic education students at private schools fell 2.5% in 2020, according to the last census, and the initial analysis of our client student base suggests an even bigger drop for 2021. In the chart below, you see that PAR, or learning system based on textbooks, posted a 16% decline in the commercial year to date. On the top of the lower number of students enrolled at our client schools, the sale of textbooks has been more severely affected by the weak macroeconomic environment. Historically, in recession times, there is a greater volume of reuse and purchase of secondhand textbooks that negatively affects the sale of new ones. Finally, looking to the bottom of the chart of the slide, non-subscription revenue tumbled 65%, reflecting not only the weakness in textbook sales, but also our commercial efforts to bring non-subscription clients to our subscription products. Therefore, as you can conclude, the pandemic effect has hit our business lines in different ways, with the growth in subscription products preserved, particularly in the export line, while non-subscription revenue has suffered the most. Then we move to the slide number six, where we provide further breakdown into the quarter, first quarter, and the commercial year to date. So as you can see, net revenue decline in 28% in the quarter. as we were efficient to anticipate part of the revenues of the commercial year to the fourth quarter, right? But when we look into the 2021 commercial year-to-date figure, this decrease is lower of 17% only. Then on the right-hand side, we provide a further breakdown into traditional learning systems, complementary solutions, and PAR. And as we mentioned before, the behavior of subscription X-PAR products That means traditional learning systems and complementary solutions have been preserved, a growing 16% and 42% in the cycle, whereas the other segments like PAR and non-subscription have suffered the most. Moving on to the slide number seven, I present adjusted EBITDA and net profit figures. In the first quarter, we posted 67 million reais in EBITDA. a drop of 47%, right, with a decrease in the margin. This has to do with the lower amount of revenues we posted in the period, right, through, therefore, impacting dilution of fixed costs and fixed expenses. But looking in the cycle and in the right-hand side of the chart, we notice that VASTA posted 226 million reais in EBITDA. adjusted EBDA, a fall of 15%, but with a 90%, nine basis points increase in the adjusted EBDA margin to 36.1%. Following adjusted net profit on the right side of this slide, we had a drop of 53% in adjusted net profit for the first quarter, which has to do again with the lower level of revenue and operating income. in the quarter, but when we look at the commercial cycle as a whole, commercial cycle to date, VASTA managed to grow just an abrupt 6% in this period to 163 million reais and this growth has been favored by the interest income on IPO proceeds that more than compensated the drop in the operating income. With that, I conclude this section of financial highlights, and I turn back to Mario Gil, our CFO. Thank you.
Mario Guil
Thank you, Bruno. Let's move to slide number eight. I will comment on the performance of our schools in the National High School Exam, the ENAME. In the 2019 edition, which results were disclosed by the end of 2020, VASTA not only maintained the leadership versus peers, but also expanded the difference to the competitors. In that year, VASTA was the content provider for top-ranked schools in 191 cities, which is 46% more cities than the second player, up from 28% in 2018. Considering the top three rankings, VASTA was the content provider for 372 schools, which is 51% more than the second player and up from 30% in 2018. Moving to the next slide, slide number nine, where we will highlight the outstanding performance of our brands at the most competitive admission test. VASTA had the highest number of approvals in 2021 admission tests of Brazil's and Latin's best university, University of São Paulo, USP, and University of Campinas, UNICAMP, according to the Times Higher Education ranking. Our results are two times higher than the second player. For instance, in medicine in University of Sao Paulo, the most competitive degree in the country, Anglo, one of our high-end brands, had the highest number of students approved. 66 students on Medicine USP, an average of one approved student at each four. And PH, also one of our high-end brands, had the first, the third, and the eighth position in the same course. In the SISU, the Unified Admission System for Federal Universities, there were more than 9,000 VASTA students approved, with hundreds of them in the top positions, as you can see in this slide. Now I'll pass the floor to our COO, Guilherme Melega, who is going to cover the satisfaction of our clients.
Bruno
Thank you, Gil. On slide number 10, something we are particularly proud of, the NPS of our brands averaged 72, with Anglo, PH, and PAR having scored at excellence levels, 79, 79, and 78, respectively. Pural had an NPS of 54. We believe that quality recognition of our services and our client satisfaction are key pillars to our long-term strategy. These differentials also resulted in the capture of more than 450 new schools during the 2000-2021 commercial cycle. During this section, we are proud to announce that we set a new partnership with Collegio Fibonacci, present for nine consecutive years among Brazil's top ten rankings. With Fribonacci, we will also launch a set of new assessment services in plural in 2021 and a new pre-learning system for the 2022 commercial cycle. Now turning back to Gil.
Mario Guil
Thank you, Malaga. Let's move to slide 11, please. I will cover the recent developments of our Plural platform, which remains the absolute leader in terms of web traffic, offering a unique digital experience to students and supporting the continuation of schools' activities during social isolation times. We have continually expanded the range of solutions offered by Plural, such as Plural Store, which substantially expands the offering of complementary content to our students. Another feature recently launched is Plural Private Classes platform, or Plural My Teacher, which allows the students from partner schools to contract customized classes inside the platform. Finally, we have advanced fast in the expansion of our digital services platform, with the acquisition of SEL and the launch of Somos Integra, which connects kindergarten schools and our partner schools. Moving to slide number 12, this is our last slide. I would like to comment on the M&A side. In addition to the strong organic growth, VASTA also made progress in its M&A front by announcing three acquisitions since the IPO being a level learning system or a level platform the most relevant. The transaction is being analyzed by Brazil antitrust body, CAGI, and we expected to have the approval in the second semester of this year. In parallel, we initiated the planning of the integration and the works are in an advanced stage. our M&A pipeline remains rich and we are engaged in other transactions which are at different stages. Having said that, I finish our presentation and now open the Q&A section. Thank you very much.
Operator
As a reminder, if you would like to ask a question, press star and the number one on your telephone keypad now. And you have a question from Dator Camida from Goldman Sachs.
Bruno
Good morning, everyone. Thanks for taking our question.
Bruno Giardino
So our first question would be on the strategic value of the PAR offering at this point, given how much it was impacted by COVID and how non-subscription Facebook offerings which have synergies with PAR are now smaller as well. So going forward, do you expect revenue from PAR to recover quickly, or is this an offering that will be less prioritized by VASTA in future sales cycles?
Bruno
And our second question would be if you could give us some more color on this strategy to create a new brand in partnership with Fibonacci, especially on how it complements your existing portfolio in terms of targeted geography, strike point, and also on how you plan to structure sales and distribution for the new brand. Thank you.
Mario Guil
Victor, thanks for your questions. I will start covering the first question regarding to PAR. And Malaga could add more comments on my answer. So first of all, yes, we are seeing PAR affected by the COVID more than our other initiatives, right? And let's remember that during the ACV building 421, we were already focusing more in traditional learning systems and also in complementary solutions, right? We were doing that at that time because we were seeing that PAR, given that the product is based on regular textbooks, PAR could be more affected than the other lines, right? But on the other hand, Victor, we know that more or less one-third of the schools in the country, they will never use a learning system. right? That's a reality. We can say that the market share of learning systems or the penetration of learning systems in Brazil are close to 70%, and we believe that that's the penetration that we are going to see for learning systems in the upcoming years. So having a solution for schools that don't like the concept of a traditional learning system gives us the opportunity to fight for revenues in a part of the market that the peers cannot compete against us. But I guess I can also offer to you that our main strategy to PAR is to eliminate the printed books, right? So all the initiatives we are doing with PAR from this commercial cycle to the next commercial cycle is to increase the penetration of our learning book which is our Chromebook as a service, right? So we are converting traditional PAR clients into PAR learning book clients and also we are of course transforming or we are incentivating the digitalization of PAR, right? Having said that, Victor, interesting to understand that PAR has margin and PAR generates cash, right? So it's not a business that we should kill. It's facing a difficult moment, right, but gave us, as I mentioned, the opportunity to fight in a part of the market that the peers cannot compete, okay? Moving to the second part of your question, and please, Meliga, feel free to compliment me at the end, right? Regarding to Fibonacci, we see Fibonacci as an excellent opportunity to reinforce our premium brands. And let's remember that Fibonacci is located in Minas Gerais, right? So it's the first brand, the first premium brand We have in Minas Gerais, we have Anglo, which is the top brand in São Paulo. We have PH, which is the top brand in Rio. But Fibonacci is going to be our top brand for Minas, and we believe with the behavior of Fibonacci, which is, by the way, the top-ranked countryside school in the country, the only school top 10 schools in Brazil in the NM results that is not located in the capital of the state, right? So with Fibonacci, we are aiming regions where the other high-end brands we have are not reaching all the results we would like to see. For instance, the Northeast region and the North region, So adding Fibonacci to our portfolio, we believe we will have for the next commercial year. Fibonacci, the Fibonacci learning system will be in our portfolio during this marketing campaign, but the revenues are going to, we are going to see the revenues in the ACV 22, so the 22, yes, so for the next commercial cycle and Again, we believe that Fibonacci will reinforce our portfolio of learning systems, right?
Bruno
Thank you very much. Gil, if I just could add one thing about PAR. We are seeing a lot of women from our PAR base to migrate to a full digital platform, such as PAR Digital Platform. full subscription model, and also migrate to a traditional learning system. So I think we can see that PAR is pretty much changing that business model to fully digital or migrate to learning system, and we see the trend very clear from our schools to adopt the new solutions. Perfect. Thank you both very much.
Operator
And once again, as a reminder, to ask a question, press star one. And you have a question from Andres Corello from Scotiabank.
Andres Corello
Yes, thank you so much for taking my question. First, I wanted to ask you, because this is such an extraordinary situation, you just mentioned that parents were caught in the middle of the second wave as they were subscribing their children to schools. So I'm wondering if in Brazil parents can inscribe their children to school at the middle of the school year. In a way, I just wanted to know if you're expecting that probably next quarter or you will see more students getting into private K-12 schools, if that is actually possible, or we have to wait until the next school cycle? That's the first question. And the second question has to do a little bit with your business model. Obviously, VASTA is a new story, so we are understanding your business model. But I'm wondering if you could tell us a little bit about how you deal with your clients in the sense that what percentage or what part of your billing comes from software services and what part comes from education services? In a way, I want you to kind of grasp the degree to which VASTA is a software company and the degree to which VASTA is an education company. This is probably a complex question, but I just wanted to hear your opinion. Thank you.
Mario Guil
Great, Andres. Thanks for your questions. Let's start with the last question, right? Currently, well, let's say that Vasta in the past was an educational company with some tech features. Today, we see ourselves as a tech company delivering education, right? That's the first statement. The second statement is the vast majority of our revenues today are coming from, you know, the core content and the complementary solutions, which are, I would say, completely educational businesses, right? And the vast majority of our clients today, they sign a contract for a bundle, right? The bundle is comprised by the content, the teacher training, plural platform assessments, and so on, right? So that's the... the contract that our client signed, this bundle. But, yes, we are moving to become a software company. And I would say that starting by the end of the second quarter, we are expecting to see the first revenues coming from these completely digital initiatives. such as Plural My Teacher, which is the platform for connecting teachers and students for private classes, and also Plural Store, which is our store connecting third-party content or services to our students. So if we could advance the movie five years from now, we are going to be much more a software company that delivers services education. But today, the vast majority of our revenues are coming from educational bundles such as learning systems, complementary solutions, and so on. Regarding to your first question, our expectations about overcoming this tough period that COVID brought to our business is not in the next quarter. I would say we are expecting to see better days in the next semester, right, especially with the young kids. The most impacted segment of education by COVID is the preschool, right, and the primary school. Especially in preschool, it's not that difficult to bring the kid back to the school in the second semester, right? Because they don't have a tight curriculum to follow during the school year. So yes, we are expecting, we cannot, we are not foreseeing how this will impact positively our revenues, but yes, we are expecting to see more kids coming back to school in the second semester, especially in the fourth quarter of the year, and probably I can comment that we are delivering a product made especially to accelerate kids that were outside the school, which means we didn't have this product in our portfolio so far, but we are developing this product to accelerate kids that stayed at their homes during the 2021 three quarters of the year, right, as a way to our partner schools to incentivize families to bring kids back to school and accelerate the kids to have a good 2021, 2022, sorry, school year, right? And finally, my comment about the future, Andres, is that in the fourth quarter of this year, and remember that the fourth quarter of any given year is the first quarter in the new commercial cycle, right? So we are expecting to see to the fourth quarter of this year, as we mentioned, we are seeing good results. how can I say, good information, right, regarding to vaccines, regarding to the macroeconomic scenario in Brazil. So we are expecting to have the next commercial year a better commercial year than we are seeing this year, right? In any of our products, even part we are confident that the behavior of PAR for the next commercial cycle will be better than this commercial cycle, right? PAR, it's a product that we only sell in the fourth quarter and in the first quarter of any given year, right? So in the second quarter and the third quarter, we don't sell spot books and we don't sell PAR. So all the impacts we could have with PAR, we already had. We already had. So now we are, I would say that we are passing on a speed bump, right? And better days will come.
Andres Corello
Thank you very much. Very complete. Thank you.
Bruno Giardino
So we have here a question from Pedro Mariani, Bank of America. Actually two questions, thank you very much Pedro. First question is a follow up regarding PAR. In order to reduce the problems of revenue conversion faced this year, would it be possible to gradually change our distribution strategy and directly deliver PAR textbooks to schools? Do you believe this could be an alternative for PAR revenue recognition? And second question, was there any reduction in enrollment, you notice, at your client schools in the latest months? And if there has been any change in the mix of schools due to the crisis?
Mario Guil
Great. Pedro, thank you. Thank you for your question. Regarding Tupar, We are doing that. We are trying to disintermediate the sales from us to the school. And we also have our Livro Fácil, which is our e-commerce. That's a way. We can intermediate ourselves through Livro Fácil, right? But the main factor that is bringing the revenues back the power revenues down is not related to intermediation or not, right? I would say that we are seeing the combination of three factors leading part to this result. First, schools adopting traditional textbooks were the schools that took more time, you know, to adapt for the first wave of COVID. So schools adopting regular textbooks, they were a little bit slow in adapting the operation in the beginning of the pandemic, and that means that at the end of the year, they lost more students or they saw less enrollment than they were expecting. This is one factor. The second factor is, you know, the middle class family in Brazil lost incomes. So if they can reuse a book of an older kid or if they can, you know, buy a secondhand book, of course they will do in this scenario, right? So this is affecting PAR even more than the first factor I mentioned, right? In the traditional learning system, given that students, they write in the, you know, they write in the workbooks, they basically in the traditional learning system, they destroy the material during the, you know, the school year. So books are different, right? That's why books have the problem in terms of secondhand, secondhand, families buying secondhand books. And the third factor is regarding to to enrollments right so really we are now we we can see that schools adopting textbooks they have less students comparing to the projections they have and they sign it in the ACV they have more they are being more affected than than schools adopting the other the other products, right? So jumping to your second question, and Meliga, please feel free to add on my answer here. Yes, we are seeing for the traditional learning systems and complementary solutions that on average schools, they are with less enrollments than they expected to have for this specific school year, right? Depends on the brand, depends on the neighborhood, they are more or less impacted, right? But I would say I can offer this information to you, Pedro, that on average we are seeing schools with somewhere between 6% less students than they were expecting to have to 9% less students than they expected to have, right? So in that sense, we are seeing that the base of students we should have with the ACV21 is affected between 6% to 9% in number of students, okay?
Operator
And there are no further questions in queue at this time.
Bruno Giardino
Excuse me, operator. Another question came up here. Another analyst with difficulty to pose a question. So that's a question from Luca Marchesini, Itaú BVA. Thank you, Luca, for the question. His question is, as Cognac continues to deleverage, should this encourage VASTA to increase M&A activity going forward? And Gio, excuse me, I'll take this question to myself. So Luca, I think VASTA has kept very active in M&A pipeline overall this period, right? And this is part of our strategy. So we maintain a great focus on M&A activity. We have a rich pipeline ahead of us. We have a very... many conversations with the targets, each of them in different stages. So we plan to continue doing M&A and we don't believe that the current situation of Cognos leverage will impair our ability to bring M&As even in the short term. We have to consider that Maybe the deals that are closer to a closing are deals of a small amount of revenue or ticket and that helps Vassa to do it without hurting Cognizant's leverage. But the right answer to your question is we continue to analyze M&A regardless of Cognizant's leverage situation.
Mario Guil
Luca, maybe I could just add to what Bruno said, that given that we have a traditional learning system under CAD's approval, which is 11, right? We are focusing all of our energy today in dealing with the opportunities we have in new technologies to complement Plurals and also complementary solutions, right? So this kind of deal is usually I would say a small deal, right? We don't have any problems to buy this kind of companies, small ed techs and so on. And we are going to move forward in terms of consolidating more the market of traditional learning systems only after CAD's approval, okay?
Bruno Giardino
So, operator, I have no further questions in my WhatsApp queue, so you can proceed to the final remarks.
Operator
And there are no further questions in the audio queue, and I'll turn the call back over to management for any closing remarks.
Bruno Giardino
Well, thank you very much for being in this call with us. Our IR department, represented by myself, is always available to receive your questions. Have a great day. Thank you all. Stay safe. Bye-bye.
Operator
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
Disclaimer