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Operator
Good afternoon, everyone, and welcome to the VASTA Platform Limited Third Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. To withdraw your question, press star 1 again. At this time, I would like to turn the conference over to Mr. Marcelo Wernick. Please go ahead, sir.
Marcelo Wernick
Hi, good evening, everyone, and thank you for joining us in this conference call to discuss Vasta Platform's third quarter 2022 results, but most importantly, the conclusion of our commercial cycle, which goes from October 21 to September 22. I am Marcelo Wernick, Vasta's IR, and with me on the call today, we have Mario Gil, Vasta's CEO, Guilherme Melliga, Vasta's COO, and Cesar Silva, Vasta's CFO. Before we begin, I'd like to read a forward look statement. During today's presentation, our executives will make forward look statements. Forward look statements generally relate to future events or future financial or operating performances and involve known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from those contemplated by these forward look statements. Forward-look statements in this presentation include, but are not limited to, statements related to our business and financial performances, expectations for future periods, our expectations regarding our strategic product initiatives and their related benefits, and our expectations regarding the market. Forward-look statements are based on our management beliefs and assumptions and the information currently available to our management. These risks include those set forth in the press release that we are issuing today, as well as those more fully described in our filings with the Securities and Exchange Commissions. The forward-looking statements in this presentation are based on the information available to us as of today. You should not rely on them as predictions of the future events and we disclaim any obligations to update any forward-looking statements except as required by law. In addition, management may reference non-IFRS financial measures on this call. The non-IFRS measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with IFRS. Let me now give the call over to Gil to make his opening statements.
Vasta Platform 's
Thank you, Marcelo. Thank you all for participating in our earnings release call. I'd like to cover the slide number three with some highlights of the commercial cycle. In this quarter, we concluded the 2022 commercial cycle, and we believe that the commercial cycle is the best way to understand our business. Vasta concluded this cycle with a 38% subscription revenue growth over the same period last year. Subscription revenues Subscription revenues totaled 1 billion and 24 million reais and thus exceeded by 2.4% our ACV guidance of 1 billion, excluding par, the ACV grew 47%. The subscription revenue highlights in this cycle are the performance of our premium brands and also an excellent cross-selling of complementary solutions that grew 77%. compared to the last cycle. The non-subscription segment, as expected, declined compared to the previous cycle, with textbook sales representing now only 12% of VASTA's revenue. Thus, in 2022 cycle, the net revenue grew 30%. VASTA's EBITDA was $336 million, in the commercial cycle, and the margin expanded 10 percentage points, reaching 29%. In the third quarter vision, the EBDA was 23 million, recovering from a loss of 29 million in the same quarter of the previous year. This increase is a result of better product mix, workforce optimization, and our budgetary discipline. And finally, our free cash saw a significant improvement of 174 million reais and total 55 million reais in this commercial cycle when compared to a consumption of 190 million in the last cycle. The improvement is driven by the recovery of operating results and better working capital dynamic. that is bringing down the net debt EBITDA ratio to less than three times. This is the 30th consecutive quarter of improvement in this indicator. With that being said, I pass the word to our COO, Malega, that will give more details about the 2022 ACV growth.
Marcelo
Thank you, Gil. Now moving to slide number four, we detail the ACV growth composition. The 2022 commercial cycle was a very positive year, surpassing our 1 billion ACV guidance by 2.4%. Q3 net revenue quarter-on-quarter grew 49% and 30% in the 2022 commercial cycle, driven by acceleration in subscription revenue that grew 76% quarter-on-quarter and 38% in the total commercial cycle. Subscription now represents 88% of total revenues. As anticipated in prior release, the different seasonality of new brands such as Eleven and McKinsey has led to a more balanced revenue recognition throughout the quarters. Although the first two quarters continue registering the larger chunk of commercial cycle, first half of 2022 accounted for 68% of total ACV. versus 71% in the same period of 2021 cycle. I will now turn back to Marcelo Wernecki, who will talk about the financial results of the class.
Gil
Thank you, Malega.
Marcelo Wernick
In slide number five, we present the composition of VASTA's net revenue. As you can see on the left side, in the third quarter, total net revenue increased 49 year-on-year. to 189 million, including here 21 million in revenues from Eleva. On organic basis, the revenue growth was 32%. Moving to the right side, we see the components of revenue growth. In total, subscription revenue jumped 76%, reflecting the superior quality of revenue mix in the 2022 ACV, plus the contribution of Eleva. Subscription revenue was mostly composed of revenues from traditional learning systems and complementary solutions, which is aligned with our strategy of shifting revenue from textbooks to learning systems and the digital platform. Moving to slide number six, we analyzed the net revenue for the 2022 cycle. Net revenue grew 30% in this quarter or 20% on an organic basis, excluding Aleva. Again, from the center to the right, total subscription revenue grew 38% or 25% on an organic basis. Subscription revenue, excluding PAR, jumped 44%, while PAR revenue fell 4% to $126 million. As previously mentioned, we see subscription revenue making more than 100% of our ACV guidance, while non-subscription revenue that now represents only 12% of our total revenue was down by 12% in line with our expectation for this cycle. Moving now to slide number seven, adjusted EBITDA in this quarter totaled $23 million, a relevant increase from the minus $29 million in third quarter 21. This improvement was driven not only by the growth in net revenue, but also by operating leverage gains, cost savings, and better product mix, with the growth of subscription and premium products. On the right side of the slide, we see that adjusted EBITDA for the commercial cycle doubled, reaching $336 million, with margin increase of 10 percentage points to 29%. This is evidence that Vassa's profitability is now standing in a much higher level than in 2021 and closer to the company's potential. In slide number eight, we observed that in proportion of revenue, gross margin grew 2.8 percentage points due to a higher quality sales mix, complementary solution penetration, and cost dilution. There was also a decrease in the provision for double accounts, as there was a hike in the provision in 2021 to accommodate the impact of the pandemic. Moreover, commercial expenses and adjusted cash expenses as a percentage of net revenue were down 2.4 percentage points and 3.6 percentage points respectively. These are attributable to the efforts such as workforce optimization and our budgetary discipline. As a result, adjusted EBITDA margin reached 29% in this cycle versus a margin of 19% in prior commercial cycle. Moving to slide number nine, in the third quarter, adjusted net loss totaled $42 million in comparison to an adjusted net loss of $47 million in the third quarter of 2021. impact mainly by higher financial leverage and the hike in interest rates. However, as we can see in the right side in the 2022 cycle, adjusted net profit increases 25% to 20 million.
Gil
Now moving to slide 10, we show the free cash flow evolution.
Marcelo Wernick
In third quarter 22, operating cash flow totalled $17 million, a significant improvement from a negative $6 million in the third quarter of 21. In this commercial cycle, the operating cash flow totalled $55 million or $75 million when excluded the early payments of $20 million in royalties to content providers. an improved comparative private cycle, which had a consumption of 119 million. Next, moving to slide 11, I will give more details on the provision for W-4 accounts and our accounts receivable. During the pandemic, the challenging business environment faced by our partner schools as well as our decision to support them by extending payment terms pressured our receivables collection and impacted our operating results by requiring a higher level of provisions for W-4 accounts. Total expenses with PDA in the 2022 commercial cycle totaled $27 million, representing 2.4% of net revenue. compared to an expense of $34 million in last commercial cycle. On the right side, we can see that the average days of accounts receivable was 102 days in the third quarter of 22, or 10 days by adding Eleva's last 12 months net revenue, which is 70 days above the same quarter of previous year. Nevertheless, we can observe a gradual normalization in the payments aligned with the restoration of school partners' regular activities.
Gil
I will conclude my part of this presentation with the slide 12.
Marcelo Wernick
VASTA ends the third quarter of 22 with a net debt position of $980 million. from the second quarter of 22, the increase was related mostly to the M&A operation in relation to the acquisition of Eduke Bank and interest accruals on the financial debts and accounts payable from business combination, partly offset by cash flow improvements. In the right chart, we can see that our leverage measured as a net debt by last 12 months adjusted EBITDA has started to decline since the first quarter of 22, reaching a ratio of 2.92 in the third quarter of 22, or 2.87, including 11 last 12 months EBITDA in full. We expect to continue this health position over the coming quarters. give the call back to Gil.
Vasta Platform 's
Thanks, Marcelo. Earlier this year, we announced the acquisition of a minority interest in Eduki Bank, but given that we had many questions about the deal and also the business model, now we are giving more callers on that. Eduki Bank's mission is to make to the schools the usual uncertain flow of tuitions over the school year, a regular monthly flow of cash discounted by a take-away rate earned by EdukiBank. EdukiBank's business model differs from other competitors and is frictionless, since the collection process from the students' parents continues to be carried out by the schools that more than anyone else understand the needs of a long-term relationship with the families. This translates into a high NPS score and low churn of schools. The investment was 157 million reais for a 45% stake, 87 million in cash, of which 40 million is conditioned to the growth of students, and 70 million in capitalization from the sale of Vasta to EducBank of the right to access our base of schools. VASTA will not consolidate Eduki Bank in its balance sheet. Eduki Bank results will be recognized via equity income. This decision was taken to preserve VASTA's asset-light model without consolidating in our balance sheet a non-core business and a capital-intensive model. With that being said, Eduki Bank has doubled the numbers of students since the acquisition date And based on the existing pipeline, this number should continue this trend in the short and the medium term. Finally, the acquisition of EdukiBank complement our portfolio of administrative services that addresses the needs of our partner schools, freeing up time for them to focus on what they know most, which is to educate. Now I'll pass the floor over to Malega.
Marcelo
Thank you, Gil. Moving on to slide 14, we present a projection of our ACV 2023. On October 31st, the 2023 preliminary ACV guidance totalled 1,230,000,000, an organic growth of 20%, versus the subscription revenue collected in 2021 cycle, or 23% versus the 2022 ATV. Excluding paper-based PAR, the organic growth is 22.4%, as nearly 100% of our new sales have come from traditional learning systems and complementary solutions, reflecting our focus on reducing exposure to paper-based textbooks channels. Complementary solutions will continue to account for the highest growth rate among the business segments, along with our premium brands, reassuring our perception that quality and reputation remains the name of the game in this business. I will now turn the floor back to Gil.
Vasta Platform 's
Thanks, Melega. Moving to the slide 15, now let's cover our ESG initiatives. Sorry, on the slide 16. Since last quarter, VASTA has been reporting updates about ESG standards, including a quarterly panel of key indicators in line with the topics identified in the maturity process, reinforcing our commitment with the highest ESG standards. We launched this quarter the Afro Internship Program, which has created exclusive intern vacancies for black people in the organization. 13 people have been hired with this program. Another highlight in this quarter is that we continue to increase the use of renewable sources of energy. Now, 98% of the energy consumed comes from renewable sources, being 100% in our largest distribution center in São José dos Campos. Committed to the accountability and transparency, VASTA launched the first greenhouse gas emissions for its operations, and the purchase of renewable energy has reduced VASTA's total emissions by 14%. Having said that, I finish our presentation and invite you all to the Q&A session.
Operator
Ladies and gentlemen, once again, if you do have a question, please press star 1 on your telephone keypad. Once again, it is star 1 to ask a question. And we will take a question from Philippe, MNCO, ItalBBA.
Philippe
Hi, guys. Good evening, everyone. Thanks for taking my question. We noticed that revenues coming from complementary solutions showed a good performance in squatters. How should we expect the contribution of this segment in the company's consolidated results looking forward? Thank you.
Marcelo
Hi, Felipe. This is Guilherme. Thanks for your question. Complementary solutions are the main driver for growth in our company with traditional business. We recorded more than 70% growth in the last commercial cycle. And we foresee a very strong growth for the next commercial cycle. Of course, the base is increasing, so we do not expect 70,000%, but definitely will be the booster of the 20% guidance that we just gave.
Vasta Platform 's
And, Felipe, if I may add, this is Gil speaking. We still have only one-quarter of our partner schools adopting at least one complementary solution. If I'm not wrong, only 3% of our partner schools are adopting two or more solutions, right? So the Malagasy is right. We have a road for growth regarding to complementary.
Gil
Super clear. Thanks for the question. Just a reminder, everyone, that is star one if you would like to ask a question. At this time, no one else has signaled on the phone. Another reminder, it is star one if you have a question. There appear to be no further questions at this time.
Operator
And everyone, as there are no further questions, I'll hand back to our management team for any additional or closing remarks.
Vasta Platform 's
Thank you, operator. In my final remarks, I would like to say that we had an excellent commercial cycle and we are really confident that the next commercial cycle will be as good as this one. We had the opportunity to share with you guys that all the marketing process or the commercial process is going fine. It's pretty much comparable to the last cycle. Malaga has reinforced that our premium brands and also complementary solutions are showing an excellent performance also in this commercial cycle that So we are really confident that we brought VASTA to a high growth moment. And also, on the other hand, we are always looking for ways to be more efficient, to be more cost efficient. And as you could see in our presentation as well, we have increased by 10 percentage points the margins in this commercial cycle. So it was a very good year, and we are confident that the next one will be as good as this one. So thank you very much for participating in our third quarter earnings call, and we hope to see you again in the fourth quarter call. Bye-bye. Take care.
Operator
And everyone, that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.
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