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Operator
Ladies and gentlemen, thank you for standing by. My name is Bhavesh and I'll be your conference operator today. At this time, I would like to welcome everyone to the VASTA Platform Third Quarter 2023 Financial Results Conference Call. At this time, 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'd like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. If you'd like to withdraw your question, please press the star followed by the one once again. Before we begin, I would like to read a forward-looking statement. 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 our 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 benefit, 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 are issuing today, as well as those more fully described in our filings with the Securities and Exchange Commission. 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 future events, and we disclaim any obligation 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 financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with IFRS. Thank you so much. I will now hand the call over to Marcelo Werneck of Investor Relations. You may begin your conference.
Marcelo
Good evening, everyone. Thank you for joining us in the conference call to discuss VASTA platform third quarter 23 results. I am Marcelo Werneck, VASTA's Investor Relations, and today we have the presence of Guilherme Mellega, VASTA's CEO, and Cesar Silva, VASTA's CFO, who will be joining me on the call. During the call, we'll cover key highlights, financial insights, and strategic developments that have shaped our performance in the 2023 commercial cycle. Let me now hand over the floor to Guilherme Melga, our CEO, to make his opening statement.
Marcelo Werneck
Thank you, Marcelo. Thank you all for participating in our earnings week call. I'd like to cover slide number three with some highlights of our 2023 commercial cycle. In this quarter, we concluded the 2023 commercial cycle, and we believe that the commercial cycle is the best way to understand our business. Our net revenue increased 24% to $1,437,000,000, mostly due to the conversion of 2023 ACV into revenue, and also due to the performance of the non-subscription products and B2G. last year's subscription revenue has reached 1,207,000,000, an 18% increase over the 2022 sales cycle, or 22% excluding textbook subscription products . Our complementary solution segment continues to stand out, showing the highest growth rate among our business segments, with a 42% increase in the current cycle. Moreover, As mentioned in the last quarter, in 2023, Vasti started to offer its products and service to the Brazilian public sector, B2G. In the third quarter of 2023, we generated 40.7 million reais in revenues with the B2G sector, and in the 2023 sales cycle, we generated 81.2 million reais in revenues with the B2G. Moving to the company's profitability, In the 2023 commercial cycle, our adjusted EBITDA experienced a growth of 23%, reaching 411 million reais, while maintaining an adjusted EBITDA margin close to 29%. Finally, this was another year of significant improvement in our cash flow. In the 2023 sales cycle, free cash flow totaled 145 million reais. 167% increase from 55 million reais in 2022 cycle. The last 12 months, pre-cash flow to adjusted ABTDA conversion rate improved from 16% to 35%. I will now turn back to Marcelo to talk about the financial results of the quarter and the 2023 commercial cycle.
Marcelo
Thank you, Melga. In this slide, we present the composition of VASTA's net revenue. On the left side, you can observe the significant organic year-on-year growth in total net revenue for the third quarter, which increased by 37%, reaching R$258 million. On the right side, let's detail the key components of this revenue growth. Subscription revenue had an increase of 15%, excluding PAR. Our subscription revenue experienced a growth of 20% year on year. During the third quarter of 23, we successfully generated another 41 million reais in revenue from the B2G sector. And finally, the non-subscription revenue increased by 17%, reaching 22 million. Moving to slide number five, we analyzed the net revenue for the 23 commercial cycle. In 2023, we achieved an organic net revenue growth of 24%, amounting to R$1,437 billion. As you can see on the right, our total subscription revenue increased by 18% on an organic basis to R$1,207 billion. Subscription revenue, excluding PAR, had an increase of 22%, reaching R$1,095 billion. However far, our textbook subscription products declined by 11%, amounting to $112 million. Subscription revenue continues to be a major contributor to our total net revenue, representing 84% of the revenue share. Also, our successful expansion into the Brazilian public sector, B2G, has yielded promising results, contributing to 10% of our overall revenue in the 2023 cycle and generated $81 million in revenues. Non-subscription revenue now comprises only 10% of the total revenue and increased by 12%, primarily driven by the introduction of the new revenue streamline from our flagship school, Start Anglo. Moving to slide number six, in this quarter, our adjusted EBITDA amounted to $39 million with a margin of 15%. This positive performance is attributed to several factors, including strong sales results, cost dilution, and operational efficiencies. On the right side, the adjusted EBITDA for the 23 cycle increased by 23% to reach 411 million, with a margin of 28.6%. In the next slide, you'll see the breakdown of the adjusted EBITDA margin. In slide 7, the EBITDA margin shows a slight decrease of 40 basis points compared to the last cycle, from 29% to 28.6%. Firstly, our gross margin declined 30 basis points S23 was a year that the industry faced higher inventory costs caused by rising inflation on paper and production costs. Moreover, our provision for double accounts, PDA, grew 150 basis points compared between the commercial cycles. This increase in PDA is impacted due to the provision of 100% of accounts receivable from a large Brazilian retail company undergoing bankruptcy procedures in the amount of $9 million in the 2023 commercial cycle, which contributes to 80 basis points in our EBITDA margins. We also experienced 70 basis points in our generic PDA, which will be explored further ahead in our presentation. Despite this challenge, there are several positive aspects to highlight as we manage to offset these negative impacts through significant operational efficiency gains and cost-saving measures. An improved product mix fueled by the growth of our subscription products has played a crucial role. As a percentage of the net revenue, our commercial expenses had an improvement of 40 basis points indicating greater cost effectiveness in our sales and marketing efforts, and our adjusted G&A expenses improved by 100 basis points. Moving to slide number eight, the adjusted net loss in the third quarter of 23 amounts to 30 million reais, comparing to a net loss of 42 million in the comparable quarter of 22. As you can see on the right side, our adjusted net profit in the 2023 commercial cycle has shown improvements increasing by 83% compared to the 2022 cycle, reaching R$36 million. Finance costs in the scenario of a spiking interest rate continues to impact our bottom line. However, we have remained committed to the leveraging as you see further in this presentation. Moving to slide number nine, we show the free cash flow evolution. We continue to observe the normalization of the company's cash flow generation. In the third quarter of 23, the free cash flow totaled $58 million, representing a solid increase compared to $17 million in the third quarter of 22. Moreover, to the right side, In the 23 cycle, our free cash flow reached 145 million, a 167% increase from the 15 million in 22. On another important metric, our last 12-month free cash flow to adjusted EBITDA conversion rate improved from 16% to 35%. reinforcing the message that cash generation continues to be a key focus area of our business. Moving to slide number 10, let me give you more details on the provision for W-4 accounts. Total expense with PDA in the third quarter of 23 totaled $15 million, representing 6% of the net revenue compared to the expenses of $5 million in the comparable quarter. Moving to the right side of the slide, we can observe that PDA for the 23 commercial cycles where report provision for double accounts grew 150 basis points between the comparable cycles from 2.4% to 3.9% of net revenue. This increase in PDA is impacted due to the provisioning of 100% of accounts receivable from a large retail a Brazilian retail company undergoing bankruptcy procedures in the amount of $9 million in the 2023 sales cycle, combined with the revised credit landscape. This has necessitated a prudent approach to risk management and credit provision with the prevailing marketing conditions. All factors considered, the participation of PDA in relation to VASPA's net revenue increased to 3.9% in the 2023 commercial cycle compared to 2.4%. However, excluding this one-off effect of the larger retail provisioning, the normalized PDA should be 3.1 of the net revenues, which is more in line with the typical course of our business. Moving to the next slide. We observed that the average payment terms of VASTA's accounts receivable portfolio was 118 days in the third quarter of 23, which is 31 days lower than the second quarter of this year. I will now conclude my part of this presentation with slide number 12. At the end of the third quarter of 23, VASTA achieved a reduction in net debt which amount to R$ 998 million, an improvement of R$ 16 million compared to the net position in the second quarter of 2023. This achievement is due to the positive cash flow generated during the period in the amount of R$ 58 million, which surpasses the impact of interest accrual of R$ 36 million and the share-by-back program in the amount of R$ 6 million in cash outflows. On the right side of the slide, we can observe that in third quarter 23, the net debt the last 12 months adjusted EBITDA ratio extends at 2.48 times, which marks an improvement of 0.14 times compared to the second quarter of 23 and an improvement of 0.5 times when compared to the third quarter of 22. With that being said, I'll pass the word to our CEO, Guilherme Mellega.
Marcelo Werneck
Thank you, Marcelo. Moving to slide 14. In this quarter, we released our sustainability report for the year of 2022. This report, which is the company's second report, was prepared in accordance with international standards. for reports of this category and showcase the implementation of our corporate strategy, challenges, and achievements, while also reaffirming our commitment to transparency and sustainability. The report complies with the Global Reporting Initiative and also considers other standards recognized in Brazil and abroad, such as the Sustainability Accounting Standards Board Guidelines for Education Sector. We are proud to say that we made strides and increased the visibility of our ESG strategy in all three pillars. In the environmental pillar, we published our first greenhouse gas inventory. We increased renewable energy consumption. We reduced our water intake. We have been FSC certified for sustainable paper sourcing. ensuring exclusive partnership with similarly certified suppliers. We developed and distributed content related to sustainability, among several other achievements. In the social pillar, we launched our first affirmative internship program, Somos Afro. We enhanced regulatory tools with clear goal-driven policies. We continued our efforts with the Somos Institute. For every R$1 invested by the Somos Institute, R$11 were returned to society. And the governance pillar, I can highlight that we have committed to the UN Global Compact 10 principle in human rights, labor, the environment, and antitrust. And we have the woman on board certification due to the presence of woman on the board of directors. I encourage you to visit our website and access our full sustainability report, which is available both in Portuguese and English. I summarize my presentation with slide 15. To mark the closure of 2023 business cycle, I would like to highlight six key elements that I believe have shaped this cycle. Our brands. Our journey of evolution was marked by the continuous evolution of our core and complementary brands. For example, our Pitagoras brand, which is celebrating 57 years of excellence, has rejuvenated its brand, modernized itself, and brings transformation in the pedagogical structure. We also redefined the educational experience with the migration from the Eleva brand to our new identity, Amplia. And in complementary segments, the launch of EDWAL in the partnership with Macmillan Education and Nile marked a significant milestone for the 2023 cycle. Exceptional academic results. Our dedication to educational quality was reflected in outstanding academic achievements. UNGLO continued to lead the university acceptance across the country. PH experienced a remarkable 35% growth in acceptance. Amplia and Fibonacci also earned their place as top performers in the NA examinations. Revenue growth in new avenues. The launch of StartAnglu franchise, combining bilingualism with academic excellence, represents a strategic expansion in our pursuit of new revenue streams. The first units are set to operate in 2024, marking the beginning of an exciting journey. Initiative technology. Sorry, innovative technology. Our Plural platform proved to be a valuable ally for parents, students, and teachers, leading the K-12 web traffic with 32% traffic share in Brazil. We surpassed the milestone of 2 million enrolled students. Also, our adaptive learning and artificial intelligence solutions, such as Plural Adapter and Redação Nota Mil, demonstrate our commitment to driving educational innovation. Solid financial results. Our financial indicators speaks for themselves. We achieved 24% growth in revenue, 22% in ABTDA, and an increase of 167% in free cash flow. These numbers reflect our commitment to financial stability and value creation. B2G We successfully venture into the public sector, generating revenue of 80 million by serving other 300,000 students. With all this in mind, 2023 was an extraordinary year, a milestone in our journey. These achievements position us favorably to face the challenges that the future holds. We have the confidence that we are on the right path to continue delivering outstanding results for our shareholders. solidify strong partnerships, and make a significant contribution to our country's education. Having said that, I finish our presentation and invite you all to the Q&A session.
Operator
Thank you. At this time, I would like to remind our teleconference participants in order to ask a teleconference question, please press the star followed by the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Lucas Nagano from Morgan Stanley. Please go ahead with your question.
Cogna
Hi. Good evening, everyone. Thanks for taking our questions. We have two questions. The first one is related to the 2024 SUV, if you could give us some color on the expectations. So for example, core revenue grew 15% this cycle. It was a little bit dragged by power, but we were just wondering if This is the new expected level from now that the penetration of learning systems is more mature. And in complementary, you delivered 40% growth. And we were wondering if this is sustainable for a few more years. The second question is related to B2G. If you could provide us some details if this was related to one or a few or many contracts and what type of service was provided. We wanted to kind of assess the level of recurrence and the ability to scale up this type of solution. Thank you.
Marcelo Werneck
Thanks, Lucas. Let me address your questions. First, about 2024 ACV, let me give you some color about that. First, let's keep in mind that our ACV for the last four commercial cycles, so since the ACV of 2019 until now, we have a compound growth of 20.5%. So we just delivered the last ACV that when you compare the last four cycles, we reached more than 20%. That's the trend that we want to keep on our company. And we do not expect any different trend from that. Since our core is still growing, we have very reputable grants, and they are very important for learning system growth. And complementary, although it's growing fast, we have a very low penetration yet on our base and on the total schools. So we definitely foresee this level of growth for complementary. So we definitely expect to keep the trend. On Cogna's day on December 7th, we will deliver our guideline and we will wait until then since we are on the peak of the campaign. But just giving you some color, we do not expect any difference on the trends. uh b2g b2g we recognize the second half of the same contract that refers to the state of para we delivered the first half of the year now we deliver the second half of the year so it's a single contract and the contract with the public entity must be renewed every year so although we believe we set the baseline to growth or next year it represents a single contract for us. But definitely we expect growth coming from the B2G from this baseline for next year.
Cogna
That's very clear. You mentioned that for next year there's a baseline, but should there be some kind of volatility in the process in the next quarter, in the next few quarters? Thank you.
Marcelo Werneck
Sure. We do not expect any new revenue in Q4 since this product is related to SIEBE and the SIEBE exam is in November. So we already delivered all our products and services for this year. But we expect to renew the contract or to acquire new contracts for next year. And normally the revenue recognition should be Q2 and Q3. But that's not the rule.
Operator
Perfect. Thank you. As a reminder, if you'd like to ask a question, please press the star followed by the one on your telephone. Our next question comes from Marcelo Santos from JP Morgan. Please go ahead with your question.
Marcelo Werneck
Hi. Good evening. Marcelo. Thank you for the opportunity to make questions. I have two also on our side. The first, if you could comment a bit, the margin outlook for the coming cycle. So you said like this cycle you had a slight decrease, you listed the issues like a little bit of bad debt, production costs and paper. How do you see the outlook for the coming cycle? And the second question is if you could comment a bit on Eduqbank. Is there any metric of performance that you could share? We see still generating net losses, but it's in early stages. Is there any insight you could provide on this initiative?
Marcelo
Thank you.
Marcelo Werneck
Hi, Marcelo. Thank you for your question. Regarding margins, we expect to have better margins for next year. We are always pursuing the 30% adjusted EBITDA margin. We will not expect new impacts from paper. next year so we already recognize our inventory levels is already at the old price level we do not expect new paper price increases of course there are inflation but we have been able to move cost based price adjustment so our prices for next year is around the double digit level so we expect to we covered some of our margins for 2024 and regarding eduq bank eduq bank were very excited with eduq bank performance this year the the company was able to fund themselves with a 70 million rai securitization and they have new credit lines in place to to fund the growth we expect to end this year, December, with 85,000 students billed. And next year, December next year, with 220,000 students billed. So it's a very fast-growth company that are funded by itself in the market. That proves the confidence that everybody has with the business model. And in terms of PPV, We are reaching the 50 million reais level right now. And obviously, this will grow with the village students for the new village students level for next year. Just a clarification, the 50 million is what, if you annualize like today's student, it's 50 million or it's 50 million for this year? Just to understand. No, it's monthly. 50 million.
Marcelo
Yeah, it's monthly. Six? 600 million analyzed.
Marcelo
OK, 50 million monthly, 600 million analyzed. Thank you very much. Very clear. Thank you, Marcelo.
Operator
As a final reminder, if you'd like to ask a question, please press the star followed by the one on your telephone. We have a follow-up question from Marcelo Santos from JP Morgan.
Marcelo Werneck
Hi, thanks for the follow-up. Just wanted to ask one single question. Usually the third quarter was a very weak quarter in terms of margins, like seasonally speaking, and you have been improving that. What's happening? What's causing you to generate this improvement over the last several years? And is this something that we should start seeing more smooth EBITDA distribution in the coming years?
Marcelo
Thank you.
Marcelo Werneck
Marcelo, the major contribution is volume. We are growing, and Q3 benefits from higher volumes, not only on the B2B segment, but also the B2G. We just recognized 40 million reais on the B2G. So margins are growing because the company is growing. That's pretty much it. There is no... And the seasonality... Q drives our margins. Q4 will be the biggest margin on our business, followed by Q1, and then we have Q2 and Q3 that we are stabilizing it on a new level of around 10%.
Marcelo
Perfect. Thank you very much, Rick.
Operator
Thank you. Our next question comes from Lucas Nagano from Morgan Stanley. Please go ahead with your question.
Cogna
Thanks for the follow-up question. I have a question on PDA specifically. So looking at Q3 alone, the PDA expenses increased because of churn, mainly known premium brands, as you say. I just wanted to understand what causes churn and how is the financial situation in those schools? Because the hypothesis is that things should improve from now, led by macro indicators. So I just wanted to to understand if there's kind of any structural change there. Thank you.
Marcelo Werneck
Hi, Lucas. Thank you. And you are right. Your hypothesis is right. We had a one-off in terms of cycle. We had the recognition of R$9 million from the large retail company in bankruptcy procedures. Disconsidering it, our PDA level is now at 3.1%. This increase of 0.7% from the cycle of 2022 is pretty much due to macroeconomic environment. We are seeing a slightly delinquency increase in the entire economy, and the schools are also facing that. But 3.1, we believe it's still a very low PDA level and definitely is one of the lowest in the industry.
spk02
Okay, thank you. There appear to be no further questions at this time.
Operator
Marcelo Wernack, I'll turn the call back over to you.
Marcelo Werneck
I'll take it here. Thank you all for participating in Q3 earnings release. We are very proud to deliver the cycle results that we just delivered with 24% revenue growth, 23% EBITDA growth, and the free cash flow EBITDA moving from 16 to 35%. Moreover, to have implemented two very important growth avenues, such as the B2G and the Start Tangle business. And looking forward to see you again, and we reaffirm our commitment and excitement for the new cycle, and looking forward to see you at the Cogna Day.
Operator
Thank you, ladies and gentlemen. We will conclude today's conference call. Thank you for participating. You may now disconnect.
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