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spk02: Good evening, ladies and gentlemen, and welcome to VTU's first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct the question and answer session, and instructions will follow at that time. As a reminder, this call will be recorded. I would now like to introduce your host for today's conference call, Carlos Fritas, VTU CFO. You may begin.
spk05: Thank you, Pedro, and good afternoon, everyone. Thanks for joining us. It's a real pleasure to be here with you all for the release of our results for the first quarter of this year. Hope all of you are doing well and healthy. Here with me is Maria Carolina Goncalves, the head of our Investor Relations Department, and a slide presentation will be part of today's webcast, which is also available in our Investor Relations website at I trust you all have this presentation in front of you. Of course, before we begin, I'd like just to make note that as detailed in the second slide of this presentation, Safe Harbor is in effect for this call. I invite you to go to page four of the presentation. This page briefly summarizes what we believe are the main highlights of the first quarter of this year. First, we have launched a new academic model that we called the FACS courses, which for us represents a huge opportunity to enter into hundreds of smaller cities in Brazil, and I'll get back to this a bit later. Second, the intake numbers were very strong in this current cycle, with a growth of around 32% versus what we had in the intake of last year. And this, again, purely on organic basis. With the delay of the NN, as you all know, the shape of this first intaking cycle of 2021 was more, I would say, back-ended than what we had last year. But at the end, it was a great accomplishment that confirms our resilience of our hybrid model. With that, we reached more than 320 thousand students in digital education, with an important growth in the south-eastern region of 85% growth in the southeast in Brazil, versus what we had in the first quarter of last year. Regarding the financials, we had, again, very solid numbers. The net revenue in our core digital education undergrad segment increased by 20%. when compared to the first quarter of last year. The consolidated adjusted BDA grew by 40%, which means a substantial increase in our margins. BDA margin grew to 26.7% this quarter, versus 22.4% last year. And last but not least, our adjusted cash flow from operations was up 55% this quarter. And we reached a just cash flow conversion from operations of around 107% this quarter. So very solid numbers as well on the financial perspective. All of this will be discussed in more detail throughout my presentation for each day, starting at next page with the Flex Courses. So now on page five, please. As I mentioned, we launched this new model, FlexCourses. We did, last year, some pilot projects regarding this subject, which were quite successful. And we decided with that to deploy this FlexCourse concept throughout Brazil. So what is that? It is basically the same class-based and tutor-centric approach that we offer in our traditional hybrid model. Instead of meeting weekly in a hub with your classmates and your dedicated tutor, you meet virtually with your classmates in weekly live classes with your tutor. In the model, the hub is smaller and used as a place for exams. Why did you do it? Why are we doing that? This model is very suited and is better for smaller cities. These students would not be disturbed by us in our traditional hybrid model because as you can imagine, there is a minimum size, a minimum scale for us to open a new hub in a given city. So we were, until now, focusing our efforts in mid-size and large cities because of the pure nature of our hybrid model with a night hub, with weekly meetings in a hub. This, for us, represents a huge opportunity to accelerate the growth of our student base by offering our high-quality models throughout Brazil with a faster expansion of hubs, with scale, and being present in every corner of Brazil with our vision, which is to offer education with high quality and, again, tutor-based and class-based. the classes, you still have the sense of belonging, sense of the nice experience that you have when you go to university, you have a dedicated tutor from your region, and instead of going to a hub physically to meet, because you live in a small city, you basically go to a hub to take an exam and you have your weekly live classes with your tutor. So this is different from what is offered from a competition when you think about Now, moving to page six, here in slide six, we have a snapshot of the growth in our base. We had, as of end of March, almost 330,000 students, being 97.5% of them engaged in digital education courses, and we focused on the students based of our digital education undergrad segment, which is our main business, you can see that we had a CAGR of 32% in the last five years. When you look at numbers for this quarter, growth is a bit smaller, it's 17%. Why was that? Because, as I mentioned before, this was due to the different shapes in the intake curves in the first quarter of this year versus the first quarter of last year. Later on, I will show you some numbers about it. This shape was more back-ended than last year, and did it mainly, as I said, due to the delay in the NN, which the NN is an important catalyst for enrollment in the post-secondary segments in Brazil, as you know. It brings a lot of momentum to the sector, and the results this year were released in late March instead of beginning of January as done last year. So, and you remember that when I said in late March when we were releasing the numbers of last year, I told you that our intake up to that date was growing high teens. High teens meant 18% in fact. And now with the full numbers for the intake cycle, we had important growth of 32% when we take the whole intaking cycle. So a very nice growth in the intaking for this quarter and for this semester, especially now in this pandemic, especially now in this economic situation, we are confirming the strength and the resilience of our model. Now, if we move to page seven, we show the trend and increase in our digital education student base. We have expanded substantially throughout Brazil, well above the markets, and this is a market that has been expanding a lot overall, and in our opinion will expand even further after COVID. And within this growing and appealing market, we have been growing steadily in competition. So our growth was, as I said, particularly strong in the Southeast region of Brazil, Our base there grew by 85% in the first quarter of this year compared to what we had in March of last year. Here on the right part of the slide, you can see as well the evolution of the number of hubs in the last five years. We have been opening around or slightly more than 150 hubs per year, mostly with partners, as you know. Now, we have more than 740 hubs throughout Brazil. With the Flex courses, we are going to open even more hubs throughout Brazil. As I said, this new concept will help us to accelerate growth throughout this year and in the future. For this year, we are going to open 250 hubs throughout Brazil. Now if we move to page eight, just to focus again on the Southeast, the growth, as I said, was very strong in the Southeast, where we have been historically shy, but where we have been expanding a lot in the last two years, two, three years. As you know, I always tell this example, we were very, very, very shy in the Southeast until 2018. And then we entered into the market of Minas Gerais with a number of hubs that were very successful and then expanded the partners. And then we entered in Rio in 19, especially last year. We opened a lot of hubs in Rio last year and in 19. By the way, the city of Rio de Janeiro in this current intaking cycle is already our second largest capital in Brazil. The first one is Porto Alegre. The second one is the city of Rio de Janeiro. This is just to confirm that our model is also proving itself in the Southeast. It's very strong in Minas Gerais. It's going to start to end in Rio now. Now, we're growing a lot in Sao Paulo. We opened a lot of new hubs there in Sao Paulo. You can see here in the chart that we have 177 hubs in the Southeast now. of which already one-third in the state of Sao Paulo, and we are going to grow even further there in Sao Paulo. So Sao Paulo is our next frontier for important growth in the Southeast. Now on page nine, we focus here on the most important driver for our organic growth over time, which is the maturation of our expansion hubs. We have now almost 90% of our hubs that we call expansion hubs that were opened after the change in regulation in 2017 and are therefore not yet mature. That's what we call the expansion hubs. And we shall maintain a substantial growth over time as those around 660 hubs that are in the expansion hubs mature over time. They are picked by cohort here in the chart on the right. They are still working up, as I said. And to illustrate this growth potential, we calculated this theoretical maturation index, which is basically the number of students we have now divided by the potential number on average in these hubs. Once they reach maturity, which is for this case here, after seven or eight years. So we have now a maturation index of around 32%, which means that those X-page hubs have the capacity to increase their student base three-fold. And again, this is growth with limited execution risk. The hub is there, the staff brand is there, the tutors are hired, the partner is there, so it is growth with limited risk of education. One remark here as well, just to highlight that the numbers that we show here are the picture as of end of March, of course, were affected by this more back-ended profile in the intake in the first quarter of this year. In a more normalized scenario, I'll say, for example, the number of students in the base hubs, the ones that are mature already, they should have been flat as a normal trend, and the growth in the expansion hubs would have been even stronger. That's what we expect to see now in the second quarter, for example. Now moving to page 10 to focus here a bit more on the net revenues and the average ticket and the intake cycle as well for the digital education undergrad segment. So net revenue in the quarter increased by 20% in the segment and again this was purely on organic basis and despite this back ended profile. So as you know we have this modular approach in which we only have a revenue contribution from a new student once he or she . So it's different from the typical model that is used by the competition and which is based on the on-campus model. In our purely digital model, it is a sequence of subjects. So you can join us in March. or in April, and then you contribute with revenues once you join us. So because we have this, as you can see here on the right, a more back-ended profile for the intake, we had, let's say, lower revenue contribution in the first quarter of this year. So again, here on the right, if you see the purple, or the light purple, let's say, curve, it's a curve for 2020, 63%, of the intake of the newcomers were already here by February. While this year, it was only 62%. 52% of the total intake in this intaking cycle. So here you see clearly that last year we had very strong January and February months, and then it was much slower after the pandemic. Now it is more spread over time. But this means what? This means that we have a decrease in the average ticket this quarter, which is here in the middle. A 4% decrease in average ticket, which was the main cause for that was clearly this delay in the entrance of new students. They are here in our picture of March, so they are in our denominator in our average ticket, but they brought not much revenue in the first quarter of this year. As I always say, our ticket will increase a little bit in some quarters, will decrease in some quarters. Last semester, as you remember, our ticket increased by 3.5% compared to the second half of 2019. This reduction that we saw in the first quarter of this year, the trend for the average ticket reverse now already in the second quarter and the second half, I would say, of this year. The trend is for Ticket to be stable over time, given our model. Now on page 11, we show a bit more about the several lines of our income statement. You can see growth in net revenue led by the expansion of additional location on the red as well as important increases in gross profit, adjustability, and margins. So let's now move to the next slide to dig a bit deeper about the drivers of these numbers. In phase 12, we focused on the net revenue between these two quarters. As you can see, the growth in the consolidated net revenue of 17% was driven not only by the growth in digital education undergrad, that we just discussed, but also by the growth in continuing education, mainly with our digital education graduate courses. There was a substantial growth in this segment, led by a better mix of courses and by, I'd say, a more intense and focused use of digital marketing this quarter compared to last quarter. So the run rate here is extremely positive and we shall continue to see important growth in our continuing education segment throughout this year as well. This consolidated growth was diluted by the reduction in our on-campus segment which has been declining over time, in line with our view for the whole post-secondary sector in Brazil. The segment is much more concentrated now on courses not offered in digital education, such as law, neuropsychology, et cetera, and we do believe that the relative contribution of the segment for our consolidated figures over time will reduce even further, which means that our consolidated Net revenue growth will be more and more closer to the growth in our two digital education segments, which are growing a lot. Now, on page 13, the drivers, the pieces of the adjusted BDA bridge. Again, a growth in our margins of 4.3 points, which is 26.7% in this first quarter. And usually, in the first quarter of the month, it is usually a smaller margin for the whole year. We had a reduction in cost of services and an increase in selling and PDA expenses, which is here on the following slides. On page 14, you can see an important reduction in the in the cost and the margins, in the cost of sales and in the, let's say, leading to an increase in the growth profit. This was due to a number of things. First, naturally, gain of sale. As we grow further, we can dilute more our fixed costs. We have also an important reduction in personal costs. And this was driven by a better ratio of students per tutor. As we go further, as we optimize on a daily basis our business, we are improving steadily, slowly but steadily, the situation as well. The flex courses also help to maximize the situation. We had as well an important reduction in the cost of academic material sent to students. It's still based on sending some books to students. They like it to have, as well, besides the app and besides the computer-based learning systems, they also like to have books. And there was a reduction in the cost with books. There was an important increase in margins here, as well. Regarding GMA, on the right. G&A increased roughly 20% in line with increase in our net revenue, and such increase was part due to our growth, but also due to our new reality as a listed company. Anyway, G&A at 8.6% of net revenue is, in my opinion, a nice number and way below what we see in the ratio of our peers. From page 15, to focus on sun expenses, sun expenses increased a little bit this quarter. This was due, I'd say, first to the pandemic. Last year, a big chunk of our intake was, as I said, in January and February, before the pandemic. Now, with the pandemic, our hubs are closed, and hubs play an important role in our enrollment, in our intake process. and the delay in the NN, which was also seen in the whole sector. With the delay in the NN, we had to spend a bit more money to attract the attention of students. Going forward, we shall see a partial reduction as well here in this line. We've got the PDA on the right. PPA increased a little bit compared to the first quarter of last year. It is more or less aligned to what we have seen in the last quarter, but it's higher than what we saw in the first quarter of last year. This was due to three reasons. The first one was the very strong intake we had in the second half of last year, last in the second intaking cycle, we grew 40% versus the second semester of 2019. So as you know, most of the PDA is concentrated around newcomers. So those newcomers, they are part of explanation for this increase in PDA. The second one is, of course, our current economic crisis. We cannot avoid it. which is true, which is different from what we saw last year. Last year, the pandemic hit us harder in the second and the third quarter, not in the first one. And also, third one, the fact that our hubs are closed. Our model is a hybrid one. Our typical traditional model relies on this weekly meeting with a tutor in a hub. It helps us to keep the students more engaged over time. It brings the sense of community that I mentioned before and has engagement. So as we move out of the pandemic and with the return of the weekly meetings at the Hub, our numbers here as well show the return to normal numbers as we go out of this pandemic. On page 16, Net income and cash flow. Net income, there was a reduction in net income, basically because of a warm-up we had last year. Last year, we recognized for the first time before-tax assets of around 18 million riyals. If you see the cash earnings that we had, it is virtually doubling. If you take out this 18 million riyals last year, the net earnings would have grown from 8 to 16 million riyals, more or less. So an important growth as well in net earnings on a cash basis. And here on the right, a very important growth in cash flow from operations and just cash flow conversion from operations. We have here an important increase in the cash generation and the cash flow conversion of more than 100%, 107%. This is very important for us. attract the students, we retain students, and we collect from them as well. We are very focused about service management. For example, we could have a higher student base, for example, if we simply provide a discount for people to renew with us without paying their tuition. It would have been very easy for us. but it would have not been a nice indication from a cash flow perspective. So the balance between tickets, student days, retention, and cash flow is very important for us as always. Now regarding expansion on page 17, on top of the growth in the student days in our digital education segment, that I mentioned already. As I said before, we launched the new technical courses in the beginning of this year, and with the success that we saw, still in very few hubs, we decided now to expand this new offering of technical courses throughout Brazil in the second half of this year. Now we are going to offer this in around 145 helps throughout brazil uh this is a new growth avenue this has a huge potential it's a very very fundamental market and and the the public the typical client is the same person that later on will enroll and engage with us in our typical undergrad courses so far here is a very important way to to to enlarge this lifelong dealing uh with the the students over time, minimizing the cost to attract this client. And last but not least, on page 18, M&A. M&A, we are going through the funnel. We are advancing in our process. We have been discussing with a number of players, and with a few of them, we are, I'd say, advancing strongly and quickly in the M&A process. Nothing yet to be announced, but we trust to be able to announce something to you quite soon. To wrap up on page 19, key takeaways. Again, we are the leading PO player in digital education in Brazil, delivering growth above the expectation of what we promised during the IPO last year. delivering an important growth in the base with a health ticket, with improvements in margins, and an important focus as well in the southeast with cash flow generation. All of that that you know as well to capture future growth. With that, I would like to open for questions.
spk02: Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And our first question comes from Victor Tomita with Goldman Sachs. Your line is now open.
spk03: Hello. Good afternoon, all, and thanks for taking our questions. So we have two questions on our side. The first one is if you could elaborate a bit more on competition dynamics during this kind of stretch of the intake process. And our second question is how relevant do you believe flex courses could be in the long term, say in five years from now, as a percentage of your revenue or student base? Thank you.
spk05: Thank you, Peter, for your questions. The competition dynamics in the first quarter, I guess that with the delay in the NEM, everybody had to compete a bit stronger this quarter than in a normal quarter, I would say. The NEM is very important. piece in the overall enrollment calendar. This quarter, there was in the first half of the cycle, a more competitive environment, especially in January and February. Then in March, April, and May, I'd say it was more normal. With that, we had a very competitive scenario. We were able to deliver a nice growth, but I guess it was slightly stronger in the first months of this intaking cycle because of the delay of the event. Everybody had to fight a bit stronger. For the second question, the FlexCourse potential, I don't have you there. the percentage that we can have in FlexCourse in the future, we have in Brazil around 800 cities, for example, that are between 20,000 and 40,000 people that we could enter with our FlexCourse, for example. Today we typically focus on cities that are bigger than 40,000 people in total population. So the FLEX course has a important potential to expand this growth and to third growth. I don't have a number to see what will be the target for FLEX courses, but this is clearly an important driver as well for our growth potential going forward. And with that we can now, we can say that we can reach every corner of Brazil.
spk07: Perfect, thank you very much.
spk02: Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. I would now like to turn the call back over to Carlos Brita.
spk05: We have here a question from Pedro from BTG. He's making two questions. First one, what is the ideal level of PDA looking forward? The PDA, as I said, is very higher within the newcomers, the intake, and much lower with seniors. The ideal level of PDA is something very tricky, very, very dangerous. If we stopped growing next quarter, for example, if we don't have any intake, our PDA will very smaller in the second half of this year. So it will depend on the growth that we have. What we expect to see is that given the nature of our growth, this number here that we had of 16% and last year was around 14% shall slowly decline over time as we have more seniors in our student base compared to newcomers. So this will, I'd say overall, in the medium term, we shall have a PDA level of around, I'd say, nine to 10% within, let's say, four to five years. Because we are going to keep growing a lot our student base. If we stop growing, PDA will have been smaller than that. The second one, the second question of Pedro, is what is our expectation for the next intake cycle? It is, I'd say, very strong. We have been already preparing ourselves for the next intake cycle. It will, of course, depend on how the pandemic evolves in Brazil because it is a fact that the hubs closed affect our intake cycle. Even with that, we had 32% growth this semester and 40% growth in the second semester of last year, which was within the middle of the pandemic. We had a very strong prospect for the second half of this year as well.
spk02: As a reminder, to ask a question, you will need to press star one on your telephone. I'm not showing any questions at this time. I would now like to turn the call back over to Carlos for closing remarks.
spk05: Thank you, Claire. So I guess we were able, again, to deliver nice numbers. And myself, Carol, and the whole IR team, we are at your disposal to solve any other questions. Thank you very much.
spk09: This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you. you Thank you. Thank you.
spk06: Thank you. you Thank you.
spk02: Good evening, ladies and gentlemen, and welcome to VTU's first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct the question and answer session, and instructions will follow at that time. As a reminder, this call will be recorded. I would now like to introduce your host for today's conference call, Carlos Fritas, B2CFO. You may begin.
spk05: Thank you, Brayra, and good afternoon, everyone. Thanks for joining us. It's a real pleasure to be here with you all for the release of our results for the first quarter of this year. Hope all of you are doing well and healthy. Here with me is Maria Karina Goncalves, the head of our Investor Relations Department. And a slide presentation will be part of today's webcast, which is also available in our Investor Relations website at investors.vitri.com.br. So I trust you all have this presentation in front of you. And of course, before we begin, I'd like just to make note that as detailed in the second slide of this presentation, Safe Harbor is in effect for this call. So now I invite you to go to page four of the presentation. So this page briefly summarizes what we believe are the main highlights of the first quarter of this year. First, we have launched a new academic model that we called the FACS courses, which for us represents a huge opportunity to enter into hundreds of smaller cities in Brazil I'll get back to this a bit later. Second, the intake numbers were very strong in this current cycle, with a growth of around 32% versus what we had in the intake of last year. This, again, purely on an organic basis. With the delay of the NN, as you all know, the shape of this first intaking cycle of 2021 was more, I'd say, back-ended than what we had last year. But at the end, it was a great accomplishment that confirms our resilience of our hybrid model. With that, we reached more than 320,000 students in digital education, with an important growth in the south-eastern region of 85% growth in the southeast in Brazil, versus what we had in the first quarter of last year. Regarding the financials, Again, very solid numbers. The net revenue in our core digital education undergrad segment increased by 20% when compared to the first quarter of last year. The consolidated adjusted BDA grew by 40%, which means a substantial increase in our margins. BDA margin grew to 26.7% this quarter, versus 22.4% last year, and last but not least, our adjusted cash flow from operations was up 55% this quarter, and we reached an adjusted cash flow conversion from operations of around 107% this quarter, so very solid numbers as well on the financial perspective. All of this will be discussed in more detail throughout my presentation for each day, starting at next page with the FlexCourses. So now on page five, please. As I mentioned, we launched this new model, FlexCourses. We did, last year, some pilot projects regarding this subject, which were quite successful. And we decided with that to deploy this FlexCourse concept throughout Brazil. So what is that? It is basically the same class-based and tutor-centric approach that we offer in our traditional hybrid model. But instead of meeting weekly in a hub with your classmates and your dedicated tutor, you meet virtually with your classmates in weekly live classes with your tutor. So in the model, the hub is smaller and used as a place for exams. So why did you do it? Why are we doing that? This model is very suited and is better for smaller cities. I mean, these students would not be served by us in our traditional hybrid model because as you can imagine, there is a minimum size, a minimum scale for us to open a new hub in a given city. So we were, until now, focusing our efforts in mid-sized and large cities because of the pure nature of our hybrid model with a night hub, with weekly meetings in a hub. So this, for us, represents a huge opportunity to accelerate the growth of our student base by offering our high-quality model throughout Brazil with a faster expansion of hubs, with scale, and being present in every corner of Brazil with our vision, which is to offer education with high quality, and again, tutor-based and class-based. We still have the classes, we still have the sense of belonging, sense of the nice experience that you have when you go to university, you have a dedicated tutor from your region, and instead of going to a hub physically to meet, because you live in a small city, you basically go to a hub to take an exam and you have your weekly live classes with your tutor. different from what is offered from a competition when you think about distance learning. Now moving to page six, here in slide six, we have a snapshot of the growth in our base. We had, as of end of March, almost 330,000 students, being 95% of them engaged in digital education courses. and we focus on the student base of our Digital Education Undergrad segment, which is our main business. You can see that we have a CAGR of 32% in the last five years. And when you look at numbers for this quarter, growth is a bit smaller, it's 17%. And why was that? Because as I mentioned before, this was due to the different shapes in the intaking curves in the first quarter of this year. versus the first quarter of last year. Later on, I will show you some numbers about it. This shape was more back-ended than last year, and did it mainly, as I said, due to the delay in the NN, which the NN is an important catalyst for enrollment in the post-secondary segment in Brazil, as you know. It brings a lot of momentum to the sector. And the results this year were released in late March instead of beginning of January as done last year. So, and you remember that when I said in late March when we were releasing the numbers of last year, I told you that our intake up to that date was growing high teens. High teens meant 18% in fact. And now with the full numbers, for the intaking cycle, we had an important growth of 32% when we take the whole intaking cycle. So a very nice growth in the intaking for this quarter and for this semester, especially now in this pandemic, especially now in this economic situation, we are confirming the strength and the resilience of our model. Now, if we move to page seven, we show the trends and increase in our digital education student base. We have expanded substantially throughout Brazil, well above the markets, and this is a market that has been expanding a lot overall, and in our opinion will expand even further after COVID. And within this growing and appealing market, we have been growing steadily in competition. So our growth was, as I said, particularly strong in the southeast region of Brazil. Our base there grew by 85 percent in the first quarter of this year compared to what we had in March of last year. Here on the right part of the slide, you can see as well the evolution of the number of hubs in the last five years. We have been opening around or slightly more than 150 hubs per year. mostly with partners, as you know, and now we have more than 740 hubs throughout Brazil. With the Flex courses, we are going to open even more hubs throughout Brazil. As I said, this new concept will help us to accelerate growth throughout this year and in the future. For this year, we are going to open 250 hubs throughout Brazil. Now if we move to page eight, just to focus again on the southeast, the growth, as I said, was very strong in the southeast, where we have been historically shy, but where we have been expanding a lot in the last two years, two, three years. As you know, I always tell this example, We were very, very, very shy in the Southeast until 2018 and then we entered into the market of Minas Gerais with a number of hubs that were very successful and then expanded the partners and then we entered in Rio in 19, especially last year. We opened a lot of hubs in Rio last year and in 19. By the way, the city of Rio de Janeiro in this current intaking cycle is already our second largest capital in Brazil in intake. The first one is Porto Alegre, the second one is the city of Rio de Janeiro. So this is just to confirm that our model is also proving itself in the southeast and very strong in Minas Gerais, Espirito Santo, and in Rio now. And now we're growing a lot in Sao Paulo. We opened a lot of new hubs there in Sao Paulo. So you can see here in the chart that we have 177 hubs in the southeast now, of which already one-third in the state of Sao Paulo, and we are going to grow even further there in Sao Paulo. So, Sao Paulo is our next frontier for important growth in the southeast. Now, on page nine, we focus here on the most important driver for our organic growth over time, which is the maturation of our expansion hubs. We have now almost 90% of our hubs that we call expansion hubs that were opened after the change in regulation in 2017 and are therefore not yet mature. That's what we call the expansion hubs. We shall maintain a substantial growth over time as those around 660 hubs that are the expansion hubs mature over time. They are split by cohort here in the chart on the right. They are still working up, as I said. And to illustrate this growth potential, we calculated this theoretical maturation index, which is basically the number of students we have now divided by the potential number on average in these hubs. Once they reach maturity, which is for this case here after seven or eight years. So we have now a maturation index of around 32%. which means that those expansion hubs have the capacity to increase their student base three-fold. And again, this is growth with limited execution risk. The hub is there, the startup brand is there, the tutors are hired, the partner is there, so it is growth with limited risk of execution. One remark here as well, just to highlight that The numbers that we show here are the picture as of end of March, of course, that, as I said, were affected by this more back-ended profile in the intake in the first quarter of this year. So in a more normalized scenario, I would say, for example, the number of students in the bait hubs, the ones that are mature already, they should have been flat as a normal trend, and the growth in the expansion hubs would have been even stronger. That's what we expect to see now in the second quarter, for example. Now moving to page 10, to focus here a bit more on the net revenues and the average ticket and the intake cycle as well for the digital education undergrad segment. So net revenue in the quarter increased by 20% in the segment, and again, this was purely on organic basis. and despite this back-ended profile. As you know, we have this modular approach in which we only have a revenue contribution from a new student once he or she . It's different from the typical model that is used by the competition, which is based on the on-campus model. purely digital model, it is a sequence of subjects, so you can join us in March or in April, and then you contribute with revenues once you join us. So because we have this, as you can see here on the right, a more back-ended profile for the intake, we had, let's say, lower revenue contribution in the first quarter of this year. So again, here on the right, If you see the purple, or the light purple, it's a curve for 2020, 63% of the intake of the newcomers were already here by February. While this year, it was only 62%. 52% of the total intake in this intaking cycle. Here, you see clearly that last year, we had very strong January and February months. And then it was much slower after the pandemic. Now it is more spread over time. But this means what? This means that we have a decrease in the average ticket this quarter, which is here in the middle. A 4% decrease in every ticket, which was the main cause for that was clearly this delay in the entrance of new students. They are here in our picture of March. So they are in our denominator in our every ticket, but they brought not much revenue in the first quarter of the year. So this is, as I always say, our ticket will increase a little bit in some quarters, will decrease in some quarters. Last semester, as you remember, our ticket increased by 3.5%. compared to the second half of 2019. And this reduction that we saw in the first quarter of this year, the trend for the average ticket will reverse now already in the second quarter and the second half of this year. The trend is for ticket to be stable over time, given our model. Now on page 11. We will show a bit more about the several lines of our income statement. You can see growth in net revenue, led by the expansion of additional educational undergraduate, as I said before, as well as important increases in gross profit, adjustability, and margins. So let's now move to the next slide to dig a bit deeper about the drivers of these numbers. The page throughout, we focused on the net revenue, between these two quarters. As you can see, the growth in the consolidated net revenue of 17% was driven not only by the growth in digital education undergrad that we just discussed, but also by the growth in continuing education, mainly with our digital education graduate courses. There was a substantial growth in NetGraph in this segment, led by a better mix of courses and by, I'd say, a more intense and focused use of digital marketing this quarter compared to last quarter. So the run rate here is extremely positive and we shall continue to see important growth in our continuing education segment throughout this year as well. This consolidated growth was diluted by the reduction in our on-campus segment, which has been declining over time, in line with our view for the whole post-secondary sector in Brazil. The segment is much more concentrated now on courses not offered in digital education, such as law, nursery, psychology, et cetera, and we do believe that the relative contribution of the segment for our consolidated figures over time will reduce even further. which means that our consolidated net revenue growth will be more and more closer to the growth in our two digital education segments, which are growing a lot. Now, on page 13, the drivers, the pieces of the adjusted BDA bridge. So, again, a growth in our margins of 4.3 points. reaching 26.7% in this first quarter, and usually in the first quarter of the month, it is usually a smaller margin for the whole year. We had a reduction in cost of services and an increase in selling and PDA expenses, which is here on the following slides. On page 14, you can see an important reduction in the cost and the margins, in the cost of service and in the, let's say, leading to an increase in the gross profit. This was due to a number of things. First, naturally, gains of scale. As we grow further, we can dilute more our fixed costs. We had also an important reduction in personal costs, and this was driven by a better ratio of As we go further, as we optimize on a daily basis our business, we are improving steadily the duration as well. The flex quarters also help to maximize the duration. We had as well an important reduction in the cost of academic material sent to students. It's still based on sending some books to students. They like it to have, as well, besides the app and besides the computer-based learning systems, they also like to have books. And there was a reduction in the cost with books. There was an important increase in margins here, as well. Regarding GMA, on the right. G&A increased roughly 20% in line with increase in our net revenue. Such increase was part due to our growth, but also due to our new reality as a listed company. Anyway, G&A at 8.6% of net revenue is, in my opinion, a nice number and way below what we see in the ratio of our peers. From page 15, to focus on sign expenses, sign expenses increased a little bit this quarter. This was due to the pandemic. Last year, a big chunk of our intake was, as I said, in January and February, before the pandemic. Now, with the pandemic, our hubs are closed, and hubs play an important role in our enrollment, in our intake process. and the delay in the NN, which was also seen in the whole sector. With the delay in the NN, we had to spend a bit more money to attract the attention of students. Going forward, we shall see a partial reduction as well here in this line. We've got the PDA on the right. PPA increased a little bit compared to the first quarter of last year. It is more or less aligned to what we have seen in the last quarter, but it's higher than what we saw in the first quarter of last year. This was due to three reasons. The first one was the very strong intake we had in the second half of last year. in the second intake cycle, we grew 40% versus the second semester of 2019. So as you know, most of the PDA is concentrated around newcomers. So these newcomers, they are part of explanation for this increase in PDA. The second one is, of course, our current economic crisis. We cannot avoid it. which is true, which is different from what we saw last year. Last year, the pandemic hit us harder in the second and the third quarter, not in the fourth one. And also, the third one, the fact that our hubs are closed. Our model is a hybrid one. Our typical traditional model relies on this weekly meeting with a tutor in a hub. It helps us to keep the students more engaged over time. It brings the sense of community that I mentioned before and has engagement. So as we move out of the pandemic and with the return of the weekly meetings at the Hub, our numbers here as well show a return to normal numbers as we go out of this pandemic. On page 16. Net income and cash flow. Net income, there was a reduction in net income, basically because of a one-off we had last year. Last year, we recognized for the first time before-tax assets of around 18 million reais. So if you see the cash earnings that we had, it is virtually doubling. So if you take out this 18 million reais last year, the net earnings would have grown from 8 to 16 million reais, more or less, So an important growth as well in net earnings on a cash basis. And here on the right, a very important growth in cash flow from operations and just cash flow conversion from operations. We have here an important increase in the cash generation and the cash flow conversion of more than 100%, 107%. This is very important for us. attract the students, we retain students, and we collect from them as well. We are very focused about student management. For example, we could have a higher student base, for example, if we simply provide a discount for people to renew with us without paying their tuition. It would have been very easy for us. but it would have not been a nice indication from cash flow perspective. So there's a balance between tickets, student days, retention, and cash flow is very important for us as always. Now, regarding expansion on page 17, on top of the growth in the student days in our digital education segment, that I mentioned already. As I said before, we launched the new technical courses in the beginning of this year and with the success that we saw still in very few hubs, we decided now to expand this new offering of technical courses throughout Brazil in the second half of this year. Now we are going to offer this in around 145 hubs throughout Brazil. This is a new growth avenue. This has a huge potential. It's a very, very fragmented market. And the public, the typical client, is the same person that later on will enroll and engage with us in our typical undergrad courses. So for us here, it's a very important way to enlarge this lifelong dealing with the students over time, minimizing the cost to attract these clients. And last but not least, on page 18, M&A. M&A, we are going through the funnel. We are advancing in our process. We have been discussing with a number of players, and with a few of them, we are actually advancing strongly and quickly in the M&A process. Nothing yet to be announced, but we hope to be able to announce something to you quite soon. To wrap up on page 19, key takeaways. Again, we are the leading PO player in digital education in Brazil, delivering growth above the expectation of what we promised during the IPO last year. delivering an important growth in the base with a health ticket, with improvements in margins, and an important focus as well in the southeast with cash flow generation. So all of that that you know as well to capture future growth. So with that, I would like to open for questions.
spk02: Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And our first question comes from Victor Tomita with Goldman Sachs. Your line is now open.
spk03: Hello. Good afternoon, all, and thanks for taking our question. So we have two questions on our side. The first one is if you could elaborate a bit more on competition dynamics during this kind of stretch of the intake process. And our second question is how relevant do you believe flex courses could be in the long term, say in five years from now, as a percentage of your revenue or student base? Thank you.
spk05: Thank you, Peter, for your questions. The competition dynamics in the first quarter, I guess that with the delay in the NEM, everybody had to compete a bit stronger this quarter than in a normal quarter, I would say. The NEM is very important. piece in the overall enrollment calendar. This quarter, there was, in the first half of the cycle, a more competitive environment, especially in January and February. Then in March, April, and May, I'd say it was more normal. With that, we had a very competitive scenario. We were able to deliver a nice growth, but I guess it was slightly stronger in the first months of this intaking cycle because of the delay of the event. Everybody had to fight a bit stronger. For the second question, the flex course potential, I don't have you there. the percentage that we can have in FlexCourse in the future, we have in Brazil around 800 cities, for example, that are between 20,000 and 40,000 people that we could enter with our FlexCourse, for example. Today we typically focus on cities that are bigger than 40,000 people in total population. So FlexCorp has an important potential to expand this growth and to third growth. I don't have a number to see what will be the target for FlexCorp, but this is clearly an important driver as well for our growth potential going forward. And with that we can now, we can say that we can reach every corner of Brazil.
spk07: Perfect. Thank you very much.
spk02: Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. I would now like to turn the call back over to Carlos Brita.
spk05: We have here a question from Pedro from BTG. He's making two questions. First one, what is the ideal level of PDA looking forward? The PDA, as I said, is very higher within the newcomers, the intake, and much lower with seniors. The ideal level of PDA is something very tricky, very dangerous. If we stopped growing next quarter, for example, if we don't have any intake, our PDA would very smaller in the second half of this year. So it will depend on the growth that we have. What we expect to see is that given the nature of our growth, this number here that we had of 16% and last year was around 14% shall slowly decline over time as we have more seniors in our student base compared to newcomers. So this will, I'd say overall, in the medium term, we shall have a PDA level of around, I'd say, nine to 10% within, let's say, four to five years. Because we are going to keep growing a lot our student base. If we stopped growing, PDA would have been smaller than that. The second one, the second question of Pedro, is what is our expectation for the next intake cycle? It is, I'd say, very strong. We have been already preparing ourselves for the next intake cycle. It will, of course, depend on how the pandemic evolves in Brazil because it is a fact that the hubs closed affect our intake cycle. But even with that, we had 32% growth this quarter, this semester, and 40% growth in the second semester of last year, which was within the middle of the pandemic. So we have a very strong, say, prospect for the second half of this year as well.
spk02: As a reminder, to ask a question, you will need to press star 1 on your telephone. I'm not showing any questions at this time. I would now like to turn the call back over to Carlos Vitez for closing remarks.
spk05: Thank you, Claire. So I guess we were able, again, to deliver nice numbers. And myself, Carol, and the whole IR team, we are at your disposal to solve any other questions. Thank you very much.
spk02: This concludes today's conference call. Thank you for participating. You may now disconnect.
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