Vasta Platform Limited (VSTA) Q4 2021 Earnings Call Transcript

Vasta Platform Limited (VSTA -1.25%)
Q4 2021 Earnings Call
Mar 24, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Vasta Platform fourth quarter 2021 conference call. [Operator instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] I would now like to hand the conference over to your speaker today, Bruno Giardino, chief financial officer.

Please go ahead.

Bruno Giardino -- Chief Financial Officer

Good evening, everyone, and thank you for joining me in this conference call to discuss Vasta Platform's fourth quarter 2021 results. With me on the call today, we have Mario Ghio, Vasta's CEO; and Guilherme Melega, Vasta's COO. 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 benefits, and our expectations regarding the market. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management, which includes those set forth in the press release that we issued 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 information available to us as of the date hereof. You should not rely on them as predictions of the future events, and we disclaim any obligation to update any forward-looking statements, except as required by law.

In addition, management 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. Let me now leave the call over to Ghio to make his opening statements.

Mario Ghio -- Chief Executive Officer

Hello, everybody. Thank you, Bruno. So, moving to the Slide Number 3, the fourth quarter of 2021 is the beginning of the 2022 cycle, a new chapter in Vasta's history because we reset the company and its growth trajectory. As we comment in the previous calls, 2021 was perhaps the most difficult period in the Brazilian K-12 sector and in the corporate's history for sure.

But 2022 school year began in line with our expectations, with the schools fully reopened, a scenario that enables Vasta to fully convert the 2022 ACV into revenues. In this fourth quarter, we also began the integration with Eleva, with the sixth-largest learning system in Brazil and the biggest acquisition in the history of our company. We are quite happy to have Eleva with us, and we are excited with all the opportunities we'll see with its combination with Vasta. Talking about the ACV, as we announced last month, we collected a total of 1 billion reais in subscription contracts, which represents a growth of 20 -- 35% over the subscription revenue for the 2021 cycle.

Excluding Eleva, the ACV increased 22% only by organic means. As we will detail you in the presentation, the composition of this ACV is richer than before, with the great performance of our premium brands. In this fourth quarter, the first of ACV 2022 recognition, total net revenues increased 16% year on year, with the subscription products up 22%. Excluding PAR, subscription revenue increased 34%, which demonstrates that we continue to migrate our textbooks-based revenue to learning systems or digital platforms.

Adjusted EBITDA grew 10% following the growth in the net revenue and partially hit by temporary cost pressures, Eleva acquisition, and integration expenses here included. Adjusted net profit fell 17% on the higher financial leverage, due to the acquisition of Eleva and on higher interest rates in Brazil. For the first time, we are releasing a revenue guidance for the next quarter. So, we expect to have 307 million reais of total revenues in the first quarter of '22, being 320 million reais in subscription revenues and more 50 million reais in nonsubscription revenues.

This implies a growth of 32% in total revenues, reiterating our belief that 2022 will be -- in 2022, we'll be able to collect 100% of the ACV but also to stabilize the sales of the nonsubscription segment. Now, I'll turn the floor to our COO, Guilherme Melega.

Guilherme Melega -- Chief Operating Officer

Thank you, Ghio. Now, moving to Slide Number 4, let's talk a little bit about our ACV. Our 2022 ACV totaled 1 billion reais, a 35% growth versus the subscription revenue collected in 2021 cycle. Organically, it means a 22% growth.

Complementary solution is once again has the highest growth rate among the business segments, with a 47% increase, evidencing that Vasta has captured the strong cross-selling potential for base space. Traditional learning systems, including newly launched Textbook as a Service platform and excluding Eleva, grew 31% compared to 2021 subscription revenue. Traditional learning systems, ex-Eleva, and complementary products together grew 32%. Finally, Eleva delivered ACV of 98 million, contributing 13 percentage points to consolidated 2022 ACV growth.

Now, moving to Slide Number 5, we detailed the composition of our ACV growth. I would like to emphasize in this slide that the quality of these ACVs, we managed to grow faster in our premium brands, Anglo and pH, and to initiate the migration from paper-based products to digital subscription products, Textbook as a Service platform, in line with our strategy. As you can see in the slide, new clients and the combination of cross, upsell, and price readjustments continued to be the main drivers of ACV growth. Each one contributed with 15%.

In the cycle, our churn was slightly above 8%, which we attributed to the tougher macroeconomic conditions. While the churn rate of our premium brands remained remarkably low, there was an upward pressure in the churn rate in the mainstream segment and PAR clients. Approximately 35% of partner schools that left our base were delinquent as of December 31. In Slide Number 6, we give you more information on how our ACV will be distributed over the year.

The 2022 ACV is less concentrated in the first two quarters than in previous years due to the different seasonality of our products such as Eleva, Mackenzie, and Textbook as a Service platform, as well as lower PAR revenue, all recognized in Q4 and Q1. That means that although the first two quarters will continue to register the largest part of ACV revenue, there will be less revenue to be captured in the first half of the sales cycle when compared with previous years, and the opposite will happen in the second half. To illustrate, in the fourth quarter, we collected 34.7% of 2022 ACV, whereas we have collected 38.3% of subscription revenue of the 2021 cycle in the fourth quarter of 2020. In order to facilitate this understanding, we are providing a guidance for the first quarter of 2022, the second quarter of 2022 ACV recognition.

So, we expect to have 320 million reais in subscription revenue in Q1 2022, 32% of the ACV, implying a 31% year-on-year growth in this line. As for nonsubscription revenue, our forecast is 50 million reais, implying a 33% year-on-year growth. Combine it, Vasta is about to deliver 32% year-on-year growth in the first quarter of 2022 to 370 million reais, confirming the recovery trend that is suggested by our ACV. In the remaining quarters, as we have more ACV to be recognized, we may expect some growth rates to continue throughout the year.

I will now turn the floor to our CFO, Bruno Giardino, who will talk about the financial results of the quarter.

Bruno Giardino -- Chief Financial Officer

Thank you, Melega. In Slide Number 7, we showed the composition of Vasta's net revenue in the fourth quarter. Total net revenue increased 16%, or 9% excluding Eleva, which contributed with 25 million reais since its integration in late October. The revenue from subscription revenue jumped 22% year on year and continues to gain relevance in our sales mix.

As you can see on the right, reaching 87% of total. When we exclude PAR, our subscription revenue increased to 34%, or 22% excluding Eleva, the pink bar on the right-hand side. Nonsubscription revenue declined 14% in the fourth quarter, reflecting the [Inaudible] dynamics in the textbook market. As previously discussed, revenue growth is set to accelerate in the coming quarters.

Now, in the Slide 8, we see adjusted EBITDA and net income. Adjusted EBITDA increased 10% in the quarter following the growth in net rev. The margin declined 230 basis points, however, due to temporary cost pressures, here included expenses related with Eleva integration. This more than offset the efficiency in commercial expenses and the slightly lower provision for doubtful accounts we had in this quarter.

When we look forward, we see a recovery trend for EBITDA margin on a yearly basis. As, one, revenue growth will accelerate. Two, we restructured our workforce in December, with benefits to be realized from January onwards. And third, synergies from Eleva acquisition.

In the fourth quarter, adjusted net profit declined at 17% year over year to 98 million. Despite the growth in operating profit, the increase in net financial expense due to the increased financial leverage and the higher level of interest rates. Our leverage is up because of the Eleva acquisition that was consolidated in late October. Next, I'll give more details on the provisions and accounts receivables on Slide 9.

As you know, over the last quarter, we have recognized a higher provision for doubtful accounts, PDA, due to the challenging business environment for our school partners. Since the beginning of the pandemic, our approach to credit issues has been to extend payment terms instead of granting discounts, which resulted in an aging of our receivable portfolio and higher provision needs. In this fourth quarter, however, as a percentage of revenue, the PDA declined 29 percentage points, and we expect a gradual reduction going forward toward the normalization in the payment cycle. Finally, the days of accounts receivable when we adjust for the effect of the Eleva acquisition stayed in line on a yearly basis and following the regular seasonality of the business.

With that being said, I'll turn the call back to Mario Ghio.

Mario Ghio -- Chief Executive Officer

Thanks, Bruno. Let's move to Slide Number 10, please. While we are already discussing '22, it's important to give a step back and look at how much things we did in '21 that are pretty sure -- we are pretty sure will be the future of Vasta. In this slide, you can see all the developments we made since our IPO.

Starting in the left, we reinforced our core business with the acquisition of Eleva, the creation of the Fibonacci Learning System, and also the distribution agreement with Mackenzie. We also launched the Textbook as a Service platform. Moving up in the model clockwise, we entered in the light pink area. We expanded our complementary solutions reach with the opening of Plurall Store, which offers a series of solutions in partnership with education companies from all over the world.

Then we entered in the B2B2C segment through the launch of Plurall MyTeacher, our private classes platform, and Plurall Adapta, adaptive learning platform. We will talk more about these two initiatives one slide ahead. In the bottom, the digital services are the acquisition of SEL, EMME, and more lately, Phidelis will enable us to build a portfolio of administrative services that will address the needs of our partner schools, freeing up time for them to focus on what they know best, which is to educate. Now, I would invite you to focus again on the light pink area.

This is everything we built or acquired since our IPO. In one and a half years, we have set new revenue pockets and we built products that may be the future of our company. Moving to Slide Number 10, let's comment on why being a platform is so important for us. We believe that Plurall is a true platform and the only super app of K-12 education in Brazil.

It all started with the full integration of Vasta's multibrand portfolio, which has led to the capture of operating and financial benefits with a unified go-to-market and technological backbone. As a second stage, the platform relevance in terms of the number of students, teachers, and traffic share attracted important partnerships with third parties like Mackenzie, Fibonacci, and all the ed-techs we include in Plurall Store. The third stage, the stage that we are now, is the offering of new disruptive products at a marginal cost, began with our interests in the B2B2C segment and will continue with the development of new products that tap other relevant addressable markets, with the expected launch in the beginning of this year. On Slide 12, I will comment on the B2B2C segment.

As we talked in the last conference call in October, we celebrated the debut of the B2B2C platform, which was a great achievement of our Plurall team. Plurall MyTeacher and Plurall Adapta recorded their first sales in the first quarter of this year and -- in this quarter, the fourth quarter of '21. And the awareness of these products has been increasing lately, day by day. We see a strong long-term potential for the B2B2C services, and this potential could materialize exponentially once the product is better known by our community.

As you can see in this slide, in the bottom, we have focused on the dissemination of this product on some of our partner schools and students. Let's talk about ESG on Slide 13. By the end of April, we are going to launch -- we are going to issue our first sustainability report, collaborated according to the highest standards available. We hope this report will help the Vasta community to understand how serious we are about ESG standards at Vasta.

Moving on to Slide 14, we anticipate some of the -- of our achievements related to ESG. On the environmental field, 89% -- almost 90% of the energy consumed comes from renewable sources, being 100% in our largest distribution center in Sao Jose dos Campos, 100% of our suppliers are FSC certified. In the social field, more than half of our -- all of our leaderships are women, 94% of women who took maternity leave remained in the post-return employment. On the governance side, our board of directors has 28.6% female members, 42% independent members, and 14% -- and has the participation of 14% in terms of the LGBT group.

Female participation in the board of directors granted us the Women On Board seal. Having said that, I finish our presentation and now open the Q&A session. Thank you very much.

Questions & Answers:

Operator

[Operator instructions] Our first question will come from the line of Vitor Tomita from Goldman Sachs. You may begin.

Vitor Tomita -- Goldman Sachs -- Analyst

Good evening, Ghio. Good evening, Giardino. Thanks for taking our questions. Two questions from our side.

The first one is on PAR. If we look at the reduction in PAR ACV, could you give us a sense of how much of that reduction is driven by book reutilization or churn and how much is instead driven by migrations to other learning systems you offer? And a second question from us, thinking about the potential of Plurall as a platform for third-party offerings, which is something you touched on in the presentation, could you give us a sense of how relevant Mackenzie, Fibonacci, and the third-party apps in Plurall Store has been as a part of 2022 ACV growth? Thank you.

Guilherme Melega -- Chief Operating Officer

Hi, Vitor, this is Melega. I will take your first question, and then I would turn to Ghio for the second one. Giving you a little bit more details about PAR, the reduction in PAR revenues is mainly due to the migration to learning systems and to the implementation of the PAR platform as a service, which will only be recognized in Q2 -- from Q2 to Q4 this year because it's a service, and we only recognize it when -- once the services is -- has been delivered. So, this -- those two are the main drivers.

We did not see an increase in reutilization of books. And what we are performing is our strategy to migrate to platform as a service and learning systems.

Mario Ghio -- Chief Executive Officer

Hi, Vitor, this is Ghio. Regarding to Mackenzie and Fibonacci, because of the commercial agreement that we have with Mackenzie, we can't be so -- we can't be very specific in terms of numbers, right? But what I can tell you is that Mackenzie is representing just a few percentage points of our ACV, right? And Fibonacci is really in the beginning of the trajectory with us, right? We just launched with Fibonacci, the material focusing on, you know, the prep course for universities, right? So, for vestibular, and this -- it's very small, the revenues we saw from Fibonacci. But the potential of Fibonacci is huge because, as we like to say, Fibonacci is the best school in the country if we consider the results in [Inaudible] OK, Vitor?

Vitor Tomita -- Goldman Sachs -- Analyst

Very clear. Thank you both.

Operator

[Operator instructions] Our next question will come from the line of Marcelo Santos from J.P. Morgan. You may begin.

Marcelo Santos -- J.P. Morgan -- Analyst

Hi. Good evening, Ghio, Melega, Giardino. Thanks for taking the question. Would you please explore a bit the higher churn from the angle of the competitive environment? I know you mentioned the macro, but what can you say about the competitive environment? And the second question that I would like to ask is you mentioned that you would have like new launches on the B2B2C markets.

Is it something -- could you discuss a bit what else do you have in store there that we could see in 2022? I think that's what I understood from the release, you would come with new things. Thank you.

Guilherme Melega -- Chief Operating Officer

Thank you, Marcelo. Let me take your first question. We see the competitive environment pretty much as usual. It's a very competitive market.

And we see pretty much the same competitors driving innovation, driving good products. And we are -- we keep moving forward also. We don't see any change if that is what you are implying in the competitive environment. And so far, we had a very good start, not also in the sales campaign, but also delivery, the contracts, and the revenue side.

Mario Ghio -- Chief Executive Officer

Yeah. Marcelo, this is Ghio, I will take your second question. So, let me first give a step back, and I would like to reinforce the importance to have a true platform. We are in the stage of our platform that, sometimes, the client is also a provider, right? The real concept of a platform, you become a platform when you have a client, for instance, our teacher, they are our clients because they are consuming our products and services.

But through Plurall MyTeacher, they are, at the same time, providers of new services, new content to our ecosystem, right? And we are doing the same with schools and many other stakeholders in our ecosystem. Regarding to your question what we are planning to launch in the beginning of this year is regarding to therapy, right? The same technology we developed for Plurall MyTeacher, we can use for therapies, right? And we are seeing a huge demand. I mean, families, they are -- after two years of pandemic, they are really concerned if their kids need some kind of, you know, a professional therapy. And we are planning to launch in just a few weeks.

We are -- at this moment, we are testing a kind of a better version of our Plurall MyTherapist. And this kind -- this is the innovation I mentioned in the presentation. But it's important to understand that the two platform means that, sometimes, our clients are also our providers. We are -- we have some ideas to transform even our students in providers of services for other students, OK?

Marcelo Santos -- J.P. Morgan -- Analyst

Perfect. Thank you very much. Just on a follow-up on Melega's answer, so the increasing churn, as you understand it, has nothing to do with an increase in competition? Just to be very clear. That was your answer?

Guilherme Melega -- Chief Operating Officer

Marcelo, in the traditional learning systems, the main -- especially in the mainstream, we did see more competition, very aggressive commercial features to our customers, and we did see a higher churn due to that but also due to the weakness in terms of financial terms of our customers that needed to switch to another provider to have better commercial terms, which we did not retain. So -- but that's pretty much it. In the premium segment, we didn't see that trend, and we definitely are very confident about the quality in our brands to maintain competition away from them.

Mario Ghio -- Chief Executive Officer

Yeah, and adding on that, Marcelo, it's important to comment that 35% of the schools that churned were delinquent payers by the end of last year, right, by the end of the year. And we decided to not renew their credit for this year, right? So, there is more competition, especially in the commercial -- with the commercial schools in the middle-end of the market. But we also decided to not renew the credit with the delinquent school. And this specific part of the churn is representing 35% of the churn.

Marcelo Santos -- J.P. Morgan -- Analyst

Perfect. Very, very clear, Melega and Ghio. Thank you.

Operator

The next question will come from the line of Vinicius Figueiredo from Itau. You may begin.

Vinicius Figueiredo -- Itau BBA -- Analyst

Good evening, everyone. Thanks for taking my question. I do have to follow up to one of your previous answers. You commented that you noted the weakening of some of your competitors.

In your view, the strength together with the tougher market scenario, does it increase the number of opportunities for market consolidation through acquisition? Thanks.

Mario Ghio -- Chief Executive Officer

Yeah, Vinicius. I guess I can start and Melega can compliment me if he wants. Yes, there is always opportunity for more acquisitions for the consolidation of the market, right? But for now, we are super focusing on integration of Eleva, right? We have a lot to do in the Eleva integration side. We are starting to collect all the synergies we can collect with Eleva, and we are also now focusing on integrate the new products -- the new tech products we also bought in the last year.

So, for instance, [Inaudible] Meu, it's in the beginning of its cycle inside Plurall. We are starting to offer SEL as a front -- the front end of schools with families and the recently acquired Phidelis, which is a complete ERP. We are now integrating these kinds of back-office services into Plurall, right? And with that integration, then we can start, for instance, to offer financial services to schools as well, right? So, we are not -- to be super clear with you, we had some opportunities. We are talking to some learning systems.

But for us, first, the Eleva integration; second, the integration of all the technologies we bought last year in Plurall. And from these new technologies, we start to offer new services such as I mentioned to Marcelo, service as MyTherapist, Plurall MyTeacher. It is just in the beginning of the journey with our students. So, there are opportunities, but it's not our focus, at least in the first half of this year. 

Vinicius Figueiredo -- Itau BBA -- Analyst

Thanks. Very clear.

Operator

Our next question will come from the line of Andres Coello from Scotiabank. You may begin. 

Andres Coello -- Scotiabank -- Analyst

Thank you. Thank you for taking my question. You mentioned in the release that in the fourth quarter, there was a little bit of cost pressure from the Eleva integration. So, I'm wondering if you can just provide a little bit of color regarding the -- how much -- you know, the cost of the integration during the fourth quarter, perhaps just detail if those costs were already included in the recurring expenses in your release or if those were not included there.

And just a little bit of -- you know, have an idea of your margins post-integration if you want to call it that way. Thank you.

Bruno Giardino -- Chief Financial Officer

Hi, Andres, thank you for the question. These expenses related with the Eleva integration are the usual expenses that we have in any kind of M&A, lawyers consultancy, that type of stuff, right? This is a -- this was a relatively sizable amount. We're not giving disclosure, but we can tell you that this is not included in nonrecurring expenses. What do you see in nonrecurring expenses are expenses related with restructuring of our workforce that we did in December, right? The results are yet to come.

So, these expenses related with the Eleva, for sure, will -- are -- were a kind of a pressure in our results, and they are temporary, OK? When we look forward to 2022, we clearly see a recovery trend for our EBITDA margin, right? We are talking here in margins going back to the level of 2020 or even more. And we are pretty confident that Eleva can have margins even greater than ours, right, because I think that Eleva is a pure subscription product. So, it naturally has higher margins than Vasta. So, the integration plus time plus synergies is also another factor that makes us confident that margins are on an upward trend in 2022, OK?

Andres Coello -- Scotiabank -- Analyst

OK. That's great. Thank you.

Mario Ghio -- Chief Executive Officer

Andres, if I may add just to give you more color about the -- what we are calling here the restructurization -- restructure of our company, right? Because of the integration of Eleva, but not only, we saw opportunities to be more efficient in many areas. We cut 20% of our payroll, right? So, it's -- it was a powerful restructuring, right? And as Bruno said, that the results are yet to come. We are expecting to see this -- the impact of this reorganization in our margins in the first quarter of now '22.

Andres Coello -- Scotiabank -- Analyst

OK. That's very clear and very impressive. Thank you.

Operator

[Operator instructions] Our next question will come -- actually, be a follow-up from Marcelo Santos from JPMorgan. Your line is open.

Marcelo Santos -- J.P. Morgan -- Analyst

Thanks for the follow-up. It's a quick one. I just wanted to check Mario Ghio's comment on the prepared remarks. So, you expect to be able to collect 100% of ACV in this commercial cycle? That's the question. 

Mario Ghio -- Chief Executive Officer

That's it. Marcelo, you are correct. We are expecting given that we have a good start in this year, right? So, schools are open, the students are going to the schools. We are -- yes, we are expecting to convert 100% of the ACV into revenues this cycle.

Yeah.

Marcelo Santos -- J.P. Morgan -- Analyst

Perfect. Thank you very much.

Operator

Thank you. And I'm actually not showing any further questions in the queue. I'd like to turn the call over to Bruno for any closing remarks.

Bruno Giardino -- Chief Financial Officer

Thank you. Thank you, everyone, for attending our call. We are always available to follow-up questions, right? And thank you and take care.

Operator

[Operator signoff]

Duration: 36 minutes

Call participants:

Bruno Giardino -- Chief Financial Officer

Mario Ghio -- Chief Executive Officer

Guilherme Melega -- Chief Operating Officer

Vitor Tomita -- Goldman Sachs -- Analyst

Marcelo Santos -- J.P. Morgan -- Analyst

Vinicius Figueiredo -- Itau BBA -- Analyst

Andres Coello -- Scotiabank -- Analyst

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