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Arco Platform Limited Reports Second Quarter and First Half 2020 Financial Results

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2Q20 Net revenues up 71% Year-Over-Year, reaffirming Arco's resilient business model and high-quality solutions.

SÃO PAULO, Brazil, Aug. 17, 2020 (GLOBE NEWSWIRE) -- Arco Platform Limited, or Arco (Nasdaq: ARCE), today reported financial and operating results for the second quarter 2020 ended June 30, 2020.

“The superior academic results are possible because we have a customer-oriented culture, attached to our always-evolving proprietary methodology, break-through technology-driven platform and tailored pedagogical consultancy. These pillars are not established overnight. They come from over 50 years of experience in education with a clear focus on quality.”

First Half 2020 Results

  • Net Revenue of R$496.4 million;

  • Net Profit of R$20.1 million;

  • Adjusted Net Income of R$114.1 million; and

  • Adjusted EBITDA of R$197.5 million.

Second Quarter 2020 Results

  • Net Revenue of R$234.9 million;

  • Net Profit of R$16.2 million;

  • Adjusted Net Income of R$57.9 million; and

  • Adjusted EBITDA of R$100.6 million.

Revenue Recognition and Seasonality

As we report the second quarter 2020 results, it is important to highlight the revenue recognition and seasonality of our business.

We typically deliver our Core Curriculum content four times each year, in March, June, August and December and our Supplemental Solutions content twice each year, in June and December, usually two to three months prior to the start of each school quarter. The amount of revenue recognized is proportional to the amount of content made available, which is not linearly distributed among the quarters, which causes revenue seasonality in our business.

A significant portion of our expenses is also seasonal. Due to the nature of our business cycle, we require significant working capital, typically in September or October of each year, to cover costs related to production and accumulation of inventory, selling and marketing expenses, and delivery of our teaching materials at the end of each fiscal year in preparation for the beginning of each school year. Therefore, such operating expenses are generally incurred in the period between September and December of each year.

Full Year 2020 guidance:

  • Adjusted EBITDA Margin is expected to be in the range of 35.5% to 37.5%.

Completion of Positivo’s corporate restructuring:
On July 07, 2020, according to a resolution approved by the Board of Directors and registered at the Board of Trade of Ceará, the corporate name of the subsidiary EAS Educação S.A. was changed to PSD Educação S.A.

On August 01, 2020, continuing the corporate restructuring, PSD Educação S.A. incorporated the Companies Positivo Soluções Didáticas Ltda. and Editora Piá Ltda. When PSD Educação S.A. acquired these entities, goodwill and fair value adjustments recognized in the amount of R$830,028 and R$726,876, respectively, were treated as not deductible. However, after this transaction, PSD Educação S.A has the tax benefit of the deductibility of the goodwill and fair value adjustments of R$529,347. The fair value adjustments should be deductible over the next 5 to 20 years, according to the useful life of the identified asset and the goodwill should be deductible for at least 5 years, under of Brazilian tax laws, depending on the utilization curve established by the Company in the initial use of the benefit.

At the end of each fiscal year, if the tax benefit is greater than the taxable income, the Company will recognize a deferred tax asset from the tax loss, which may be offset in the next fiscal years, limited to 30% of taxable income.

Information related to COVID-19 pandemic:
As discussed in more detail in our June 30, 2020 condensed consolidated financial statements submitted to the Securities and Exchange Commission on Form 6-K, the COVID-19 pandemic has not had a material impact on the Company’s operations, distribution capacity and revenue recognition so far. As of June 30, 2020, there was a total impact of R$7,898 on the Company's condensed consolidated financial statements related to the Covid-19 pandemic mainly related to: (i) revision of the Company’s estimated credit losses from its trade receivables based on expected increases in financial default and in unemployment rates in Brazil for the next months, which resulted in an increase of R$4,028 thousand, (ii) the Company incurred additional expenses of R$3,680 related to IT, network infrastructure and an integrated teaching platform, as well as expenses to maintain protective measures.

Despite legally mandated school closures, the Company did not suspend its activities and, following health and social distancing guidelines, its workforce continues to work remotely from home, with the exception of teams from the distribution centers that are working on site, however, with several safety rules, in accordance with health and social distancing guidelines. In this scenario, the Company made investments in IT and network infrastructure, had additional expenses for cleaning and disinfecting the installations, bought alcohol and masks, funded COVID-19 tests and H1N1 flu vaccination campaigns with the objective of taking care of employees, reducing the demand for care in health units and to facilitate the diagnosis of COVID-19 in order to safeguard the health and safety of its employees, customers and suppliers. Our content production continues according to the scheduled curriculum calendar and the current educational material has been delivered to the schools according to the planned schedule, enabling the Company to recognize the revenues on these products.

The future impact of the COVID-19 pandemic on an ongoing basis is still uncertain, and the Company’s management team will continue to closely monitor and assess the potential impacts it may have on the Company’s business, its financial performance and position.

The extent to which the coronavirus (COVID-19) impacts our financial results and operations will depend on future developments, which are uncertain, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the impact of the coronavirus (COVID-19) pandemic. Based on future developments of the coronavirus (COVID-19), it is possible that we may, in the future, be required to take actions or steps in relation to our business that could have a disruptive or a material and adverse effect on our business.

About Arco Platform Limited (Nasdaq: ARCE)

Arco has empowered hundreds of thousands of students to rewrite their futures through education. Our data-driven learning, interactive proprietary content, and scalable curriculum allows students to personalize their learning experience with high-quality solutions while enabling schools to provide a broader approach to education.

Forward-Looking Statements

This press release contains forward-looking statements as pertains to Arco Platform Limited (the “Company”) within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, the Company’s expectations or predictions of future financial or business performance conditions. The achievement or success of the matters covered by statements herein involves substantial known and unknown risks, uncertainties, and assumptions, including with respect to the COVID-19 pandemic. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, the Company’s results could differ materially from the results expressed or implied by the statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward looking statements are made based on the Company’s current expectations and projections relating to its financial conditions, result of operations, plans, objectives, future performance and business, and these statements are not guarantees of future performance.

Statements which herein address activities, events, conditions or developments that the Company expects, believes or anticipates will or may occur in the future are forward-looking statements. You can generally identify forward-looking statements by the use of forward-looking terminology such as “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “evaluate,” “expect,” “explore,” “forecast,” “guidance,” “intend,” “likely,” “may,” “might,” “outlook,” “plan,” “potential,” “predict,” “probable,” “project,” “seek,” “should,” “view,” or “will,” or the negative thereof or other variations thereon or comparable terminology. All statements other than statements of historical fact could be deemed forward looking, including risks and uncertainties related to statements about our competition; our ability to attract, upsell and retain customers; our ability to increase the price of our solutions; our ability to expand our sales and marketing capabilities; general market, political, economic, and business conditions in Brazil or abroad; and our financial targets which include revenue, share count and other IFRS measures, as well as non-IFRS financial measures including Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, Adjusted Net Income Margin, Free Cash Flow and Adjusted Free Cash Flow.

Forward-looking statements represent the Company management’s beliefs and assumptions only as of the date such statements are made, and the Company undertakes no obligation to update any forward-looking statements made in this presentation to reflect events or circumstances after the date of this press release or to reflect new information or the occurrence of unanticipated events, except as required by law.

Further information on these and other factors that could affect the Company’s financial results is included in filings the Company makes with the Securities and Exchange Commission from time to time, including the section titled “Risk Factors” in the Company’s most recent Forms 20-F and 6-K. These documents are available on the SEC Filings section of the Investor Relations section of the Company’s website at: https://investor.arcoplatform.com/

Key Business Metrics

ACV Bookings: We define ACV Bookings as the revenue we would contractually expect to recognize from a partner school in each school year pursuant to the terms of our contract with such partner school, assuming no further additions or reductions in the number of enrolled students that will access our content at such partner school in such school year (we define “school year” for purposes of calculation of ACV Bookings as the twelve-month period starting in October of the previous year to September of the mentioned current year). We calculate ACV Bookings by multiplying the number of enrolled students at each partner school with the average ticket per student per year; the related number of enrolled students and average ticket per student per year are each calculated in accordance with the terms of each contract with the related partner school.

Non-GAAP Financial Measures

To supplement the Company's condensed consolidated financial statements, which are prepared and presented in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board—IASB, we use Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, Adjusted Net Income Margin, Free Cash Flow and Adjusted Free Cash Flow which are non-GAAP financial measures.

We calculate Adjusted EBITDA as profit for the year (or period) plus income taxes, plus/minus finance result, plus depreciation and amortization, plus share of loss of equity-accounted investees, plus share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units), plus M&A expenses, plus non-recurring expenses and plus effects related to Covid-19 pandemic. We calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by Net Revenue.

We calculate Adjusted Net Income as profit for the year (or period) plus share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units), plus amortization of intangible assets from business combinations (which refers to the amortization of the following intangible assets from business combinations: (i) rights on contracts, (ii) customer relationships, (iii) educational system, (iv) trademarks, (v) non-compete agreement and (vi) software resulting from acquisitions), plus/minus changes in fair value of derivative instruments (which refers to (i) changes in fair value of derivative instruments—finance income, and plus (ii) changes in fair value of derivative instruments—finance costs), plus/minus changes in accounts payable to selling shareholders plus share of loss of equity-accounted investees, plus/minus changes in current and deferred tax recognized in statements of income applied to all adjustments to net income, plus/minus foreign exchange gains/loss on cash and cash equivalents, plus interest expenses, plus M&A expenses, plus non-recurring expenses and plus effects related to Covid-19 pandemic. We calculate Adjusted Net Income Margin as Adjusted Net Income divided by Net Revenue.

We calculate Free Cash Flow as Net Cash Flows from Operating activities less acquisition of property and equipment less acquisition of intangible assets. We consider Free Cash Flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by operating activities and cash used for investments in property and equipment required to maintain and grow our business. We calculate Adjusted Free Cash Flow as free cash flow for the year (or period) plus (i) interest change in financial investments, (ii) M&A expenses and (iii) non-recurring expenses.

We understand that, although Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, Adjusted Net Income Margin, Free Cash Flow and Adjusted Free Cash Flow are used by investors and securities analysts in their evaluation of companies, these measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results of operations as reported under IFRS. Additionally, our calculations of Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, Adjusted Net Income Margin Free Cash Flow and Adjusted Free Cash Flow may be different from the calculation used by other companies, including our competitors in the education services industry, and therefore, our measures may not be comparable to those of other companies.

Conference Call Information

Arco will discuss its second quarter 2020 results today, August 17, 2020, via a conference call at 4:30 p.m. Eastern Time. To access the call (ID: 2374425), please dial: (866) 679-4032 or +1 (409) 217-8315. An audio replay of the call will be available through August 31, 2020 by dialing (855) 859-2056 or +1 (404) 537-3406 and entering access code 2374425. A webcast of the call will be available on the Investor Relations section of the Company’s website at https://arcoeducacao.gcs-web.com/.

Investor Relations Contact:

Arco Platform Limited
IR@arcoeducacao.com.br
Source: Arco Platform Ltd.

Arco Platform Limited

Interim Condensed Consolidated Statements of Financial Position

June 30,

December 31,

(In thousands of Brazilian reais)

2020

2019

Assets

(unaudited)

Current assets

Cash and cash equivalents

188,894

48,900

Financial investments

702,761

574,804

Trade receivables

298,407

329,428

Inventories

47,175

40,106

Recoverable taxes

29,175

15,612

Financial instruments from acquisition of interest

-

3,794

Related parties

1,321

1,298

Other assets

32,207

14,630

Total current assets

1,299,940

1,028,572

Non-current assets

Financial instruments from acquisition of interest

32,311

32,152

Deferred income tax

198,377

156,748

Recoverable taxes

9,531

6,613

Financial investments

4,791

4,690

Related parties

15,106

14,813

Other assets

16,136

14,399

Investments and interests in other entities

57,250

48,574

Property and equipment

22,082

21,328

Right-of-use assets

19,409

21,631

Intangible assets

1,793,850

1,811,903

Total non-current assets

2,168,843

2,132,851

Total assets

3,468,783

3,161,423


June 30,

December 31,

(In thousands of Brazilian reais)

2020

2019

Liabilities

(unaudited)

Current liabilities

Trade payables

30,806

34,521

Labor and social obligations

89,645

68,511

Taxes and contributions payable

4,729

7,508

Income taxes payable

54,506

52,038

Advances from customers

36,452

25,626

Lease liabilities

7,639

6,845

Loans and financing

302,682

98,561

Accounts payable to selling shareholders

344,214

117,959

Other liabilities

757

607

Total current liabilities

871,430

412,176

Non-current liabilities

Labor and social obligations

6,335

2,801

Lease liabilities

16,758

19,012

Loans and financing

1,226

-

Financial instruments from acquisition of interest

29,446

33,940

Provision for legal proceedings

845

251

Accounts payable to selling shareholders

911,192

1,098,273

Other liabilities

787

160

Total non-current liabilities

966,589

1,154,437

Equity

Share capital

11

11

Capital reserve

1,608,499

1,607,622

Share-based compensation reserve

99,558

84,546

Accumulated losses

(77,304

)

(97,369

)

Total equity

1,630,764

1,594,810

Total liabilities and equity

3,468,783

3,161,423


Arco Platform Limited

Interim Condensed Consolidated Statements of Income

Three months period ended
June 30,

Six months period ended
June 30,

(In thousands of Brazilian reais, except earnings per share)

2020

2019

2020

2019

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Net revenue

234,864

137,566

496,443

254,621

Cost of sales

(43,120

)

(25,827

)

(110,340

)

(47,696

)

Gross profit

191,744

111,739

386,103

206,925

Operating expenses:

Selling expenses

(88,070

)

(39,315

)

(175,970

)

(75,450

)

General and administrative expenses

(60,139

)

(44,926

)

(126,922

)

(65,758

)

Other income (expense), net

347

(437

)

759

2,922

Operating profit

43,882

27,061

83,970

68,639

Finance income

12,792

13,961

22,179

30,917

Finance costs

(30,752

)

(12,374

)

(69,091

)

(28,855

)

Finance result

(17,960

)

1,587

(46,912

)

2,062

Share of loss of equity-accounted investees

(3,293

)

(667

)

(3,999

)

(1,159

)

Profit before income taxes

22,629

27,981

33,059

69,542

Income taxes - income (expense)

Current

(22,435

)

(10,899

)

(54,623

)

(29,151

)

Deferred

16,050

8,617

41,629

16,149

Total income taxes – income (expense)

(6,385

)

(2,282

)

(12,994

)

(13,002

)

Net profit for the period

16,244

25,699

20,065

56,540

Basic earnings per share – in Brazilian reais

Class A

0.30

0.51

0.37

1.12

Class B

0.30

0.51

0.37

1.12

Diluted earnings per share – in Brazilian reais

Class A

0.29

0.49

0.36

1.09

Class B

0.30

0.50

0.37

1.10

Weighted-average shares used to compute net income per share:

Basic

54,942

50,709

54,941

50,505

Diluted

55,335

51,276

55,334

51,072


Arco Platform Limited

Interim Condensed Consolidated Statements of Cash Flows

Three months period ended
June 30,

Six months period ended
June 30,

(In thousands of Brazilian reais)

2020

2019

2020

2019

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Operating activities

Profit before income taxes for the period

22,629

27,981

33,059

69,542

Adjustments to reconcile profit before income taxes

Depreciation and amortization

31,373

9,103

60,048

16,343

Inventory reserves

1,538

1,332

3,644

3,560

Allowance for doubtful accounts

6,386

550

12,554

2,203

Loss on sale/disposal of property and equipment and intangible assets disposed

780

29

1,452

131

Fair value change in financial instruments from acquisition interests

(913

)

-

(859

)

1,866

Changes in accounts payable to selling shareholders

294

-

6,894

-

Share of loss of equity-accounted investees

3,293

667

3,999

1,159

Share-based compensation plan

8,741

14,296

17,648

14,433

Interest accretion on acquisition liability

16,711

8,498

36,977

14,440

Accrued interest on loans and financing

5,733

-

6,975

-

Income on financial investments

(3,617

)

-

(5,656

)

-

Interest on lease liabilities

687

387

1,419

782

Provision for legal proceedings

561

132

594

211

Provision for payroll taxes (restricted stock units)

3,158

6,518

9,046

6,518

Foreign exchange income

922

592

180

516

Gain on sale of investment

-

2

-

(3,286

)

Other financial cost/revenue, net

(1,038

)

(1,202

)

(1,038

)

(1,202

)

97,238

68,885

186,936

127,216

Changes in assets and liabilities

Trade receivables

39,179

7,792

18,467

(8,409

)

Inventories

(7,078

)

(2,067

)

(7,563

)

(2,031

)

Recoverable taxes

(2,610

)

(401

)

(4,304

)

(5,373

)

Other assets

(1,865

)

(9,778

)

(18,901

)

(7,826

)

Trade payables

(16,353

)

(27

)

(3,715

)

659

Labor and social obligations

21,164

6,580

15,622

11,354

Taxes and contributions payable

(219

)

(475

)

(2,779

)

(1,047

)

Advances from customers

(38,654

)

(5,830

)

10,826

14,998

Other liabilities

(924

)

(53

)

(982

)

(354

)

Cash generated from operations

89,878

64,626

193,607

129,187

Income taxes paid

(6,477

)

(5,175

)

(64,020

)

(23,210

)

Interest paid on lease liabilities

(285

)

(220

)

(710

)

(220

)

Net cash flows from operating activities

83,116

59,231

128,877

105,757

Investing activities

Acquisition of property and equipment

(1,665

)

(3,036

)

(4,042

)

(5,829

)

Payment of investments and interests in other entities

-

(4,200

)

(12,675

)

(4,200

)

Acquisition of subsidiaries, net of cash acquired

-

(16,137

)

-

(16,137

)

Acquisition of intangible assets

(22,421

)

(6,887

)

(39,480

)

(18,379

)

Purchase of financial investments

60,774

(36,238

)

(122,402

)

(62,529

)

Loans to related parties

-

-

-

(14,000

)

Net cash flows from (used in) investing activities

36,688

(66,498

)

(178,599

)

(121,074

)


Financing activities

Capital increase

-

12,611

-

13,829

Share issuance costs

-

-

-

(673

)

Payment of lease liabilities

(1,425

)

(565

)

(3,779

)

(1,080

)

Payment of loans and financing

-

(14

)

-

(14

)

Payment to owners to acquire entity’s shares

(1,001

)

-

(1,001

)

-

Loans and financing

(553

)

-

198,372

-

Dividends paid by subsidiaries

-

-

(3,696

)

-

Net cash flows (used in) from financing activities

(2,979

)

12,032

189,896

12,062

Foreign exchange effects on cash and cash equivalents

(922

)

(592

)

(180

)

(516

)

Increase (decrease) in cash and cash equivalents

115,903

4,173

139,994

(3,771

)

Cash and cash equivalents at the beginning of the period

72,991

4,357

48,900

12,301

Cash and cash equivalents at the end of the period

188,894

8,530

188,894

8,530

Increase (decrease) in cash and cash equivalents

115,903

4,173

139,994

(3,771

)


Arco Platform Limited

Reconciliation of Non-GAAP Measures

Three months period ended
June 30,

Six months period ended
June 30,

(In thousands of Brazilian reais)

2020

2019

2020

2019

Adjusted EBITDA Reconciliation

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Profit for the period

16,244

25,699

20,065

56,540

(+) Income taxes

6,385

2,282

12,994

13,002

(+/-) Finance result

17,960

(1,587

)

46,912

(2,062

)

(+) Depreciation and amortization

31,373

9,103

60,048

16,343

(+) Share of loss of equity-accounted investees

3,293

667

3,999

1,159

EBITDA

75,255

36,164

144,018

84,982

(+) Share-based compensation plan, restricted stock
units and provision for payroll taxes (restricted stock
units)

15,480

20,814

31,440

20,951

(+) M&A expenses

2,427

4,423

3,991

4,423

(+) Non-recurring expenses

2,827

-

10,058

-

(+) Effects related to Covid-19 pandemic

4,591

-

7,993

-

Adjusted EBITDA

100,580

61,401

197,500

110,356

Net Revenue

234,864

137,566

496,443

254,621

EBITDA Margin

32.0

%

26.3

%

29.0

%

33.4

%

Adjusted EBITDA Margin

42.8

%

44.6

%

39.8

%

43.3

%

Three months period ended
June 30,

Six months period ended
June 30,

(In thousands of Brazilian reais)

2020

2019

2020

2019

Adjusted Net Income Reconciliation

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Profit for the period

16,244

25,699

20,065

56,540

(+) Share-based compensation plan, restricted stock
units and provision for payroll taxes (restricted stock
units)

15,480

20,814

31,440

20,951

(+) Amortization of intangible assets from business combinations

18,252

3,085

36,235

6,065

(+/-) Changes in fair value of derivative instruments

(913

)

-

(859

)

1,866

(+/-) Changes in accounts payable to selling shareholders

294

-

6,894

-

(+) Share of loss of equity-accounted investees

3,293

667

3,999

1,159

(-) Tax effects

(21,996

)

(10,732

)

(42,424

)

(13,724

)

(+) Foreign exchange on cash and cash equivalents

922

592

180

516

(+) Interest expenses (income), net

16,478

6,357

36,496

13,881

(+) M&A expenses

2,427

4,423

3,991

4,423

(+) Non-recurring expenses

2,827

-

10,058

-

(+) Effects related to Covid-19 pandemic

4,591

-

7,993

-

Adjusted Net Income

57,899

50,905

114,068

91,677

Net Revenue

234,864

137,566

496,443

254,621

Adjusted Net Income Margin

24.7

%

37.0

%

23.0

%

36.0

%


Three months period ended
June 30,

Six months period ended
June 30,

(In thousands of Brazilian reais)

2020

2019

2020

2019

Free Cash Flow Reconciliation

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Cash generated from operations

89,878

64,626

193,607

129,187

(-) Income tax paid

(6,477

)

(5,175

)

(64,020

)

(23,210

)

(-) Interest paid on lease liabilities

(285

)

(220

)

(710

)

(220

)

Cash Flow from Operating Activities

83,116

59,231

128,877

105,757

(-) Acquisition of property and equipment

(1,665

)

(3,036

)

(4,042

)

(5,829

)

(-) Acquisition of intangible assets

(22,421

)

(6,887

)

(39,480

)

(18,379

)

Free Cash Flow

59,030

49,308

85,355

81,549

(+) Interest change in financial investments

3,617

-

5,656

-

(+) M&A expenses

2,427

-

3,991

-

(+) Others

2,827

-

14,408

-

Adjusted Free Cash Flow

67,901

49,308

109,410

81,549