Arco Platform Limited
Q3 2020 Earnings Call Transcript

Published: 30 Nov 2020

[Operator:]

Good afternoon, everyone. Thank you for standing by and welcome to the Arco Platform Third Quarter 2020 Earnings Call. This event is being recorded and all participants are in a listen-only mode during the company's presentation. After Arco presentation, there will be a question-and-answer session. This event is also being broadcast live via webcast and may be accessed through Arco's website at investor.arcoplatform.com where the presentation is also available. Now, I would turn the conference over to Carina Carreira, Arco's IR Director. Carina, you may begin your presentation.

[Carina Carreira:]

Thank you. I am pleased to welcome you to Arco's third quarter 2020 conference call. With me on the call today, we have Arco's CEO, Ari de Sa Cavalcante Neto, and Arco's COO, Pedro Guerra. 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 and guidance for future periods, our expectations regarding our strategic product initiatives and their related benefit and our expectations regarding the market.

[Pedro Guerra:]

Thank you, Carina, and thanks everyone for joining Arco's third quarter 2020 conference call. We hope that you and your relatives are all healthy and safe. During today's call, we'd like to discuss four topics as shown in slide four. First, our financial results for the quarter and for the 2020 school year. The resilience of our business model and the importance of our solution to partner schools allowed us to deliver a 2020 school year ACV in line with the contracted value. Net revenues and adjusted EBITDA presented triple digit growth, and we are confirming the margin guidance for 2020 fiscal year of 35.5% to 37.5%. Second, our guidance for 2021 ACV bookings, we expect solid growth of 20% to 25% with a broader range reflecting a delayed commercial cycle due to COVID. Third, an update on our operational results; we believe the accelerated evolution in our products, service, and go-to-market practices implemented during the first nine months of 2020 further differentiated the quality of our solutions, our brand reputation, and distribution capability. As a result, we are experiencing record levels of user engagement, client satisfaction, retention, and lead generation. These evolutions will bear fruits for years to come, and we believe that Arco is emerging from this pandemic as a stronger company with even brighter growth prospects.

[Ari Neto:]

Thank you, Pedro, and good evening, everyone. Thank you for your time and I also hope that you and your relatives are all safe and healthy. Let's now turn to slide 9. This year has been a period of intense change for Arco. We believe that we are even more prepared now to win this game, as structural changes in the sector favor the adoption of technology by students, teachers, and parents while reinforcing our reigning factors of having a high quality and client center reputation and distinguished distribution capabilities. Moving to slide 10. While protecting our team, we acted fast to offer comprehensive support to our partner schools and generate growth opportunities for our company. Beginning in March and continued to this day, we have designed and launched several innovations in the way we serve our clients and convert prospects. We believe changes such as 100% of our content available in video, tools for live classes embedded in our platforms, fully remote pedagogical consultancy, and trusted investments in digital marketing and large scaled training of our salesforce for remote negotiations have further differentiated Arco. On slide 11, we offer a glimpse into the fully digital experience that our partner schools and prospects have enjoyed during this period. Almost 16,000 video classes delivered 340 webinars with global keynote speakers, a portfolio of online assessment tools with over 250,000 additional activities, and more than 9,100 remote pedagogical meetings with schools for teacher training and management support. As we rolled out these innovations to meet the remarkable new levels of tech adoption by schools, we have experienced outstanding operational results as shown in slide 12.

[Pedro Guerra:]

Thank you, Ari. I will now switch to slide 15. We are excited with the opportunities ahead of us as we are only scratching the surface of a huge and fragmented market. With underserved clients that share a pressing need for high quality solutions. We will continue to approach these opportunities from three angles growing organically through our superior solutions and distribution capabilities; pursuing disciplined M&A for a scale and scope and wisely making bets in adjacent markets that might create additional growth engines in the long run, without distracting us from more obvious and immediate prizes.

[Ari Neto:]

Thank you, Pedro. As we approach the end of our call, I would like to share good news regarding Positivo and Escola da Inteligência. On Positivo, positive two pieces of good news. First, we are closing to concluding our back office integration that has been executed within the expected timeframe and cost. Second, it is gratifying to see significant improvement in customer satisfaction and retention just one year after the acquisition by reinforcing Positivo's frontline team, invigorating the company's leadership team and culture and by improving its products and services, our team has delivered a 15% increase in client NPS and five percentage points improvement in retention rates. As Positivo starts to shine brighter, we expect to capture growth synergies over the coming cycles. Finally, on Escola da Inteligência, we expect the Brazilian antitrust authority to present its final approval tomorrow, December 1, and a closing to happen on December 2. We are looking forward to EI joining articles portfolio of great companies. EI is the clear winner within the exciting social, emotional learning vertical and its talented team shares our same long-term focus on quality, clients and growth. With that we conclude our presentation. I would like to thank our clients for the trust in our work; to thank our investors for all the support and our team for the relentless pursuit of excellence and value to our partner schools. We are here for the long run. Thank you for your time. Operator, we can now open for questions.

[Operator:]

Our first question comes from Vitor Tomita, Goldman Sachs.

[VitorTomita:]

Good evening, all. I hope you all are well, both you and your families. So, we have two questions on our side. The first one is on competition. If you could give us some more color on how you are seeing competition moving during this final stretch of the sales cycle, and especially on how well competitors have been able to digitalize their sales approach as you have detailed on your side, and whether you have seen any competitors get more aggressive at this point? And our second question would be regarding digital-only offerings with no printed content, if you already are seeing increased demand or increased opportunity for accelerating the introduction of this type of offering or is the cultural factor related to physical books is still much a barrier at this point. Thank you.

[PedroGuerra:]

Thank you for your questions, Vitor. Pedro, here. First on competition; it is important to note that we have been competing in a fragmented market with basically the same players for a long time. We’ve been gaining share from existing learning systems, including disrupting textbooks from a combination of winning factors and distribution in brand reputation and in quality of our solutions. You've seen that historically, and you'll also see that this year with record levels of retention and very healthy price increases. We don't see significant changes this year in competition. Regarding your second question on tech adoption, yes, we believe tech will now even more be a key part of our solutions to schools. And that is represented both in the record levels of user engagement that we've experienced this year, but also in evolution of our product offerings where we've had significant acceleration in the rollout of new features and solutions for partner schools. We expect that in the coming years that will continue to be the case with growing levels of user engagement and accelerating the evolution of our technology offering to partner schools.

[Operator:]

Our next question comes from Vinicius Ribeiro, UBS.

[ViniciusRibeiro:]

Hi, guys. Good afternoon, everyone. Hope everyone is safe as well. Two questions on our side here. The first would be if you could give us a little bit of color on how much the complementary solution is representative of the ACV particularly when guidance is provided. And the second, I just want to understand one thing a little bit in more detail. You said that the conversion of new schools accelerated when the school reopens. Can you just help us consider how does that mean for the go-to-market when you're using more digital or more digital part of our visit. With the conversion, it's only in fact materialized when the visit is made or just so that we can understand how to secure in the sense further sales cycles. Thanks.

[PedroGuerra:]

Hi, Vinicius. Thank you for your questions. First one regarding supplemental; first, it's important to know that each supplemental is going to have a longer cycle, even than core historically schools make a decision on supplemental after they decided on core. And even this year, the decision is delayed; we believe we still have some months ahead of us. So we still don't have complete clarity on how supplemental is going up and up. And that is reflected in our guidance of -- in our range for the guidance. Second, we believe this is going to be a tougher year for supplemental and we foresee slower growth in our supplemental, whereas we see a very strong year for core. However, it's important to note that we're very confident on the long-term trends for supplemental as the schools are looking for 21st century skills to strengthen their education. And second, we see a move from out of school to in-school adding more convenience at a lower cost to parents and students. Second, regarding our digital marketing; first, we believe that our future will be a hybrid model where we continue to invest in the generation of leads to digital marketing where we use keynote speakers at large online events to accelerate the funnel and where we continue offering premium solutions. However, we still believe that the last mile of negotiations will be taken care by in-person meetings, where our consultants help the school understand the details of the solution and generated trust and partnerships that are important for success. Finally, to your question, we book our ACV when the contract is signed, so when we have a firm commitment from the school, the school cannot let go without significant penalties.

[Operator:]

Our next question comes from Fred Mendes, Bradesco BBI.

[FredMendes:]

Hello, everyone. Thank you. Thanks for the call. I have two questions here as well. And the first one, if I can go back to the supplemental course. If you can just give us an idea about which ones, which products, if they are performing better, they're the ones that got the highest impact. The negative effects of COVID-19, I guess mainly the international schools, if you can describe a little bit more about this would be great. And then on the second question, is there any difference in the performance of your products? For example, if the more premium products they're performing better like SAS, or they're performing quite even across the board? Thank you very much.

[PedroGuerra:]

Hi, Fred, thank you for your questions. First, on supplemental, we're seeing similar dynamics for our supplemental solutions, longer sales cycle, overall slower growth for the year, but with strong trends for the coming cycles that make us believe they will continue to be strong engines of growth for Arco. Second, on core, we're seeing similar behaviors for our solutions and the tendency of our price points, high customer satisfaction, very high levels of customer retention, healthy price increases, and a strong pickup and rebound in new school intake after sales team returned to the field as the schools reopen.

[Operator:]

We have a question from the webcast. Ian Seskin from BTG.

[UnidentifiedAnalyst:]

Good evening, everyone. Does the guidance for 2021 ACV growth already considered Escola da Inteligência? Thank you.

[PedroGuerra:]

Thank you for the question. As you expect, Escola da Inteligência to become part of Arco post-closing which is due to happen in the first days of December. We are including Escola da Inteligência in our guidance.

[Operator:]

We have another question from webcast. It's from Andres Davis.

[UnidentifiedAnalyst:]

Good afternoon. Thank you for taking my question. Is your M&A growth strategy, how do you envision future acquisitions affecting our ACV and gross profits?

[PedroGuerra:]

Thank you for the question. First, it's important to note that we believe the main engine of our growth will be continued to be organic growth. Second, M&A will continue to have an important part in our growth as it has had in our past performance. We will pursue acquisitions in core with either other brands that have attractive growth potential or by gaining SKU in our current brands. Second, we are pursuing supplemental solutions, either by reinforcing the portfolio where we already playing at or adding new verticals to Arco. Third, we're continued to acquire great fintechs that offer high quality solutions and talented teams to help us increase our value proposition suppliers. We will pursue these acquisitions with discipline and we only do so if we believe they are accretive to our company and to our shareholders.

[Operator:]

We have a question from the webcast. It comes from Alex.

[UnidentifiedAnalyst:]

Good afternoon. Can you talk about the growth rate of EI for 2021 assumes and what it means for organic growth in 2021?

[PedroGuerra:]

Thank you, Alex, for your question. Overall, we see Escola da Inteligência following same path as other supplemental solutions with a longer sales cycle with overall slower growth for the year, but with attractive long-term trends for growth and for adding new skills to schools and to students. We're not disclosing Escola da Inteligência whole detail we believe it is not material for Arco.

[Operator:]

That concludes our Arco's video conference for today. Thank you very much for participation. And have a nice day.