Q4 2023 Vasta Platform Ltd Earnings Call

Participants

Marcelo Werneck; IR; Vasta Platform Ltd

Guilherme Melega; Chief Executive Officer; Vasta Platform Ltd

Marcelo Santos; Analyst; JPMorgan Chase & Co.

Mariana Oliveira; Analyst; Bank of America

Presentation

Operator

Good day, everyone, and welcome to the Vasta Platform fourth-quarter 2023 financial results call. Before we begin, I would like to read forward-looking statements. 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 or actual results to differ materially from those contemplated by those 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.
These risks include those set forth in the press release that we are issuing today as well as those more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on the information available to us as of today. You should not rely on them as predictions of 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.
I will now turn the call over to Marcelo Werneck, Investor Relations. Please go ahead.

Marcelo Werneck

Good evening, everyone. Thank you for joining us in this conference call to discuss Vasta Platform's fourth quarter and full year of '23 results. The fourth quarter also represents the first quarter of the 2024 sales cycle, which goes from October '23 to September '24. I'm Marcelo Werneck, Vasta's Investor Relations. And today we have the presence of Guilherme Melega, Vasta's CEO and Cesar Silva, Vasta's CFO, who will join me on the call.
Let me now hand over the floor to Guilherme Melega to make his opening statements.

Guilherme Melega

Thank you, Marcelo. Thank you all for participating in our earnings release call. I'd like to cover slide number three with some highlights of 2023 fiscal year. Vasta concluded this year with a 18% net revenue growth over the same period of last year, mostly due to the conversion of ACV into revenue and the performance of the B2G business units. Faster subscription revenue has reached BRL1,278 million.
Our Complementary solutions segment continues to stand out, showcasing the highest growth rate among our business segments with a 34% increase compared to 2022 and with an accelerated increase in both student base and market penetration.
Moreover, as mentioned in the last quarter, in 2023, Vasta started to offer its products and service to the Brazilian public sector, and we generated BRL81 million in revenue from the B2G sector in 2023 fiscal year. The expansion into the public sector marks a momentous opportunity for Vasta, allowing us to contribute to advanced education in Brazil while creating new revenue streams.
Moving to the company's profitability. In 2023, our adjusted EBITDA experienced a growth of 20%, reaching BRL451 million while increasing an adjusted EBITDA margin to 30.3%. This increase was mainly driven by gains in operating efficiency, cost savings and sales mix that benefited from the growth of subscription products.
Finally, this was another year of significant improvement in our cash flow. In 2023, free cash flow totaled BRL189 million, a BRL100 million increase from BRL89 million in 2022. The free cash flow to adjusted EBITDA conversion rate improved from 24% to 42% as a result of faster growth and implementation of efficiency measures.
I will now turn back to Marcelo. We'll talk about the financial results on the quarter and 2023 fiscal year.

Marcelo Werneck

Thank you, Melega. In this slide, we present the composition of Vasta net revenue. On the left side, you can observe the organic year-on-year growth in total net revenue for the fourth quarter, which increased by 10%, reaching BRL554 million.
On the right side, let me tell you the key components of this revenue growth. Total subscription revenue had an increase of 16%, reaching BRL515 million and representing 93% of our total revenue for this quarter far, our textbook subscription products also increased by 16%, amounting to BRL78 million, benefiting from the migration of non-subscription. Non-subscription dropped 35% to BRL39 million and as expect, we did not record B2G revenue in this quarter.
Moving to slide number five, we analyze the net revenue from the '23 fiscal year. In 2023, we achieved an organic net revenue growth of 18% amounting to BRL1,486 million. As you can see on the right, our total subscription revenue increased by 14% on an organic basis to BRL1,278 million. Subscription revenue were [Ex-Par] had an increase of 16%, reaching BRL1,155 million in Par. Our textbooks subscription products declined by 3% in a year amounting to BRL123 million.
Subscription revenue continues to be the major contributor to our total revenue, representing 86% of the revenue share. The B2G contributed to 5% of our overall revenue in '23 and generated BRL81 million in revenue. Non-subscription revenue now comprises only 9% of total revenue and as expected, dropped to 11% BRL127 million.
Moving to slide number six. In this quarter, our adjusted EBITDA amounted to BRL240 million and with a margin of 43.2%, an increase of 20% from the BRL200 million in the fourth quarter of '22. This positive performance can be attributed to several factors, including strong sales results, cost dilution and operational efficiencies. On the right side, we see that adjusted EBITDA in '23 also increased by 20% and reach the BRL451 million with a margin of 30.3%.
Let's now move to the next slide and explain the breakdown of the adjusted EBITDA margin. In slide number 7, we observe that EBITDA margin improved 60 basis points from 29.7% in '22 to 30.3% in '23. Firstly, our gross margin declined 1-percentage-point as 2023 was a year that the industry facing the high inventory costs caused by the rising inflation on paper and production cost.
Provision for doubtful accounts or PDA declined 0.2-percentage-points between the years, in line with the revised and the credit landscape. As a percentage of net revenue, our commercial expenses increased (sic-see slide 7) by 1.2-percentage-points driven by higher expenses related to business expansion in marketing investments. In adjusted cash G&A expenses improved by 2.9-percentage-points, mainly driven by workforce optimization and budgetary discipline.
In slide number 8, in the fourth quarter of 2023, adjusted net profit totaled BRL96 million, a 32% increase compared to adjusted net profit of BRL73 million in the fourth quarter of '22. In 2023 fiscal year, adjusted net profit reached BRL60 million, a 55% increase from unadjusted net profit of BRL39 million in '22. Finance costs in a scenario of the spike of interest rate continues to impact our bottom line. However, we have remained committed to the deleveraging as you see further in this presentation.
Moving to slide number 9, we show the free cash flow evolution. Our cash flow generation was one of the main highlights of this year. In the fourth quarter of '23, the free cash flow totaled negative BRL100,000, representing an increase compared to negative BRL43 million in the fourth quarter of '22. Now on the right side, in 2023, our free cash flow reached BRL189 million, a BRL100 million increase on the BRL89 million in '22 as a result of Vasta's growth, implementation of efficiency measures.
Another important metric our free cash flow to EBITDA conversion rate improved from 23.8% to 41.8%, reinforcing the message that cash generation continues to be a key focus of our business. Moving to slide number 10, we show the provision for doubtful accounts. Total expenses, which PDA in the fourth quarter of '23 totaled BRL29 million, representing 5.2% of the net revenue compared to an expenses of BRL29 million in the comparable quarter.
Moving to the right side of the slide, we can observe that PDA in '23 fiscal year grew from 3.6% to 3.8% of net revenues. In '22 PDA had an impact of the provision of 100% of the accounts receivable from a large retail companies undergoing traditional recovery. In '23 PDA is linked to a credit scenario review tied to the refinement of our customer base a strategy where we have chosen to cease financing mainstream school with low value contracts is going quickly putting emphasis on premium schools.
This shift is promoting growth in high-quality education systems such as Anglo, Piaga, Amplia (technical difficulty) and Fibonacci and similar nature, these brands, so higher average ticket values, lower default rates, greater adoption of complementary solution and foster long-term relationships.
Moving to the next slide, we observed that the average payment terms of Vasta's accounts receivable portfolio was 169 days in the fourth quarter of '23, which is 60 days lower in the fourth quarter of '22. Moving to slide number 12, let's take a closer look at the net debt movement. As of the end of '23 fiscal year, Vasta had a net debt position of BRL1,064 million, a BRL66 million increase compared to the third quarter of '23, mainly due to the impacts of financial interest costs and the share repurchase program.
In comparison to the fourth quarter of '22, the net debt position increased BRL22 million from BRL1,042 million, driven also by the financial interest costs, the share repurchase program and M&A expenses, which were partially offset by the positives free cash flow of BRL189 million in 2013.
I will conclude my presentation with slide number 13, where we can observe that as of the fourth quarter of '23, the net debt to adjusted EBITDA ratio, it stands at 2.36 times, which marks an improvement of 0.07 times compared to the third quarter of '23 and an improvement of 0.4 times when compared to the fourth quarter of '22.
With that being said, I'll pass the word to our CEO, Guliherme Melega.

Guilherme Melega

Thank you, Marcelo. Moving to slide 14, let's talk about ACV. From the commercial cycle of 2020 to 2023, we have achieved a compound annual growth rate of 20%. In the commercial cycle of 2024, we ended with BRL1.4 billion in contracts signed. Traditional learning system represents 77% of our subscription revenue, and we increased 14% in comparison to the 2023 commercial cycle.
Higher growth observed in our premium brands such as Anglo, Pitagoras, Fibonacci and Amplia reassuring, our perception that quality and reputation remain best in our business. Complementary solutions will have the highest growth rate among the business segments with a 24% increase compared to the 2023 cycle subscription revenue.
Continuing to ramp up penetration across our current client base. The partner schools base that uses our complementary solutions increased by over 300 new schools, surpassing 1,700 schools and a 14% growth in the number of students served by our solutions. The growth of the complementary solutions is concentrated in three main solutions by Mind Maker, Lider em Mim and Eduall.
And finally, consistently with our strategy. We continue to invest in the migration from far deeper base of products to our digital subscription product. Our textbooks as a service platform offered on a fee per student base.
Moving to slide 15, let me provide you with an exciting update on our significant avenue of growth. As mentioned last quarter, the launch of Start-Anglo franchise combining bilingualism with academic excellence, signifies a strategic expansion in our quest for new revenue. And we are happy to report that we currently have two fully operational units in 2024.
The first is our flagship in São José do Rio Preto which is operating with 300 students. In additionally, our inaugural franchise Alphaville is exceeding expectations. Boasting over 170 students surpassing our target of 120 students. Furthermore, we have secured a contract with the procedures institutionally Liceu Pasteur for a new flagship in São Paulo plan and to commence operations under the stock symbol brand in 2025, which 15 contracts already in place.
We are optimistic that this franchise model will play a pivotal role in the successful execution of our business strategy. Moving to slide 16, and finally, let me provide you an update on another growth avenue, our B2G initiatives. 2023 mark of the year when we expanded our products and services to serve the Brazilian public sector, we generated BRL81 million in revenue from the B2G sector in 2023 and we have already renewed this contract for 2024.
We are very optimistic about the possibilities. This development presents and are committed to deliver high-quality education solutions tailored to the unique needs of the public sector. With all of these accomplishments in mind, 2023 was an extraordinary year and another milestone in our journey. These achievements position us favorably to face the future challenge.
We have the confidence that we are on the right path to continue delivering outstanding results for our shareholders, solidify partnerships and make a significant contribution to education in our accounts. Having said that, I finish our presentation and invite you all through the Q&A session. Thank you.

Question and Answer Session

Operator

(Operator Instructions)
Marcelo Santos, JPMorgan.

Marcelo Santos

Hi, good evening. Thanks for taking my questions. I have actually two. The first question is on the ACV. I could discuss the evolution of ACV that you have up to 2024 cycle in terms of volume, price churn, could you give us an idea how this things moved versus the previous years? Just to understand the dynamic? Sorry, if that wasn't a slide, but I couldn't really get the presentation so far.
And the second question is regarding the margin outlook for 2024. So now that you have the cost pressures behind. What kind of evolution, it looks like it's going to be a good evolution in terms of margin for 2024. Is that the case is what are the moving parts here to understand that the outlook of margin for 2024? Thank you.

Guilherme Melega

Marcelo. Thanks very much for your question. Let me give you some color about ACV and now since we are the only player the delivery details about the results. We will consider to reduce a little bit the disclosure about the ACV details, but I can give you some color about that. We are pretty much breakeven in terms of volume and our ACV growth relies on pricing and better mix.
That's pretty much the major drivers of growth in our ACV. And in terms of margins, I've said we already reached the 30% margin that we aimed for cost pressures are definitely behind us. And we had a very good year in terms of savings and reducing redundancy in process with SG&A savings. But we tend to spend commercially in acquiring new contracts. So we do not forecast major improves in the margin, so they should be around the 30% level.

Marcelo Santos

Okay, perfect. Very clear. Thank you very much.

Guilherme Melega

Thank you

Operator

(Operator Instructions)
[Mariana Oliveira], Bank of America.

Mariana Oliveira

Good evening, Melega, Marcelo and everyone. I have one question on the growth perspectives and the ACV for next year implies a slight deceleration from the past years. Could you comment a little bit on the if this deceleration is driven more by the traditional learning system or if it is lower growth on the complementary solutions. So a little bit of the mix here.
And a second question, could you provide any more details on the B2G contract that you just renewed?

Guilherme Melega

Thank you very much, Mariana, for your for your questions. So in terms of ACG complementary, if I keep boosting the growth is the most interesting product that we have. We grew more than 30% last cycle. And we intend to keep the pace is definitely where we have more room to growth.
In terms of products of learning system, we have a slower growth and learning system is a more penetrated market and our strategy is to focus on premium brands. So we'll focus on premium schools on a focusing on Anglo, Piaga, Amplia, Mckenzie this will be the major focus for our learning system growth. But complementary is the main lever for the growth.
And regarding B2G, we renewed our contract with PREPARA much in the same terms that we had last year. So it's already a huge accomplishment. So our business will keep the same. We will start with growth from the same level that we left on 2023. And we are very confident to book new contracts very soon. We have a very heated pipeline.
And on Q1, we already have the sales for the PREPARA contract and we expect to have new contracts in Q2. But for the time being, we don't have any one signed yet. So I can just share with you our positive sensation about the business.

Mariana Oliveira

Thank you. That's very clear.

Operator

(Operator Instructions) Alright. There are no further questions at this time. I'd like to turn the call back over to Guliherme Melega for closing remarks.

Guilherme Melega

Thank you all very much for attending the Vasta Q4 conference call. We are very proud to deliver the results that we reached in 2023. Just to mention, I feel our revenue grew 18% our EBITDA 20%, our free cash flow grew 112%. So very solid results. And we opened our 2024 year at a very good momentum. We launched last year, the Start- Anglo and we are seeing the new franchisees piling up new contracts being signed and very positive for the company and also B2B with a very significant pipeline for new contracts. We are in the major states and huge municipalities. So we definitely expect to have new contracts very soon. Thank you all very much. Looking forward to see you in the Q1 conference call.

Operator

Thank you. That does conclude today's presentation. Thank you for your participation and you may now disconnect.